Some measures of the money supply include governments bonds... but I wonder to what degree governments bonds can be considered money.

IMHO the degree to which X can be thought of as money equals the degree to which you can easily buy things with X. What can you buy with bonds? If your answer is that "you can sell your bonds for money and then buy things" - that simply underlines that the bonds themselves were not money.

Perhaps some mega purchases like buying companies could involve the transfer of bonds directly?? I have no idea how common this is.

Are there any other reasons that bonds can be considered money?

  • $\begingroup$ Bond is a financing derivative that is not money. However, it may caused liquidity catastrophic if not managed careful. E.g. Greek debt is just a simple example. $\endgroup$
    – mootmoot
    Mar 18, 2019 at 15:27

3 Answers 3


Unfortunately, economists have no consensus definition of money.

However, I do think the definition given by Ryan-Collins et al. (2013, Ch. 1.2.1) in Where Does Money Come From? strikes the right balance between generality, common sense, theoretical considerations, and history (emphasis added):

Defining money is surprisingly difficult. In Where Does Money Come From? we cut through the tangled historical and theoretical debate to identify that anything widely accepted as payment, particularly by the Government as payment of tax, is money. This includes bank credit because although an IOU from a friend is not acceptable at the tax office or in the local shop, an IOU from a bank most definitely is.

By this definition then, government bonds are not money, because they are not acceptable "at the tax office or the local shop".

For example, the US Internal Revenue Service does not appear to accept US government bonds as tax payments. I do not know of any other tax authority that does.

One peculiar exception is the Venezuelan government which sometimes make payments using its own bonds -- see e.g. this 2018 WSJ story) where it paid a Canadian mining firm bonds with a market value of $88.5M. But of course, the Venezuelan government is quite peculiar and I suspect that it would not accept its own bonds as payment from anyone.

Here are two other clues or indications that government bonds are not money:

  • Open market operations.

At least before the crisis, a central bank such as the US Fed would increase/decrease the money supply by buying/selling US government bonds.

If US government bonds were money, then such operations would not have their intended effect.

  • Government bonds as collateral.

Consider for example a repurchase agreement (repo), which is like a pawn:

Chase has a one-month \$100 US government bond and would like to borrow \$99 for a week. Google has \$99 it'd like to lend for a week. So, what they could do is this: Chase gives Google the \$100 bond as collateral and Google gives Chase \$99. One week later, Chase repays Google \$99.01 (where the extra one cent is Google's reward or interest for this loan), while Google returns Chase the \$100 bond. (If Chase defaults, i.e. fails to repay the \$99.01, then Google keeps the \$100 bond which it can redeem for \$100 in another three weeks.)

If US government bonds were money, then there'd be no point in the above transaction. Chase would just use the \$100 US government bond for whatever purposes it needs, instead of having to borrow \$99 from Google.

Perhaps some mega purchases like buying companies could involve the transfer of bonds directly?? I have no idea how common this is.

Yes, this could happen (we actually already have something like this in the above repo agreement).

However, this would be more akin to a barter trade, such as when a farmer trades two pigs for a cow with another farmer. However, in such a barter trade,we would not consider either the pigs or the cow money.

Likewise, we would not consider the government bonds swapped in exchange for some other asset (say a building) money.

  • $\begingroup$ (1)I do not (and did not) downvote your answer, but history disproves Ryan-Collins's "implication" that money invariably needs a regime's acceptance for it to be considered money. Recent examples of that are the cryptocurrencies, especially during their periods of stability. (2)US Fed's efforts to peg US gov. bonds to the dollar reflect an intent to preserve some equivalence (market-wise) between them. The shorter the gap between bond's face value and the money borrowed, the more evident that such efforts achieve that intent of equivalence. Being put as collateral does not nullify that nature. $\endgroup$ Mar 17, 2019 at 15:27
  • $\begingroup$ Your repo example comes very close to showing exactly why your answer is incorrect: negative real (and sometimes even nominal) yields on general collateral repos make no sense according to the story you're telling. If bonds aren't more money-like than, for example, deposits, nobody should ever pay to loan cash and receive Treasuries. Yet, they have occurred multiple times over the past decade, and the Fed had to set up an entire program (the RRP) to combat them. $\endgroup$ Mar 18, 2019 at 0:41
  • $\begingroup$ Before the financial crisis, there were effectively no excess reserves in the system. The Fed had to do open market operations in order to keep the banking system in aggregate from having shortfalls in required reserves. That’s just how the system worked, and doesn’t say much about the “moneyness” of bonds. $\endgroup$ Mar 20, 2019 at 22:05

Short answer: Yes, there's another important reason that government bonds are often considered money, which is the role they play as a store of value.

There are three dimensions of money that form the long-standing textbook definition of money (see Mankiw, “Principles of Economics, 8th Edition.” p. 605):

  1. Use as a medium of exchange (i.e., its value for settlement of claims).
  2. Use as a store of value (the degree to which it is a "safe asset”).
  3. Use as a unit of account (the degree to which it is used to denominate claims).

In the modern framework different assets are considered to fulfill these dimensions to differing degrees, which is why different measures of money include or exclude different assets.

Thus, the state of the art is not to think of assets as being either "money" or "not money," but to think of different assets as being more or less "money-like," or having differing degrees of "moneyness."

Dimension three, for example, is generally fulfilled only by physical cash and claims on banks. Claims aren't settled for "20 units" of Treasury bonds, they're settled for a certain par value of those bonds, denominated in dollars. So clearly Treasury bonds are not at all money-like along this dimension.

Dimension one, the one you raise in your question, is fulfilled by Treasury bonds to a greater degree than one might expect, though still only to a very limited amount. While Treasuries are not used for settlement in the real economy, they are used for settlement somewhat frequently in the financial system, which is responsible for a disproportionate amount of financial transactions (though even in finance they are used far less often than settlement for cash). For example, Treasuries are commonly used in securities lending transactions to obtain other securities, and they're often used to meet default and liquidity fund obligations to central counterparties.

Where Treasury bonds shine, though, is on dimension two, their use as a "store of value,” or as a “safe asset.” Per Gorton:

Safe assets play a critical role in an(y) economy. A “safe asset” is an asset that is (almost always) valued at face value without expensive and prolonged analysis. That is, by design there is no benefit to producing (private) information about its value. And this is common knowledge. Consequently, agents need not fear adverse selection when buying or selling safe assets. Safe assets can easily be used to exchange for goods or services or to exchange for another asset. These short-term safe assets are money or money-like.

The “short-term” part of this refers to the fact that their usefulness as a store of value rises as their residual maturity (and thus their duration, or sensitivity to changes in interest rates) falls. Once their residual maturity falls below three months, they're treated for accounting purposes as being equivalent to cash, because their value isn't likely to change significantly in response to changes in the interest rate environment (this is true under both US GAAP and IFRS):

Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition.

Importantly, Treasury bonds solve a very real problem for many firms that have large cash balances, which is that for large-value claims, they are actually more money-like than bank deposits. This is because there's a limit on deposit insurance (currently in the U.S., \$250k per bank, per account type, of which there are two, so \$500k per bank). As a result, for firms that hold large amounts of cash, bank deposits become a relatively poor form of money, because they're not eligible for the government guarantee. As a result, if the bank fails, they're exposed to both credit and liquidity risk (they may not get all their money back, and even if they do, it may not be available for quite a long time).

This is actually why firms frequently either hold balances in institutional money funds that do repos against government securities, or lend them in repo themselves— it allows them to upgrade what would otherwise unsecured claims on banks to claims that are secured by Treasury bonds, highlighting the "safe asset" role that these bonds play.

A very good summary of this concept, the "hierarchy of money," can be found in Pozsar's "Shadow Banking: The Money View." As he discusses in the paper, for many financial market participants, safety (dimension two) is more important than settlement value (dimension one) (emphasis mine):

[T]here is a strong case for the introduction of a new set of monetary aggregates that track the supply of money and money-like claims held not for real economy but for financial economy transactions. The Federal Reserve’s M2 aggregate measures the money demand of households and has been used to analyze growth dynamics and threats to price stability. Because the bulk of money claims included in M2 are insured, it was built following a hierarchy based on transactional liquidity. But for institutional cash pools, money begins where M2 ends, and as the crisis has shown, intra-system holdings of uninsured money market instruments can pose threats to financial stability. Institutional cash pools hold money claims mostly for portfolio management reasons and because they are too large to be eligible for deposit insurance, their focus is on money claims’ safety – that is, proximity to the government – first, and transactional liquidity second.

This is, of course, why the Fed had to create the Reverse Repurchase Program. Without it, cash lenders in repo were occasionally so eager to exchange their "cash" in the form of claims on banks for claims on Treasuries that they were willing to accept negative real (and, in certain circumstances, negative nominal) yields on general collateral repos against Treasuries— they were literally willing to pay to hold Treasuries rather than bank deposits. As a result, the Fed set up the RRP to allow their counterparties to do unlimited amounts of repo at a fixed rate, setting a floor under short rates in money markets.

Finally, there is a good working paper out of the Federal Reserve, authored in part by former Fed governor Jeremy Stein, that goes into further detail on the use of Treasuries as money-like claims.

  • $\begingroup$ Would absolutely love to hear the reasoning for the downvotes on this. $\endgroup$ Mar 18, 2019 at 1:21
  • $\begingroup$ I did not downvote - but I would point out that the settlement aspect of money is always top of any list of money characteristics, and perhaps a low score in settlement can not really be made up for with a high score in other categories. $\endgroup$
    – Mick
    Apr 23, 2019 at 9:29
  • $\begingroup$ @Mick I understand your view. That said, it's worth keeping in mind that Federal Reserve governors and researchers, accounting standards boards, and experts in short-term funding markets all agree that Treasuries can and do act as (one dimension of) money. It's certainly possible that they're all wrong, but if we allow that they might have a point, it's easy to see why Treasuries are sometimes included in certain measures of the money supply, while also understanding that they don't belong in all measures of it. [1/2] $\endgroup$ Apr 23, 2019 at 15:27
  • $\begingroup$ Specifically, because certain entities are more concerned about the safety dimension than the settlement dimension, as described above, they actually prefer to hold Treasuries than bank deposits. However, if the supply of Treasuries is insufficient to meet their needs, they may need to hold, e.g., bank deposits instead, which impacts the supply/demand balance of narrower "settlement money." As a result, the supply of Treasuries can, in certain contexts, actually matter even to someone like yourself who is only concerned about settlement. That's why some measures include it. $\endgroup$ Apr 23, 2019 at 15:34
  • $\begingroup$ I guess I'll add a third comment for emphasis: My answer explains the fact that many experts view government bonds as money-like in certain ways, and the fact that these bonds are as a result included in some broad measures of the money supply that are designed for certain purposes. My answer is not a claim that Treasuries are exactly the same as settlement money, which would be obviously wrong. $\endgroup$ Apr 23, 2019 at 15:38

Are there any other reasons that bonds can be considered money?

Yes to the extent that:

(1) government bonds typically have much greater liquidity than corporate bonds as well as other instruments which might not even be broadly traded; and

(2) it is unusual/unlikely for a government to default on its obligations.

Unlike non-governmental entities, a government is oftentimes aided by the central bank through policies such as quantitative easing (printing money) or modification of requirements of banks' reserves. The goal is that the resulting supply of money preserve stability of the value of government bonds, thereby corresponding with the stability of purchase power of money.

What can you buy with bonds? If your answer is that "you can sell your bonds for money and then buy things" - that simply underlines that the bonds themselves were not money.

Then you would have to conclude that foreign currencies cannot be considered money either, because first you would have to convert them to money that is accepted in the domestic economy in order to buy goods and services.

I am not suggesting that government bonds and domestic currency are perfect substitutes. My point is that government bonds satisfy key conceptual attributes of money.

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    $\begingroup$ Re: foreign money: Money does need a context... so for example foreign money is money in another country just like cigarettes are money in prison or "half a crown" was money money in the past. Foreign money is not money in this country. $\endgroup$
    – Mick
    Mar 17, 2019 at 10:04
  • $\begingroup$ @Mick Yes, but now you are belatedly narrowing the scope of your question basically to "are government bonds considered money in this [unspecified] country?". The way your question is formulated (devoid of specific context and ending with "Are there any other reasons that bonds can be considered money?"), though, reflects a focus on whether government bonds meet essential attributes of money, independent of the context. $\endgroup$ Mar 17, 2019 at 15:52
  • $\begingroup$ Though I've added my own answer, this one is also correct, as it both notes (1) the high liquidity and safety of government bonds, which indicate their usefulness as a store of value, and (2) that while government bonds aren't generally used for settlement, that's only one dimension of money. $\endgroup$ Mar 17, 2019 at 17:04
  • $\begingroup$ I agree with @Mick here - government bonds aren't considered money in any country, but foreign currency is. If something can be used as money somewhere, it's money. Government bonds can be used as money in the local economy nowhere in the world, so they's not money. They're a very safe store of value that can be liquidated into money easily, but it's simply not an acceptable means to settle day-to-day debts at the grocery store or corner shop. $\endgroup$ Mar 19, 2019 at 12:49
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    $\begingroup$ @NuclearWang Again, you are looking at the OP's belated change of his inquiry. The question he actually formulated is "Are there any other reasons that bonds can be considered money?"(emphasis added), and the answer is in the affirmative because the systemic handling of governmental bonds results in these bonds satisfying essential attributes of money. My argument of foreign currencies addresses OP's mistaken presumption that conversion [to cash] necessarily negates a money status, but that is regardless of the potentiality for bonds to constitute money as per how they are implemented. $\endgroup$ Mar 19, 2019 at 14:45

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