LewRockwell
Part 1
Here is a head-scratcher. During the long 46-year stretch from February 1974 to February 2024 “required reserves” in the US banking system climbed steadily from $35 billion to $208 billion.
And then, bang! By orders of the Federal Reserve that number cliff-dived to zero in one fell swoop.
Required Bank Reserves, 1974 to 2020
It’s not that the detention of nearly a quarter trillion dollars of commercial bank assets in Fed-mandated reserve accounts had been all that onerous. By that point in time, the Fed was paying 1.60% on required reserves or essentially the same as could be earned in the open money market, where the Fed funds rate was 1.58%, and far more than the yield on depositor CDs, which stood at a piddling 10 basis points.
No, the more pertinent question is why didn’t the Fed declare victory on its 1913 mandate and close-up shop in March 2020?. After all, Carter Glass, the Fed’s legislative author, had given the new system of 12 regional reserve banks a very narrow remit: Namely, to ensure an “elastic currency” by providing Fed-created credits (reserves) to its member banks, albeit at a penalty spread over the free market rate on short-term money and on the back of sound commercial loan collateral.
That is, as a reserve provider of last resort, the new Fed was intended to obviate the periodic “panics” and bank runs that occurred when over-extended banks were forced to call in loans in order to meet depositor withdrawals while maintaining required reserve balances. At times, this contraction process became self-fueling, causing fearful depositors to drain their accounts for cash, which then disappeared into mattresses and other hoarding venues, thereby causing banks to call even more loans and stimulating even further demands for currency.
These periodic banking system contractions and related bouts of paper money hoarding led to the impression that the US hand-to-hand currency of the day was “inelastic”. This was especially thought to be the case at harvest time or during material disruptions of commerce caused by floods, fires, earthquakes and the like…
READ FULL ARTICLE HERE… (lewrockwell.com)
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