This chapter documents the explosive growth of the market for cash equivalent instruments (the money market) during the two decades preceding the recent financial crisis. This growth went virtually unnoticed in both academic and policy circles. The chapter then reviews the various legal, accounting, financial, and economic contexts in which cash equivalents are treated “as if” they were checkable deposits, even though cash equivalents do not generally function as a medium of exchange. Within economics, there is a notable cognitive dissonance in this area: one sees a conceptual tendency to group cash equivalents with ordinary bonds rather than with acknowledged forms of money like checkable deposits. With this discussion as a backdrop, the chapter investigates what it means to say that cash equivalents are money-like, whereas other financial instruments—like longer-term bonds, or shares in equity mutual funds—are not. There is a remarkable lack of any clear account on this score in the existing literature. This analysis provides an important foundation for the book’s institutional design. In particular, the analysis suggests that the legal category “deposit” is formalistic and obsolete. Our current system of money and banking does not take the money market seriously as a legal-institutional matter.
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