Excess reserves during the 1930s: Empirical estimates of the costs of converting unintended cash inventory into income-producing assets

Abstract

It is often argued that the persistent amounts of excess reserves in the 1934–1941 period were sought either for protective liquidity or as a signal of bank safety to depositors. More recent explanations argue that these excess reserves were unintended inventory due to the high internal adjustment costs of converting reserves to income-producing assets. Our findings support the latter explanation and reveal high internal asset adjustment costs after 1933. Thus, a monetary policy focused on increasing reserves would have been ineffective. A successful monetary policy would be one that increased outside money.(JEL G210, G280, O420)