Can’t Monetary Stimulus Overcome a Severe

the government therefore owes paper money to the holders of government bonds.

Nevertheless, current central-bank accounting has ignored the fundamental change that occurred when the government withdrew its promise to pay gold (or silver) to any holder of its paper money. Paper money held by the public continues to be listed in the liability column of the central bank’s balance sheet. Moreover, when the accountants produce the consolidated balance sheet of the government and the central bank, paper money held by the public continues to be included in the liability column of the consolidated balance sheet. This inclusion causes the liabilities of the central bank, and of the consolidated government, to be greatly overstated.

By contrast, official government debt correctly includes government bonds held by the public and correctly excludes paper money held by the public. The official government debt correctly focuses attention on the government’s obligation to pay money to bondholders and ignores paper money held by the public because the government has no obligation to pay anything to the holders of paper money.

Some economists, however, not just central-bank accountants, continue to call government paper money held by the public “government debt,” usually without giving any justification for using the term “debt.” Why do they do this? One reason may be inertia: government paper money was indeed government debt when the government promised to pay gold to anyone holding the paper money who wanted gold. Another reason may be an intuition that there can’t be a “free lunch.” It seems like a free lunch when the government writes checks to members of the public and prints enough paper money to pay check recipients who request paper money. Surely it must be true, some think, that the government is incurring a debt when it prints pieces of paper to give to the public; it can’t really be that easy for the government