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I am a newbie and wanted to ask a quick question regarding statements that economists make, that is:

  1. "A currency is a promise to pay"

  2. "US will not be able to pay it's debt"

So that I can understand their point-of-view in full: My understanding is that prior to fiat currency (1971), the promise to pay on the currency was the equivalent in gold (in proportion to the value of the currency). However, the changeover to fiat currency since 1971, meant that the new fiat currency no longer has any physical commodity attached to it. As there is no physical commodity, and it's the currency itself, then one would think the US government's 'promise to pay' on fiat currency no longer applies, because there is no physical commodity to pay anymore and the bearer already has the dollar currency:

So, my question is in 2 parts as they are linked:

  1. How does the US government materialise the 'promise to pay' to the bearer of the fiat currency?

  2. What debt is there to pay, when the bearer already has the dollar?

Many thanks in advanced.

Cem R.
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1 Answers1

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  1. If you ask the Federal Reserve to honour the promise to pay on a dollar bill, they will give you a different dollar bill.

  2. The US debt that economists worry about is not the amount of paper currency in circulation, but US Treasury bonds. Of course the US could pay them off by printing money, but to do so would devalue the dollar, cause high inflation, and make people reluctant to lend the US government money in future and so increase the interest rate they would have to pay.

Mike Scott
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