Marvin Goodfriend and Monica Hargraves
Laws requiring banks to hold a volume of reserves equal to a prescribed fraction of their deposits originated in this country more than a century ago. Since then both the financial system and the rationales supporting reserve requirements have changed considerably. Nevertheless, the practice of requiring reserves has continued without interruption. This article examines the history and function of reserve requirements at the national level and assesses the validity of various prominent reserve requirement rationales.