Lesson Progress
0% Complete

Activity title

Issue government bonds

(possibly as a continuation of the activity “founding a state”)


Part 1 Government bonds made easy 

As in the activity “founding a state”, there is a finance minister, a head of the central bank and the group that plays the population or the private sector. First, the government again decides on deficit spending and pays the population for goods and services. The resulting national debt is noted on the blackboard. The new private sector assets are also noted on the blackboard. Then the government issues government bonds for the same amount of deficit spending. It sells the bonds to the population. The changes are entered on the balance sheet of the state on the blackboard. It will become clear that the issuing of bonds does not change the debt level of the state. There is only a change in the kind of debt. Then the government bonds fall due and are repaid – again we see on the blackbord that the government debt stays unchanged. Discussion What is changing instead? What effect do the government bonds have? Answer: Bonds change liquid money into a non liquid asset. What consequences could that have? In what situation will that be helpful?

Part 2: Government bonds and the banks

This passage is more complex and takes into account the role of the banks. It illustrates government spending in a two-stage monetary system. Again, the government decides on deficit spending. But this time, the government transfers the money to the recipients through its banks. The banks keep the state money and pass it on to the recipients. The head of the central bank complains that the banks have too much central bank money – they will not need to borrow money from the central bank against the key interest rate. The key interest rate will not work anymore. To help the central bank the government is now selling government bonds to the banks. The excess liquidity in the banks is sucked up, and the central bank’s monetary policy with its key interest rate is possible again.


What should the participants take with them?

– Because of its currency monopoly, the state can create money with the help of its central bank. 

– State deficits are the counterpart of the savings of the private sector.

– Government bonds are not necessary to raise money. Instead, they have the function to change liquid state money into a solid asset, also guaranteed by the state. 

– The sale of government bonds changes the kind of debt the state holds in its balance sheet, and to a change on the asset-side of the citizen, or the bank. Only the type of the debt or credit changes. But the amount of the net assets remains unaffected. 

– When government bonds are sold to citizens, the liquidity of the private sector decreases, and so does total demand. Government bonds that are sold to the public therefore counteract inflationary tendencies.

– In a two stage monetary system, private individuals cannot hold non cash central bank money, they only use the banks’ deposit money. The banks are intermediaries and “translators” between the two types of money.

– When the government spends government money in a two stage monetary system, both the amount of bank money in the public sector and the amount of central bank money in the banks is increased by their “translation”. 

– The rise of central bank money in the banking sector is an undesirable side effect of the deficit spending. It disturbs the central bank, because it wants the banks to have to borrow money from it again and again at the key interest rate.

– Government bonds that are sold to and with the help of banks absorb this excess liquidity in the banking sector. Only in this way can the central bank enforce its key interest rate.


Paper in three colours to mak central bank money, government bonds and deposit money (paler, smaller), a board on which the government debt levels can be noted clearly visible. A slip of paper with the text for the head of the central bank. 


1,5 hours

Group size

3 bis 20

Instructions for trainers

part 1. Government bonds made easy 


1. head of the central bank 

2. finance minister

3. the group as population and private sector


1. deficit spending:

See activity “State foundation”. The government decides to spend 2200 money on government expenditures that are not covered by tax revenues. The central bank makes the money, gives it to the Minister of Finance. The Finance Minister pays citizens for goods and services. The deficit expenditures are noted on the blackboard as national debt: 

Government debt before government bond are issuesd:

Deficit expenditure 2020:           -2200 Money

Government debt:                      -2200 Money

2. selling government bonds to the population

The Minister of Finance issues government bonds in the same amount as the national debt, (here in the amount of 2,200 money). The bonds are denominated in the national currency, i.e. money, and are issued in the same denomination as the money. But unlike money, government bonds promise an interest rate and have a term. 

On a government bond, for example, it could say: “Government bond, value:100 Money, term: 1 year, interest: 5%. The government bonds can be labelled or simply differ by colour or form. The Minister of Finance offers the government bonds with the appropriate information for purchase. Most players should be interested in the deal. The Finance Minister exchanges the government bonds for the banknotes. 

What happened? Does the state now have higher debts due to the issue of government bonds?

Government debt after issuing government bonds:

Deficit spending                                                  -2200 Money

Income from the sale of government bonds    +2200 Money

Debt from government bonds                            -2200 Money

Government debt:                                               -2200 Money

On the blackboard we see the balance sheet of the government after the bond issuing. The net assets have not changed. The state previously had 2200 money public debt from money creation for the deficit budget. Now the money comes back. The revenues cancel the debt from the money creation. However, a new debt has been created instead: Because now the state owes its citizens the repayment of the government bonds. From the point of view of the state, then, it is a change of liabilities: which means that it has exchanged one debt for another (the debt from money creation for the debt from the government bonds) without any change in the total result. From the point of view of the citizens, on the other hand, it is a change in on the asset side. They have exchanged liquid state money for an interest-bearing government bond.

Government bonds become due

What happens if the government bonds are due after one year – does the government have a problem then? No. Again money and government bonds are exchanged. The bonds expire and the citizen are paid back their money – which leads to a renewed deficit expenditure of 2200 Money for the state. But the liability of the bonds has expired. The private sector now has again money instead of government bonds on the asset side. And the government again owes from the money issuing and no longer from the bonds. The only factor that changes the net assets for both parties is the 5% interest that the private sector receives and the state has to pay.

Part 2 Government bonds and the banks


1. head of the central bank

2. finance minister

3. 1-3 bank director

4. the group as population and private sector

The government’s deficit spending…

This passage is more complex and takes into account the role of the banks. The “population” gathers in groups behind their banks. The government is again making deficit spending. Again, the central bank prints money, but this time the government transfers the money to the banks through the central bank.

…is translated into deposit money by the banks

A chain is formed. The Minister of Finance announces to transfer 200 Money as Corona-immediate-aid to each citizen. Then the central bank takes 200 money each and hands it to the recipient’s bank. The bank, however, keeps the state money and passes another kind of money on to the recipient – the so-called deposit money, which the banks make themselves. (For example, from smaller, paler pieces of paper on which they paint a DM for deposit money). In the end, all citizens have their deposit money with which they do business among themselves. 

The head of the central bank fears for the key interest rate:

The banks now each have a small pile of central bank money on their desk. This is a problem for the head of the central bank. She now says her text loudly and lamentingly: “My key interest rate no longer works! My key interest rate no longer works! The banks already have enough money. Nobody has to borrow money from me at the key interest rate anymore!”

Short explanation from the trainer: The key interest rate is the most important instrument for the monetary policy of the central bank, as  the key interest rate influences the whole economy. But to make changes in the key interest rate effective, banks must always borrow new money at the actual key interest rate from the central bank. (See article section 7 What part do government bonds play in deficit spending? And 12. when does inflation arise? And why is deflation a problem?) 

Government sells government bonds to the banks 

Now the government does what it always does: it is selling government bonds to the banks – the same amount of the former deficit spending. The banks have no choice but to buy. It is a good offer. Now the banks no longer have central bank money, but instead the government bonds that pay an interest. In return, however, they will soon have to borrow money from the central bank again for their business … at the key interest rate. The head of the central bank is relieved. Her most important instrument is working again.

In conclusion, ask what the participants have learned about government bonds. In the end summarize once again:

1. government bonds do not serve to raise money. They have various other functions: most important government bonds make a monetary policy with the prime rate possible. By selling government or central bank bonds to the banks, the government or central bank can take back to the banks the excess central bank money that is stuck with them. In this way, they remain dependent on constant credit from the central bank at the prime rate.

2. When the population buys government bonds (through the banks), they also serve the purpose of reducing demand in the real economy and prevent inflation.

4. Bonds are the safest possible form of investment. Banks and insurance companies need them for security. And private individuals also love government bonds as a risk-free form of investment. Financial markets are hard to imagine without government bonds

Debriefing and evaluation


Tips for trainers

The most important information on these exercises can be found in the paragraphs of the article on MMT: “6 If central bank money and fiat money move in separate monetary cycles – how does government spending make its way into the deposit money cycle and thus into the real economy?” “7. what part do government bonds play in deficit spending?”

The activity is best performed with a group that has already performed the state-founding game. If the group instead is new to the topic, invest some more time in the first round with the first deficit spending.

Challenges that might occur: .

If in part 1 not all citizens want to exchange their money for government bonds, it doesn’t matter. Then the government debt on the blackboard is made up partly of the original deficit spending and partly of government bonds. The trainer can say that she will later sell the remaining government bonds in an auction to the banks, which will certainly take them.

The participants may ask: Why are the banks buying bonds even when there is a 0 interest-rate, or even a negative interest rate? Because the central banks can make them do so. All central bank money exists on central bank accounts. The central bank can ask the banks a negative interest rate on the central bank money that the banks are holding in their account. If the negative interest is even more negative than the negative interest on bonds – they will be the lesser of two evils and banks will buy the bonds. Central banks have three different key interest rates. By manipulating them, they can make banks buy bonds at any rate they decide.

If the participants say that the government cannot simply get money from the central bank when it wants to (keyword: ban on public financing) the trainer can explain that the relationship between the government, the central bank and the banks and the order of money flows is regulated differently in different countries. 

But that the game shows two basic truths that apply in all countries with their own fiat money: The state in its two roles as government and central bank has the monopoly on the currency (no matter how the processes between the two state institutions are organized). And government bonds are used to withdraw liquid money from circulation and replace it with a fixed value investment. 

If the learners insist on a completely realistic presentation or show great interest in the different institutional processes and the practical implementation of government debt, then in another lesson hand out information on the procedure of government debt in Canada, the USA and the euro zone. Three participants could form three groups, study the process in one country and then try out for themselves how the game would have to be adapted to represent the respective money creation mechanisms. 

× Chat with us! Available from 10:00 to 18:00 Available on SundayMondayTuesdayWednesdayThursdayFridaySaturday