The constitutionality of California IOUs

July 13, 2009

Matt Yglesias questions here whether California is violating the constitution by issuing IOUs.

First you’d have to determine whether the warrants are debt or currency. States are prohibited from circulating their own version of the greenback.

I’d argue debt since they bear interest and have a maturity date. The SEC’s ruling that they are securities also bolsters the case since it means the rules and regulations governing the municipal debt market would apply to IOUs. Now, if the state passes a proposed bill allowing IOU recipients to pay their taxes in IOUs, I think the distinction gets murkier.

My colleague Felix Salmon forwarded along this from Bureau Crash, which cites two precedent cases, one in 1830 and another in 1900, to argue the point that if looks like currency, walks like currency, it most likely is currency.

If it is unconstitutional though, how come California has been able to issue IOUs twice? I can’t imagine lawyers would let the opportunity slip by if there was a strong case.

One comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

This would make a good bar question, but hope they do not ask it ! What is the definition a bill of credit ? If vendors are forced to sell the IOU’s on Craigs list just to get money to survive, can they later recoup those charges from State of Californa? What about the interference with Union contracts, forcing furlough days in abridging contractual negotiations ? The whole issue appears to be very interesting ?
Note, the States cannot even issue bills of credit if they have approval of Congress.

Article 1 of the Constitution of the United States

Section. 10.

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it’s inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.

No State shall, without the Consent of Congress, lay any Duty of Tonnage, keep Troops, or Ships of War in time of Peace, enter into any Agreement or Compact with another State, or with a foreign Power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.

Posted by Paul Weiss | Report as abusive