Would Stimulus without Debt Undermine the Fed’s

not government debt. When government paper money was introduced during the past three centuries, it was usually “backed” by gold (or silver)—that is, if any holder of paper money wanted the government to exchange it for gold, the government promised to make the exchange. Thus, the government owed gold to any holder of paper money, and the government had to be ready to provide gold to any holder of paper money who requested it. Because of this promise, government paper money held by the public was viewed as government debt and included in the liability column of the government’s balance sheet. This promise to pay gold was probably necessary to win the acceptance of government paper money by the public.

But in the last century, the public in most economically advanced countries gradually gained confidence in government paper money. The governments of these countries gradually withdrew their promise to provide gold to any holder of paper money who requested it. Despite the withdrawal of this promise, most of the public continued to be willing to hold paper money and use it in transactions. One reason for this public willingness was that the government guaranteed that the public could use its paper money to pay taxes; another was that the government stated that its paper money could be used by the public to pay off private debts. But it is possible that even without these guarantees by the government, the public would have been willing to hold and use government paper money because of confidence gained over decades of use for transactions.

Thus, it is now the case that in most economically advanced countries, the government does not owe anything to holders of its paper money. Paper money held by the public is therefore no longer government debt. By contrast, each government bond held by the public is government debt because the government promises to pay its paper money to holders of bonds according to the schedule of interest and principal on the bonds;