Reserve Definition

A reserve is the capital a person possesses. It is present capital, as opposed to invested capital. Present capital depreciates and as such represents an ongoing cost to its owner. The ratio of reserved to invested capital is a reflection of the owner’s time preference.

Reserve capital intended for the settlement of debts is the settlement medium. For example, where gold is the settlement medium, gold is the reserve capital. A promise for gold, such as a gold certificate, is a loan and therefore not a reserve against the debt. If the debt can be settled with gold certificates, then possession of the certificates constitutes reserve.

While holding a certificate as reserve against certificate debt may appear to contradict the definition of reserve as present capital, it does not. As the settlement medium the certificate itself is nothing more than a piece of paper to the person holding it in reserve. The terms it carries are to be passed to the certificate’s issuer. No costs or gains in settling the certificate are experienced by the person holding it in reserve. His settlement cost is only a consequence of transferring the paper to his creditor.

Reserve is often conflated with maturity matching. Management of disparate loan maturities and rates of interest is a risk management strategy. While capital reservation is also a risk management strategy, the distinction of a reserve is that reserved capital is "present", having a maturity of zero.