The Sovereign State of California?

by L. Randall Wray

As everyone knows, California’s state budget is in dire straits. Unlike the federal government, US state governments really do finance their spending through a combination of tax revenues and borrowing. They are users of the nation’s currency (the dollar), not issuers. The current recession (or depression) has caused their tax revenues to collapse. Their projected budget deficits cause ratings agencies to downgrade their debt—making it too expensive to borrow as this sets off a vicious cycle of further downgrades and ever rising interest rates.

However, California might have discovered a solution. Why not become sovereign? (As a native Californian, I can recall the 1960s pipedream of secession of northern California along with Oregon and Washington to create a utopian, green, peaceful nation—but that is another matter.) As reported this morning by Jim Christie:

“California prepared on Tuesday to resort to issuing IOUs as the giant but cash-strapped U.S. state struggled to approve a new budget in time for the new fiscal year that begins on Wednesday. The IOUs, which are notes promising payment to vendors and local agencies, or shutting down some public services, are among measures that California and other states may have to rely on as they contend with staggering budget gaps caused by the U.S. recession.”

That could be a step in the right direction, but it is still borrowing. Here is a suggested improvement. The state should announce a new currency, the California Dollar. Henceforth, the California Dollar will be accepted in all payments made to the Great State of California (fees, fines, and taxes, including payments made by students to the state’s public universities). The state, in turn, will begin to make a portion of its payments in the form of California Dollars. Of course, no one can actually make payments in the form of California Dollars until the state has actually spent some into existence. State payments using California Dollars will be made, as described above, to “vendors and local agencies”. Over time the state can negotiate with others, including employees, to pay out California Dollars. Note that the state will run deficits in California Dollars only to the extent that the population wants to accumulate those Dollars (in excess of the fees, fines, and taxes paid).

Some readers might worry about anti-counterfeiting laws. So far as I understand it, the California Dollar would be treated like the “local currency” systems already in operation around the nation. In the beginning, California will probably value the California Dollar at par against the US dollar. However, it should not promise to convert the California Dollar on demand since that could lead to insolvency (after all, California’s current problem is that it cannot get enough US dollars to cover its spending). The California Dollar would be freely convertible in private exchanges, however—at a floating rate. Exchange rates are very complexly determined and I would not want to predict how the California Dollar will do over the next few years. However, since this proposal would allow California to halt the “Little Hoover” downward spiral occurring in states all across the country, I expect its new Dollar would do pretty well.

Who knows, maybe Arnold—not Obama–is the next FDR?

4 Responses to The Sovereign State of California?

  1. I'm no fan of FDR, but this is one of the best ideas I've heard. Independence for California and every other state. Most states are still far too big though (California & Texas especially). They should be broken down to about the level of city-states. The easier it is for people to leave a polity the more "policy competition" there will be. Away with oligopoly in the governance industry! Let a thousand nations bloom!

  2. What if all states in the US with budget deficits and chance of start doing it? Will Igor Panarin's prediction come true? Check Wall street journal Dec 28 2008 issue

  3. Jct: There’s nothing wrong with small denomination California State IOUs if anyone can pay their taxes with them. When Argentina’s government workers were faced with cuts, their unions talked 6 state governments into paying them with small-denomination state bonds which could be used to pay for state services and taxes by everyone. When the local currency is pegged to the Time Standard of Money (how many dollars per unskilled hour child labor) Hours earned locally can be intertraded with other timebanks globally! In 1999, I paid for 39/40 nights in Europe with an IOU for a night back in Canada worth 5 Hours. U.N. Millennium Declaration UNILETS Resolution C6 to governments is for a time-based currency to restructure the global financial architecture. See Too bad California IOUs won’t be accepted in payment for state taxes and services like state bonds were in Argentina. Too bad California IOUs will be denominated too big to use as local currency. Too bad Argentina people were smart enough to avoid the tent-cities catastrophe and California people are too stupid to follow their example.If they make IOUs legal tender, I'll take back every joke I ever made about Girlieman Governor Musclehead if he engineers the California state currency lifeboat. .

  4. I still think Arnold should pick up this matter again. It can work. Boy, could it work. No need to secede.