AN ANALYSIS AND EVALUATION OF ALTERNATIVE RESERVE REQUIREMENT PLANS

Abstract

ALTHOUGH RESERVE REQUIREMENTS first were imposed on commercial banks in the belief that they would help protect depositors and holders of bank notes, it now is clear that required reserves are virtually the least liquid of a bank's assets. Nor do the funds kept on deposit with the Federal Reserve bear interest. Thus reserve requirements must be evaluated with respect to their effect on (1) the Federal Reserve's control of demand deposits and the money supply, and (2) resource allocation and equity among competing financial institutions. The first criterion in analyzed with respect to control of the demand deposits of member banks (section I), of non-member banks (section II), and of time deposits (section III). The second criterion is discussed in section IV with respect to competition among member banks, between member and non-member banks, and between banks and other financial institutions, and with respect to resource allocation and the general question of legally required reserves.