<p>First, bonds do not count as money because they typically have too long maturity so they will not qualify even as broad money (<a href="https://data.oecd.org/money/broad-money-m3.htm#:%7E:text=Definition%20of,securities%20up%20to%20two%20years." rel="nofollow noreferrer">M3</a>). However, if they would qualify as a money then it would still reduce money supply.</p>
<p>If you count the bond as money then when the 1000 dollar bond was issued by government and bought by newly created  central bank reserves then 2000 dollars will be created (bond with nominal value of 1000 and reserves worth 1000). When central bank sells the bond, it gets back the 1000 so money supply would drop by 1000.</p>

CC BY-SA 4.0
2022-11-11T21:09:19.130Z
1. For something to be money medium of exchange is not enough, it also has to be unit of account and store of value. 2. Every currency has its own money supply. Bitcoin adds exactly 0 to the money supply of US dollars, it only adds to money supply of bitcoins
1muflon1
CC BY-SA 4.0
2022-11-11T21:22:28.607Z
Not of US dollars. I mean what sort of a question is this? Imagine that company x produces ice cream and shampoo. Both shampoo and ice cream happen to have same price, so if they produce more shampoo did ice cream supply increased? Of course not. Dollar 1 and 2  despite of peg are two separate currencies
1muflon1
CC BY-SA 4.0
2022-11-11T21:24:15.197Z
Money supply is supply of some currency. I used dollar as an example. You cannot add supply of two different currencies together to create some sort of ‘supreme’ money supply. Or to be more clear you could do that but it would be like adding two distinct goods together, and so it’s not being done
1muflon1
CC BY-SA 4.0
2022-11-11T21:30:06.420Z
@user253751, what exactly are you trying to achieve? It should be very obvious that buying and selling bonds by a central bank alternates money supply.
AKdemy
CC BY-SA 4.0
2022-11-11T21:52:43.943Z
Open market operations have very little to do with ["total money supply"](https://economics.stackexchange.com/a/49858/37817).
AKdemy
CC BY-SA 4.0
2022-11-11T22:08:05.767Z
@user253751, bonds simply are not money, by any definition I know. See for example [this answer](https://economics.stackexchange.com/a/52316/37817) which is probably similar to what you have in mind.
AKdemy
CC BY-SA 4.0
2022-11-14T00:03:30.833Z
question was about singular currency/money supply by single central bank. The question wasn't about currencies plural. Also, while commentators might sometimes talk about supply of cosmetics lets say, mathematically and economically it makes 0 sense to try to add quantities of different goods. Aggregate supply is not even sum of individual market supplies because that would make 0 sense. However, this is moot point since is crystal clear the question is not asking about multiple different currencies.
1muflon1
CC BY-SA 4.0
2022-11-15T06:54:02.023Z
It’s impossible for bond to be separate currency. Bond is the currency in which its denominated. Cheque denominated in dollars is part of dollar money supply not supply of cheques
1muflon1
CC BY-SA 4.0
2022-11-11T09:29:54.730Z
2022-11-11T09:29:54.730Z
1muflon1
<p>When bonds are sold by the central bank then existing bonds will have their value drop.
For example, if you got a bond for 10% coupon at 10K and the central bank sold bonds now in the secondary market they are priced at 5K. This means that their coupon is now 20% because it has not changed in nominal terms.
So, if the government wants money they have to issue bonds at 20% because if they issue them for less people will buy the existing ones instead. So, government and corporations that issue those bonds will tighten up their spendings and money will be more valuable.
Using bonds as currency would make no difference at all.</p>

CC BY-SA 4.0
2022-11-14T15:01:05.510Z
2022-11-14T15:01:05.510Z
Stelium
<p>When the central bank wants to reduce the money supply, it can sell bonds. That way, the money supply reduces by the amount paid for the bonds. The buyer will have bonds instead of cash. The bonds can be used as a currency (e.g. exchanging the bonds for goods and services, or using the bonds as collateral for borrowing money). If the bonds are indeed used as currency, wouldn't the bond sale by the central bank have failed in its objective to reduce money supply?</p>

CC BY-SA 4.0
2022-11-11T20:46:43.900Z
This also applies to increasing money supply, which means in your view, central banks cannot change money supply at all.
Alex
CC BY-SA 4.0
2022-12-14T16:43:27.153Z
Does this answer your question? [Is it reasonable to consider government bonds as money](https://economics.stackexchange.com/questions/27297/is-it-reasonable-to-consider-government-bonds-as-money)
Mick
<money-supply><central-banking><bonds>
How does the central bank reduce money supply by selling bonds if the buyer of the bonds can use bonds as currency?
Flux
# How does the central bank reduce money supply by selling bonds if the buyer of the bonds can use bonds as currency?

(Asked by: username_0 on 2022-11-11)

When the central bank wants to reduce the money supply, it can sell bonds. That way, the money supply reduces by the amount paid for the bonds. The buyer will have bonds instead of cash. The bonds can be used as a currency (e.g. exchanging the bonds for goods and services, or using the bonds as collateral for borrowing money). If the bonds are indeed used as currency, wouldn't the bond sale by the central bank have failed in its objective to reduce money supply?

**Tags:** money-supply, central-banking, bonds

> **Comments:**
> **username_1**: This also applies to increasing money supply, which means in your view, central banks cannot change money supply at all.  
> **username_2**: Does this answer your question? [Is it reasonable to consider government bonds as money](https://economics.stackexchange.com/questions/27297/is-it-reasonable-to-consider-government-bonds-as-money)  

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## 2 answers

### Answer by username_3 on 2022-11-11. Score: 0

First, bonds do not count as money because they typically have too long maturity so they will not qualify even as broad money ([M3](https://data.oecd.org/money/broad-money-m3.htm#:%7E:text=Definition%20of,securities%20up%20to%20two%20years.)). However, if they would qualify as a money then it would still reduce money supply.

If you count the bond as money then when the 1000 dollar bond was issued by government and bought by newly created central bank reserves then 2000 dollars will be created (bond with nominal value of 1000 and reserves worth 1000). When central bank sells the bond, it gets back the 1000 so money supply would drop by 1000.

> **Comments:**
> **username_3**: 1. For something to be money medium of exchange is not enough, it also has to be unit of account and store of value. 2. Every currency has its own money supply. Bitcoin adds exactly 0 to the money supply of US dollars, it only adds to money supply of bitcoins  
> **username_3**: Not of US dollars. I mean what sort of a question is this? Imagine that company x produces ice cream and shampoo. Both shampoo and ice cream happen to have same price, so if they produce more shampoo did ice cream supply increased? Of course not. Dollar 1 and 2  despite of peg are two separate currencies  
> **username_3**: Money supply is supply of some currency. I used dollar as an example. You cannot add supply of two different currencies together to create some sort of ‘supreme’ money supply. Or to be more clear you could do that but it would be like adding two distinct goods together, and so it’s not being done  
> **username_4**: @user253751, what exactly are you trying to achieve? It should be very obvious that buying and selling bonds by a central bank alternates money supply.  
> **username_4**: Open market operations have very little to do with ["total money supply"](https://economics.stackexchange.com/a/49858/37817).  
> **username_4**: @user253751, bonds simply are not money, by any definition I know. See for example [this answer](https://economics.stackexchange.com/a/52316/37817) which is probably similar to what you have in mind.  
> **username_3**: question was about singular currency/money supply by single central bank. The question wasn't about currencies plural. Also, while commentators might sometimes talk about supply of cosmetics lets say, mathematically and economically it makes 0 sense to try to add quantities of different goods. Aggregate supply is not even sum of individual market supplies because that would make 0 sense. However, this is moot point since is crystal clear the question is not asking about multiple different currencies.  
> **username_3**: It’s impossible for bond to be separate currency. Bond is the currency in which its denominated. Cheque denominated in dollars is part of dollar money supply not supply of cheques  

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### Answer by username_5 on 2022-11-14. Score: -5

When bonds are sold by the central bank then existing bonds will have their value drop.
For example, if you got a bond for 10% coupon at 10K and the central bank sold bonds now in the secondary market they are priced at 5K. This means that their coupon is now 20% because it has not changed in nominal terms.
So, if the government wants money they have to issue bonds at 20% because if they issue them for less people will buy the existing ones instead. So, government and corporations that issue those bonds will tighten up their spendings and money will be more valuable.
Using bonds as currency would make no difference at all.


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