The Demand for Money, Near-Money, and Treasury Bonds
Modern money is broader than currency and checking accounts. Households, firms, and financial institutions hold many assets because they are safe, easy to sell, or useful as collateral. Bank deposits do this. Money market instruments do this. U.S. Treasury securities do this too. The paper asks a simple but important question: when investors want liquidity, how much do they view these assets as substitutes for one another?
The answer matters because many public policies work by changing the supply of one kind of liquid asset. Quantitative easing changes the amount and maturity of Treasuries held by the private sector. Bank regulation changes the supply of bank-created money. Shadow banking creates private money-like claims outside the traditional banking system. If these assets are perfect substitutes, then shifting supply from one to another has limited consequences. If they are imperfect substitutes, the composition of safe assets can affect interest rates, monetary transmission, and the organization of the financial system.
We measure the quantities and prices of bank-created money, shadow-bank money, and Treasury bonds from 1934 to 2016. The price of liquidity is the interest investors give up to hold a safe and liquid asset rather than a less liquid alternative. We use these liquidity premia, together with quantities, to estimate how easily investors substitute between deposits and Treasuries and how much liquidity service each asset provides.
The central finding is that Treasuries and bank transaction deposits are substitutes, but not perfect substitutes. This is economically intuitive. Deposits are useful for making payments. Treasuries are especially useful as safe collateral and as an asset that can be traded in deep markets. They overlap, but they are not the same object. Treating them as identical misses an important part of how modern money works.
The paper also shows that nontransaction financial-sector debt, including shadow-bank money-like claims, is a closer substitute for Treasuries than transaction deposits are. But per dollar, Treasuries provide more liquidity service than these private near-money claims. This helps explain why both public and private safe assets coexist. Private financial institutions can create money-like assets, but Treasuries remain special because they deliver a strong bundle of safety and liquidity.
One implication is that monetary policy and debt management should not be analyzed only through the level of interest rates. They also operate through the supply and composition of liquid assets. When the central bank buys Treasuries, it removes one type of liquid asset from private portfolios and replaces it with another. The effect depends on whether investors view those assets as equivalent. Our evidence says they do not.
The paper also helps resolve the long-standing instability of traditional money-demand measures. Measures such as M1 became less reliable as money market funds and shadow banking grew. Once the monetary aggregate is expanded to include broader money-like claims and Treasuries, money demand looks much more stable. The problem was not that liquidity demand disappeared; it was that the financial system started supplying liquidity through instruments that older monetary aggregates did not capture.
The takeaway is that the boundary between money and government debt is porous. Treasury securities are not just a way for the government to borrow. They are part of the economy's liquidity infrastructure. When the government issues debt, when banks create deposits, and when shadow banks create near-money claims, they are jointly shaping the supply of assets that investors use as money-like stores of value. Understanding that system is essential for thinking about monetary policy, financial stability, and the role of Treasuries in global markets.