Lessons from the Historical Use of Reserve Requirements in the United States to Promote Bank Liquidity

Efforts in the United States to promote bank liquidity through reserve requirements, a minimum ratio of liquid assets relative to liabilities, extend as far back as 1837. Despite such requirements, banking panics and suspensions of deposit convertibility continued to occur. Eventually, policymakers created a central bank to ensure bank liquidity. This paper reviews the historical debates about reserve requirements, supplemented by empirical evidence, to provide insights relevant today about using reserve requirements to regulate liquidity. The insights are related to convincing institutions to use the reserve during stress events and the ways reserve requirements for banks affect interactions with other financial firms before and during a panic.