Excess Reserves

Excess reserves are reserves in excess...but they’re also not in excess, since they’re required.

Say whaaa?

Excess reserves refer to reserves that banks are required to have on hand (because the central bank said so).

Ever hear about those run on the banks in the early 1900s? Some people started to withdraw all of their money from the banks, which made everyone else say “maybe I should do that, too…” But banks didn’t have the cash on hand to give everyone their money.

Of course, one of the ways banks make their money is by taking what we give them and reinvesting it (where’d you think that interest came from, anyhow?), so they don’t have everyone’s deposits on hand.

To keep banks from reinvesting all (or nearly all) of the money they have (which would, in theory, yield them the most profits), the central bank said “hey now, you have to have at least this much cash on hand to pay your customers, k? K.”