Reserves

Reserves can refer to a lot of things: army reserves, reserve funds, reserve chocolate (that your partner hid in the back corner of the top shelf).

What do they have in common? Reserves refers to storing something. Something off-site. Something “liquid” (or “mobile,” in the human case). Like an emergency fund, it’s gotta be ready to go and not tied up in some investment.

Businesses often have reserve funds, which are like emergency savings. It’d be really silly for a whole business to go under just because it didn’t have a rainy day fund when it needed it.

Banks have required reserves, which are based off the government-set reserve ratio. For instance, if the reserve ratio is 10% and you deposit $1,000, then $900 of it will be loaned out by your bank. The remaining $100 will be in reserves. They’re required, because banks are incentivized to lend out everything...the whole $1,000 deposit. But when too many people want their money (think: run on the banks), this causes trouble. So the government stepped in and said “we’re going to make you have a safety blanket.”

Some governments have sovereign reserves...particularly the ones whose economies rely on specific commodities (like oil). That way, when times are good (oil prices up), the government can fill up the reserve fund, and when times are bad (oil prices down), they can tap it.