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

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) Partial funding for this paper was provided by the Kentucky EPSCoR Program. We thank Patrick Marchand, David Schutte, Fallaw Sowell, Randall Parker, and Richard Timberlake for helpful comments on this paper.