Sovereign State of California (An Update)

by L. Randall Wray

Finally, there is some good news out of California:

SACRAMENTO — State vendors and contractors could use their government-issued IOUs to pay state taxes, fees and liens under a bill approved by an Assembly committee. The Business and Professions Committee unanimously passed the bill by Assemblyman Joel Anderson during its first legislative hearing Tuesday. The bill requires the state to accept its own IOUs as payment for money owed to the government.

As a stopgap measure, this will ensure a demand for the state’s IOUs. Each individual vendor, contractor, or even state employee will accept the state’s new warrants up to the individual’s expected tax liability. Eventually the warrants will also be accepted by retail establishments and others who also have liabilities to the state of California—meaning that the state could (eventually) issue a number of warrants equal to the total of all such obligations owed to the state, on an annual basis.

The next step is to issue these IOUs at zero interest. The taxes, fees, and liens will be sufficient to generate a demand without promising interest. Currency is simply an IOU that does not pay interest—it is “current”. As I suggested before, the state can also accept its own “currency” in payment of fees and tuition paid to state institutions of higher learning—further increasing demand.

Unlike other local currencies around the country—such as the BerkShare in Massachusetts, the new California currency will be “tax driven”, thus sustainable. In other words, it is a sovereign currency backed by the state’s ability to impose taxes. As California is reportedly the eighth largest economy in the world, a new Bear Flag Dollar ought to do fairly well internationally (meaning in the United States and abroad).

It is amazing that the Obama Administration is ignoring the fiscal crisis in that state (and in all states). Since Arnold cannot run against Obama in the next election, he can at least threaten to secede and run for President of the new Great Nation of California. Mike Norman has outlined a nice game of chicken he could play:

“Here’s what Arnold can do, and I’ve said this before: Declare himself President of California and secede from the Union. Then he can issue his own currency (which is what these I.O.U’s are, effectively). After that, there’d be a short war and California would be brought back into the U.S. and war reparations would be paid to the state. (Possibly far more than what the state was asking for anyway.)”

Perhaps it is a bit far-fetched, but better than going bankrupt quietly—think Orange County in 1994 or New York City and State in 1975-76. See also John Avalon’s thoughts on the possible bankruptcy of both NY and CA.

Hey, here’s an idea. Why don’t all 50 states secede, form a Second United States, issue a New Dollar, and ramp up spending to the required level to get the national economy as well as the economies of the 50 states on a path to full employment?

8 Responses to Sovereign State of California (An Update)

  1. Yeah increase taxes and loose more jobs.We should't change the currency of the states but the political class in DC. All of them. Read what happens in CA after tax increases…“I have been forced to lay off 37 percent of my work force, including an employee who has been with me since 1981,” said Amir Oram, of the Market Place in City Heights. “No doubt about it, the economy is bad, but tax increases and the added cost of doing business are what worry me.”Read the rest here Tax Increases Costing Vital Local Jobs

  2. Randall:Will there not be utter chaos if states/counties/cities start seceding and issuing their own sovereign currencies? How do you handle something like this?

  3. Hi: we are already headed toward chaos because the federal government is standing idly by, allowing state and local governments to collapse. Something similar happened in Argentina before its financial collapse–provinces were forced to issue their own currencies because the federal government would not provide funding. However, Argentina was stuck on a dollar currency board–hence its national government really was helpless. The Obama administration is tying its own hands–it has a sovereign currency it can use. Thus, the threat of issue of sovereign currencies by states could prompt the federal government to finally take action. L. R. Wray

  4. Do you think a government seizure of all banks, which basically generate their own money through leveraging credit, would work instead? The interest generated by lending would then flow into government revenue directly instead of profits for already wealthy privite individuals, and could then be used to pay off debts, offer more needed public services, and then the government-run banks can then be used to finance infrastructure projects at little or no cost to the government. And I do not just mean control of banks by federal and state governments, but perhaps large and small municipal governments as well. Wouldn't this more or less create a huge stimulative effect?

  5. There are state regulators of state chartered banks; I do not know the procedures for seizing an insolvent bank at that level. Usually it is the FDIC and I suspect the proposal that state and local gov'ts seize banks would not be lawful. And anyway there is no need to take that step. A sovereign gov't spends by issuing currency (in the case of the federal gov't, mostly by simultaneously crediting bank reserves and deposits. The bank serves as intermediary between gov't and payee. There is no need to seize a bank to do this–they are happy to play the role. L.R. Wray

  6. Heer's the legal problem. Article 1 Sec 10 of the US Constitution forbids the states from issuing "bills of credit." That is essentially what these IOU's are. A bill is a promise to pay. But what the legislature is actually doing is converting these IOU's into redemption certificates which are promises to accept as payment.It may be this passes constituitional muster.I say go for it California.By the way, I am an attorney and lawyers interested in the monetary system are discussing the legal possibilities here.

  7. Just did some legal research on the qustion of whether tax redemption certificates are constitutional. According to these cases they are. They are known as the Virgina Coupon cases.Poindexter v. Greenhow, 114 U.S. 269 (1885)Cahffin v. Taylor, 116 U.S. 567 (1886)

  8. I have now read what appears to be the leading landmark case on the subject,Houston & Texas Central Rd. v. Texas, 177 U.S. 66 (1900),Which discusses all of the previous cases. What the court essentially holds is that regardless of what the instrument is called, the question is whether the legislature intended it to be used as money and circulated like money.If it is not intended to be used as a money substitute, then it does not violate the Constitutional prohibition against "bills of credit."But the case also holds that even if a state does issue an unconstitutional instrument, the state is within its right to honor the instrument or should replace it with an instrument that is not illegal.