BANK RESERVES

BANK RESERVES were originally required by various states before the civil war to provide for convertibility or redeemability of bank notes. following the panic of 1857 and the national bank Act of 1863, a number of regulatory agencies required reserves against both bank notes and bank deposits. These required reserves could be either in the form of lawful money or in correspondent balances in other banks. Some states also permitted banks to include certain securities,such as federal government securities and certain state and local government securities,in their legal reserves.
Regardless of the form of bank reserves,they were invariably regarded as being necessary to maintain bank liquidity. In other words,banks in their search for profits had to be prevented by the regulatory authorities from an over-extension of bank credit,wherein particular banks might be unable to satisfy the claims of their creditors in an emergency period. Today,however,it is recognized that liquidity for the banking system as a whole depends ultimately upon the ability and willingness of the Federal reserve to supply additional funds to the banking system when needed.Reserve requirements now are regarded as a fulcrum,or pressure point,whereby the monetary authorities can make effective their desired monetary-credit policies. However,this fulcrum of legal reserve requirements applies only to a certain amount of the primary,or cash,reserves of a bank.