Those who do remember history: Part 2

by: Ken Agle

Part 2 of 2

When it comes to compliance, sometimes knowing the “why” can make all the difference. In this two-part series, Ken Agle provides some background on how the gold standard, historical wars, economic development, and other events have impacted modern transaction limitations.

In Part 1 of this series, Ken gave a brief overview of how the metal standards have played their role. In Part 2, he addresses how the reserve requirements factor into the equation and how the pieces fit together.

Reserve Requirements Play Their Role

Reserve requirements have long played a role in our nation’s financial system as movement away from gold standards evolved. When bank notes were first issued in the 19th century, few individuals outside the very narrow geographic area of the issuing bank would rely on those notes. Eventually arrangements between banks allowed for the expanded geographic use of bank notes, but largely on the basis that such banks maintained reserves sufficient to cover the amounts, thereby increasing their liquidity.

With the Civil War came the first reserve requirements on a national bank for deposit accounts. The National Bank Acts of 1863 and 1864 provided the opportunity for national banks by creating a network of institutions whose notes could circulate more easily throughout the country.

Reserve requirements were critical to ensuring the liquidity of the national bank notes and promoting them as a medium of exchange. It was only a matter of time that the role of deposits, enhanced by partial reserves, supplanted bank notes as the primary medium exchange for many transactions.


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