When IOUs become currency

By Felix Salmon
July 13, 2009

OK, this is getting REALLY annoying — it’s happened again! Why is Ecto killing my posts when I publish them? Here’s a shorter version of my now-lost IOU post:

Yglesias says California’s IOUs are “arguably” unconstitutional. Babcock demonstrates if they’re not unconstitutional already, they will be if California starts accepting them in payment of taxes. Are we moving towards an alternative currency like the patacón? Will California banks start opening IOU-denominated bank accounts? Will California effectively devalue against the dollar? And how can that possibly be good for the nation as a whole? Geithner should put a stop to all this nonsense once and for all, ban the IOUs, and just bail out California already. It’s inevitable he’ll do it sooner or later, so best do it before Americans’ faith in fiat currency is shaken up too much.


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Why don’t you try saving your posts before you post them? Just a wild suggestion.

Posted by Jesse Eisinger | Report as abusive

Hm. So if the IOU’s are unconstitutional, then why would school vouchers be constitutional?

Posted by Jon H | Report as abusive

I heard somewhere that some town are issuing “script” locally. I guess we’re headed back to the 1800s faster than I thought. Fine. Great music and great novels.

Posted by E L | Report as abusive

Want to echo Jesse’s advice. But don’t save them in Ecto, save them in Word or textedit or something else.

Posted by Joel Spolsky | Report as abusive

Why are they unconstitutional? They’re just another form of bonds, which are tradable. I don’t think there is anything in the constitution that would prevent someone from tendering bonds or any other asset as a payment.

I think the banks are incredibly stupid in not accepting the IOUs, but that’s not really news, is it? They have demonstrated they don’t know when to buy or to sell. I’ll be surprised if stores like supermarkets and big electronics chains don’t start accepting the IOUs as payment.

Posted by KenG | Report as abusive

California’s IOUs pay 3.75% per annum interest and have a projected 90 dat maturity, so they are more bond-like than currency-like. Except, of course, that people aren’t buying them, but being forced to accept them. I have read that some people/businesses are already offering to buy the IOUs (at a discount, of course). Does anyone have any details on the prices being offered?

Posted by Donald A. Coffin | Report as abusive

I guess, IOUs are more like bonds with open ended maturity or zero maturity. If bond prices can go up or down, price of IOUs also can also go up and down. So technically it should be possible for the IOUs to be bought / sold at a discount or a premium compared to the “federal” dollars. I do NOT see anything illegal with that, as a “monetary” concept.

Bonds are in existence for decades. IOUs will now be the next level of sophistication in “financial innovation”.

Now that the California has discovered a new mechanism to create money out of thin air, I expect other states to follow and they could all be traded in the exchanges pretty soon.

Posted by RN | Report as abusive

Easy to laugh at the Patacón, but it patched over the gap it was supposed to patch quite efficiently.

As for Ecto, why not got luddite for a while, write your posts in Gates’ Word then paste ‘em in. Automatic failsafe that way. You’re not a big charts’n'photos blogger anyhow, Salmon.

Posted by otto | Report as abusive

As debt there is nothing unconstitutional about them. I was thinking about what would make them currency though. Requiring they be treated as legal tender would. Disavowing any repayment in the future other than in more IOUs would. Short of that, it lacks the defining characteristics of currency.

Before posting a blog comment, I always select the entire text and use Ctrl-C to copy it to the internal Windows clipboard. If anything goes wrong after clicking Submit, I can bring it back instantly with a Ctrl-V. Simple and effective.

Posted by anonymous | Report as abusive

IOUs will now be the next level of sophistication in “financial innovation”. [...] Now that the California has discovered a new mechanism to create money out of thin air, I expect other states to follow and they could all be traded in the exchanges pretty soon.

Why not take this further? You could combine IOUs from all 50 states (and maybe a few Argentinian provinces) and securitize them as IBS (IOU-backed securities). Then pool the IBSs into CIOs (collateralized IOU obligations) and divide those up into tranches…

Posted by anonymous | Report as abusive

I use Windows Live Writer for blog posting. It’s like Word but built specifically for blogs.

No bailout for California. They voted themselves bread and circuses, no tax increases, and no way for their government to fix things. No way the rest of the country is on the hook to “rescue” the state with the 8th highest per capita income (my state, for instance is 23rd), just so they can go on keeping their property taxes low.

Chrysler and GM had to go through bankruptcy to get their books cleaned up. California should have to reform its Constitution and budgetary process before this is even on the table. –Of course, if they did that, there wouldn’t _be_ a crisis. Or at least, no more in California than anywhere else.

Posted by Craig | Report as abusive

>>No way the rest of the country is on the hook to “rescue” the state with the 8th highest per capita income

Isn’t that the American way – for the poorest to bail out the richest.

Posted by jzw | Report as abusive

what you’ve lost in rhetorical flourish, you’ve (more than) made up for in succinctness; I wish you’d lose more posts to Ecto! or, at least, provide an Ecto-loss-like (what’d you want to say if you lost your post, but in short form) concise summary ahead of your longer posts :P

also fwiw…
http://www.winterspeak.com/2009/07/sorry -state-of-mark-thoma.html
http://neweconomicperspectives.blogspot. com/2009/07/berkshares-buckaroos-and-bea r-dollars.html

Posted by glory | Report as abusive

They are unconstitutional, that’s easy to see..however, I suspect before anyone can clear that up in court it will be past October already. No Fed money for CA is what DC is saying. Community currency would be very helpful for towns, counties and even regions but NOT statewide.
Editor Community Currency Magazine

If you are a Californian it makes sense to advocate a bailout for your state, but for others, what would be the logic of subsidizing a process that makes poor choices? Why would a non-Californian go along with a bailout?

I don’t see the IOUs degrading US currency unless the Federal Reserve tries to peg the exchange rate. It is much more likely that the market price of IOUs will be 50% to 90%, and so therefore California will experience inflation of 100% or so. Or, you could look at it as a movement of money from the pockets of the recipients of IOUs to the State. In other words, a stealth tax.

Posted by mrmeercat | Report as abusive

I have to say it too: Ctrl-A, Ctrl-C. It’s a reflex for me before I hit submit on anything.

Posted by Noumenon | Report as abusive

California IOUs are bid 97 cents on the dollar on Sacramento Craigslist – multiple buyers.

Posted by Michael Murphy, CFA | Report as abusive

Can’t state enough how important the sacrifices that go into wealth creation are.

Curious if anyone has caught this book yet? “The Richest Man in Town” by W Randall Jones. I’ve read half of it so far and let me tell you it is well worth it. Would like to hear what everyone else thought of it?