I want to close out now by talking about the least important part of this lecture. Okay. which is the, which is the reserve requirement. Okay. which you'll read about in Stegun. There's all this discussion of the reserve requirement. And the the necessity of banks having to, having to make sure not that they meet the clearing at the end of the day, but they're these two week maintenance periods. And you have to have an average quantity of a certain quantity reserves by the end of that two week period. So there, there's sort of two things you're maximizing. You're making sure that you can meet, meet the clearing today But that's not so hard, you can always do that by borrowing and lending in the Fed Funds Market. But you also have to make sure that you're actually holding reserves positions of a certain average amount over, over this period. And that is sort of gaming and makings sure that you're, you're just hitting that target and not over and, this was an attempt She has an extremely interesting discussion, which is now just of historical interest I suppose, of the attempt during the monetarist phase of, of, of the Fed under vulgar. monetarists said, we want to make sure that we have used these, used these reserve requirements to control the money supply. Okay. If you have to, if you have accumulate these reserves, this prevents you from expanding your balance sheet. See this. Okay. These deposits incur required reserves. Okay. And if the, if the city bank is worried about not having enough reserves, or if there aren't enough reserves in the system. The idea is that it limits the expansion of money and also limits the expansion of credit, at least bank credit, okay, in this way. That was the idea. There had been before, what was called lagged reserve accounting. Which meant that banks had to accumulate reserves that were [COUGH] sufficient to be a certain proportion of the deposits that they had two weeks ago. Okay. So, you could make this loan without the reserves needed to back it. Everything is fine, and then two weeks later, you've got to find the reserves. Well, clearly in that environment, the Fed has to supply the reserves. Okay. By, because otherwise somebody is not going to meet there reserve requirement, it's not going to all add up. These deposits are already there. They already been created two weeks ago, okay. There's no, so the Fed has to provide the reserve. [COUGH] It can provide the, using this sort of mechanism here. Okay. and the monitors were concerned about that. They said the Fed isn't really controlling the money supply, it's just really, the demand is expanding and the Fed is just expanding to meet that. So we want to have more discipline. Okay? It's all about discipline versus elasticity. And the way we're going to have, we're going to achieve that is with contemporaneous reserve accounting. ' Kay, by saying the amount of reserves you have to hold during this two week period, ha, has to do with the average deposit accounts you've had during this same two week period. Okay? So you can image, this is a little tougher to hit this thing, because the quantity of deposits is fluctuating around, the quantity of reserves is fluctuating around. It led to a lot of chaos in Fed funds market, actually. And, and so, they abandoned it. Okay. But it was tried for awhile. It was tried, the important thing to understand about this sort of intellectually, is this was an attempt to create some discipline in a system that people felt had run out of control. You know, this was the period of, of, of double digit inflation. And the thought was how, maybe we can use contemporary instrument, contemporaneous reserve accounting to put some control on this system. Okay? Turned out it didn't really work. she's pretty clear about that. Okay? There's still arguments among, among academics about this but there, it hasn't been tried, it hasn't been tried again. And now, you know, this is all a dead letter, because there's so many reserves. Okay? That this just no, the notion that you have to hold a certain amount of reserves against your deposits. You know, there's trillions of reserves. It's not a problem. It's not a problem, but the Fed Funds market still exists, and it exists for these payment purposes. the, to, to satisfy the payment purposes at the end of the day. The question is, don't I think that the reserve requirement is going to become relevant again at some future date after we're out of this crisis? and I guess I have two two answers to that. There, there was more to the question than that, but that was the essence of it. first of all, we're in the crisis and it's going to take a while. There's a trillion dollars worth of excess reserves out there that's not going to go away in a minute. But, but that wasn't your question, so look, look through that. The deeper question is, was the reserve requirement ever kind of important? Okay? And I think this is an important question, and, and, and one that we're going to be grappling with in this course. You know, does the quantity of reserves in any, in any significant way restrict the expansion of credit or the expansion of money? Because what we're going to see is that there's a parallel banking system, the shadow banking system, which can create, pretty close substitutes for all this stuff, and credit. Okay. That doesn't face any reserve requirement, that doesn't face any capital requirement, that can be offshore, it can be anywhere in the world. Okay. And marginal credit can flow through that. So, there's an institutional example where it's not clear that even if reserve requirements buying for banks, does that mean that that controls credit or controls the money supply? I mean, you can, you can crank up buying on banks. That's where we started. Right? With this article here. That European capital requirements are trying to make banks safer. And so, what it's doing is making sure that banks are not a source of credit. Okay. In Europe. That doesn't mean there is no source of credit in Europe. It just means that it's not going to be banks, it's going to be something else. Okay? So, I think in general that's true about monetary systems. That if you put restrictions on one thing, you can control one thing. But is that the thing, does that do anything to a larger economy. [COUGH] Was is just like you know, a balloon, you punch it here and it, it blows out, it blows out there. [COUGH] There are, this is a real question, it's a real debate. I tend to be you can probably hear, on the side of people who say, but, that, that, that mostly, these are ineffective constraints. The reserve constraint is, is an ineffective constraint in modern, in modern financial markets. It probably wasn't in 1950 when it was invented, and all the text books were written. Okay? Because there weren't any alternatives, and you could really things really tightly with that. I think it's not really true with that effect about, about the world. That doesn't mean there is nothing you can do. That doesn't mean there is no way to control. It's just that's not a very effective measure.
