A Problem With Minimum Requirements
By David Henderson
“To rely upon a reserve requirement for the meeting of cash-withdrawal demands of banks’ customers is analogous to trying to protect a community from fire by requiring that a large water tank be kept full at all times: the water is useless in case of emergency if it cannot be drawn from the tank.”
Armen A. Alchian and Willam R. Allen give this unsourced quote on p. 708 of the first edition of their modern classic, University Economics. BTW, I lost my copy of the third edition in my 2007 fire and my friend, Gloria Valentine, Milton Friedman’s long-time assistant, gave me Milton’s autographed copy. It’s inscribed, “To Milton, Herein–somethings old, somethings new, somethings good–borrowed straight from you. Armie.”
I was reminded of this when I read Russ Roberts’ post in which he quoted from an article in The Economist. For days, the Japanese government kept to its policy of requiring that oil refiners keep a minimum of 70 days’ supply in reserve. Specifically:
When the crisis hit, there was a law on the books requiring energy companies to keep 70 days of petrol in reserve. This was quickly lowered by three days, but that did not help. And there is the outrage. It was not until March 21st, ten days after the crisis, that the limit was lowered to 45 days.
See the problem?