Can Stimulus without Debt Be Used by Other

to create an asset, paper money, without also creating a debt. But in a paper money system, it really is that easy.

Although paper money held by the public is not government debt, injecting too much paper money into an economy that is already at full employment of resources will make aggregate demand for goods and services exceed potential output and therefore generate rising prices—inflation. Injection of money into the economy should not cause concern about government debt, but should cause concern about inflation if the economy is already at full employment. The policy I will call “stimulus without debt” prescribes injecting money only in a recession when employment is below its potential, so that, as I’ll explain later, an increase in demand for goods and services will cause an increase in output, not an increase in prices.

Stimulus without debt in the Benevolent Ruler’s Economy

In the benevolent ruler’s economy, money consists of official paper notes, and all transactions in this economy occur in official government paper notes. These paper notes were once backed by gold, but are no longer backed by gold or anything else, so they are not government debt. Assume the benevolent ruler’s economy is initially at full employment. Now suppose a recession occurs because of a fall in aggregate demand for goods and services. There are several possible causes of a fall in aggregate demand. Consider a fall caused by a dramatic and sustained plunge in the stock market. In response, anxious consumers with less stock market wealth cut their spending, so consumer demand for goods and services falls. Producers of these goods and services respond by cutting production and employment. Managers in firms making consumer goods or providing consumer services react by cutting