I am now 60 years old, so it has been many years since I was enrolled in courses of formal education. Something keeps nagging at me however.
I seem to remember something about it no longer being legal for the individual states or cities to issue their own legal tender. Maybe it was when the federal reserve system was created. Or perhaps it was after the war between the states and after the Confederate States of America having issued lots of paper money which ended up being completely worthless.
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A little research turned this up. The U.S. Constitution, Art. I Sec. 10 Cl. 1, states, in part that:
"No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; ..."
If the state of California issues IOUs, and the banks accept these IOUs to pay obligations like loan payments, then in my logic these state issued IOUs have clearly morphed into a form of currency or legal tender issued by the state of California. I guess over the years this has been made legal. Another way to view it is that the state of California is requiring its creditors to accept (whether wanted or not) that instead of getting their money immediately the creditor will be forced to loan the state that amount of money at a rate of interest of 3.75%. Not a bad rate for a state with a horrible credit rating.
It is my understanding that California intends to issue IOUs because they would have to pay outrageously high rates of interest if they borrowed money short term in their current precarious credit situation. Lots of consumers find themselves in this exact situation, and are forced resort to rip offs like payday loans or using their credit cards (not debit cards) to buy groceries and gasoline. Some even use one credit card to make the payments on another card.
If I am in Wal-Mart or McDonalds and try to pay my bill by giving them an IOU they will either laugh at me, throw me out, or call the police. I read in today’s news that California intends to issue IOUs as payment for income tax refunds. Say what?
This is a consumer protection issue. It is important that only the federal government be allowed to issue currency and print paper money. The U.S. Dollar is backed by the full faith and credit of the federal government of the United States of America, so most people find it to be just as safe as using coins which are made from a precious metal like gold or silver. Well almost… But an IOU issued by the state of California or an individual city is not just as good and as safe, not by a long shot.
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