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.

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