Excess Reserves in the 1930s: A Precautionary Tale

• Excess reserves generally are not excess in the sense of being surplus or extra. • In the 1930s, excess reserves were considered to be surplus, and increases in reserve require-ments during that decade were designed to mop up those excess reserves. • Banks responded to increases in reserve requirements by reducing deposits and restoring some of the excess reserves. This historical observation indicates that reductions in excess reserves are best approached with caution. Things are not always what they seem. For instance, are excess reserves really excess in the sense of being surplus or extra? Why do banks want to hold excess reserves? Required reserves include vault cash and deposits at the Federal Reserve. Excess reserves are deposits at the Federal Reserve in excess of those reserve require-ments. Excess reserves can be used, for example, to pay depositors who want cash and to transfer funds to other banks. Excess reserves are part of banks ’ total reserves, which also include required reserves. Banks can use required reserves only to satisfy their reserve require-