In the run-up to the 1937 dip, many people thought inflation was imminent due to the jump in excess bank reserves.

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Americans during the Great Depression voiced the same concerns about excess bank reserves, budget deficits, competitive devaluations and commodities speculation as they do today.

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In 2009, excess bank reserves grew through banks' preference for liquid assets, and the certain (though low) interest earned by deposits at the Federal Reserve.

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Treasury purchases get sterilized into excess bank reserves without a significant expansion of U.S. money, but some reserves seep out and cause an expansion in foreign money, which is only spent on food.

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First, neither excess reserves nor the monetary base (currency plus bank reserves) are money.

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Raising the rate of interest paid on excess reserves can make new bank loans less attractive, thus tempering overall credit creation.

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For example, the European Central Bank allows banks to place excess reserves in an interest-paying deposit facility.

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First, the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements with financial market participants, including banks, government-sponsored enterprises and other institutions.

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Bank loans and investments trending up, excess reserves trending down.

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Clearly, bankers reeling from the shocks of the Depression, including many bank failures, did not regard those reserves as excess.

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The proposed operation would also eliminate bank account balances at least equal in amount to the excess reserves that were extinguished.

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The Fed s likely ease will involve zero interest on excess reserves: Since October 2008 the Fed has been paying interest on commercial bank deposits held at the central bank.

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Paying interest on excess reserves will initially sterilize the new high-powered money, without much impact on bank lending and nominal incomes, let alone real GDP growth.

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