• Most Effective
• Least used

The most effective, and fortunately least used, weapon in the Federal Reserves arsenal to influence bank reserves consists of changing Bank Reserve Requirements.

You got a taste of the strong impact of changing reserve ratios in the section on Fractional Reserve Banking. In this section, I will provide a short history of reserve requirements. Then I will provide some graphic evidence of the impact of changes to required reserves.

Short History of Reserve Requirements

We will look at the tables that show the details of bank reserve requirements since the inception of the Federal Reserve System. Don't get bogged down in the details, but notice the overall trend for reserve requirements.

Evidence of the Impact of Changes to Required Reserves

I have included three charts that provide some evidence of the impact that changes in the required reserves have had on the structure of bank deposits and the trend in monetary expansion.

Bank Deposits and Reserve Requirements

Transaction Deposits as Percent of Total Deposits

Money Supply, Bank Deposits vs. Bank Reserves