Answer to Question #87005 in Macroeconomics for Dennis Gurban

Question

Do you believe and could you explain how if every single dollar owed to the US government was paid back, there would not be one dollar in circulation?
Marriner Eccles who was Governor of the federal reserve said in 1941 “If there were no debts in our money system, there wouldn't be any money.”

Answer 1

Every dollar of the monetary base (or "narrow money" or "high-powered money") comes into existence with a one-to-one increase in the public debt, collectively owed by the taxpayers. Then, private banks use that base to create more dollars (in "broad money") that come into existence with a one-to-one increase in private debt.

Going the other way, if people in the private sector ever paid off all of their debts, and the federal government paid off all of its bondholders, then the supply of US dollars would be virtually extinguished.

For exhample, when the commercial bank extended a $900 business loan to Sally, it created that money out of thin air. When Sally goes to to buy supplies — writing checks drawn on her new business checking account — she pushes up prices even though no one else in the community has had his spending reduced by $900. Billy the teenager still thinks he has $1,000 in his checking account, which he is free to spend as he pleases. In a very real sense, the bank loaned Sally $900 that it created as a bookkeeping entry.

On the other hand, when Sally pays off her loan, that $900 is extinguished just as magically as it had first been created. When the bank's accountants remove the liability of Sally's checking account from the bank's balance sheet, it doesn't show up in someone else's checking account.