While the terms “money" and "wealth" often mean the same thing in everyday parlance, economists define money more narrowly as the component of wealth consisting of “transaction balances.ȁ That is, if you can use it to buy goods and services and to settle debts, then it’s considered to be money.

Money is distinct from other forms of wealth that first need to be liquidated—that is, converted into money—before their value can be spent. According to this definition, physical currency and checkable bank deposits constitute money. And, indeed, these objects make up the definition of what economists label as the M1 money supply.

Because money is valued as a payment instrument, people are willing to hold a fraction of their wealth in money form for the sake of convenience, even though money earns relatively little interest and cash usually earns no interest at all.

If M1 carries the opportunity cost of not earning much interest, then why has the M1 money supply been increasing?

This increase is shown in the RE graph above (red line), where we measure M1’s opportunity cost as the one-year U.S. Treasury yield (green line). In late ebruary and early March of 2020, the ed cut its policy interest rate dramatically to help ease credit conditions during the COVI-19 crisis. The resulting acceleration in the supply of M1 can be understood largely as banks accommodating an increase in people’s demand for money. However, the opportunity cost of money has remained more or less constant throughout 2020, over which time M1 growth has accelerated. What might account for this behavior?