Looking at California’s ongoing money problems I was struck by an odd idea: they’re the eighth largest economy in the world and they don’t have their own fiscal system.
So the first question is could California issue Cali-bucks good for all debts private and public within the state of California?
What complications would ensue if they embarked on my mad scheme? What if they enforced the circulation of Cali-bucks somewhat by only handling the state’s financial transactions in Cali-bucks.
What difference would it make for the rest of the US if the Cali-buck was fixed to the US dollar or floated free; could California drag the rest of the country into its deeper economic hole through its own fiscal policies?
Are there any examples of two overlapping government currencies along these lines anywhere in the world?
Putting aside the legality of that, considering that California has the lowest bond rating of any state right now (correct me if I’m wrong), I wouldn’t accept Calibux.
I’m pretty sure you’re right on that which is part of the reason I find the question interesting. I can recognize that it wouldn’t be a good idea but I’m interested in all of the implications of such a move…
It’s not quite the same thing, but in some countries of the Carribean, Central America, and South America, the U.S. dollar is as common as the local currency. When I was in St. Martin a few years ago I wanted to get some of the local currency to add to my collection of currency from countries I had visited and I couldn’t find any. All the hotel, restauants, etc. that I patronized had only U.S. dollars. And a few years ago one of the South American countries (I’m blocking on which one) nearly voted to abolish its own currency and use U.S. currency.
If you’re interested in why this is case (and also the bit about not allowing them to permit anything but gold and silver as payment of debts), you might find Charles A. Beard’s “An Economic Interpretation of the Constitution of the United States of America” an interesting read.
I’m not trying to be argumentative here, just trying to understand.
So what about banknotes, then? The US didn’t issue banknotes until the 1860’s. Since private banks in the US did before that point I can only assume that it wasn’t considered to be against the Constitution. Is this a situation where the definition of “coin money” has shifted enough that the hypothetical Californian currency would be struck down? Is it just a situation where a state demanding it would be the problem? (I assume an answer would be in Beard’s book but Amazon doesn’t ship that quickly. )
And because I’m still curious about the economic effects of California trying to establish their own currency I’m still interested in what would happen if they tried.
There have been various authorities who have issued scrip, for instance during the Depression:
Scrip which circulates at a local level to a degree is still sometimes issued as a publicity or fundraising effort by entities like school districts. This is not unconstitutional. It CAN arouse the attention of the IRS, who view it as a form of barter, and want to be sure tax laws are not being circumvented. If California payed its state employees off in California-issued scrip, the IRS would insist that some equivalency be established, and those employees still paid their Federal income taxes. In dollars.
Well, nothing in the Constitution prohibits a private bank from issuing a bank note, or a private citizen from accepting them in payment of debt. This is, more or less, what a cashier’s check amounts to. But private bank notes are not, as a U.S. central bank note (i.e. dollar bill) is, “legal tender for all debts, public and private”. Meaning, neither you nor your state government can force someone else to accept a private bank note as being a valid instrument for repayment of debt.
Incidentally, I believe the text of the Charles Beard book I mentioned is available online somewhere. Seems like I came across it on a university web site somewhere. I’m not really sure what the copyright status is, to be honest. It was written in 1913, which was before the Berne(?) convention of copyrights was adopted by the U.S.
Long story short, most of the people involved in drafting the Constitution were significant investors, particularly in land speculation. A major problem they faced is that the would loan money (for example, in the form of land grants) to people in other states. The debtor would then fall behind on the loans. In states with a large number of debtors and relatively few loan-makers, the state legislature would often declare that the loan could be repaid using whatever curreny-du-jour the state had devised. Of course, this currency was essentially worthless paper, which was the entire point. Obviously, this didn’t fly with the drafters of the Constitution. This is also why there’s a clause forbidding the states from interfering in private contracts. Sometimes the “debtor states” would just declare the loan null so that the creditor was unable to collect on the money owed.
Costa Rica uses colones, but Ecuador, El Salvador, the Marshall Islands, the Federated States of Micronesia, Palau, Panama, Timor-Leste, and the UK’s dependencies of the British Virgin Islands and the Turks and Caicos Islands all use the U.S. dollar (and of course so do all of our unincorporated territories and Commonwealths: American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands). Several other countries have currencies that are “pegged” to the USD at a fixed exchange rate, in some cases 1:1.
Some books by him are available at gutenberg.org, but “An Economic Interpretation of the Constitution of the United States of America” is not one of them.
But it should be legally available to include there – generally, anything published pre-1923 is now in the public domain.
Since Beard is being recommended, I feel compelled to note that much of Beard’s work has been pretty significantly discredited. I don’t know of any contemporary constitutional scholar who accepts the theory that the Constitution can best be explained as a tool of the aristocracy. The founding fathers were not drawn especially from some creditor class. They were just as much planters, agrarian interests, merchants, artisans, etc. The disparities in wealth that began to exist after the industrial revolution simply did not exist back then, so Beard’s marxist interpretation comes across as anachronistic. And Beard’s theory also fails to explain why so many of the wealthy creditors opposed the Constitution, and why the founders put the document to the most democratic vote in the history of the world (even non-property holders were allowed to vote).
I don’t know what work has been done about the “coin money” clause in particular, but I wouldn’t be at all surprised to learn that Beard got that history wrong too. I would recommend a more contemporary source. Perhaps Akhil Amar’s book, Reading the Constitution, which makes some reference to it. I’ll see if I can dig up something else.
The restriction against coining money is probably the least important of the money-related restrictions against states. It merely got the states out of the business of running mints.
In an era of specie standards, anyone could run a mint–you would bring in your bullion, and the mint would turn it into coins of certified weight and grade. If the mint master was trustworthy–big if–the coins would circulate as money. In the early (and colonial) United States, coins minted by the Spanish colonies circulated the most widely.
The framers, however, looked to the future and coveted this field for the feds for two reasons–money and prestige. Respected mints could charge seigniorage–that is, require you to bring in 1.01 ounces of gold for a 1-ounce gold coin, and keep the balance as profit. In addition, mints were a symbol of sovereignty and prestige–since Roman times, emperors had been running mints and stamping their image on coins as a token of their importance. The framers wished to reserve this privilege for the federal government.
Today, needless to say, minting isn’t a big deal. Putting bullion in a coin doesn’t make it money.
The more important restriction against states is the prohibition against making anything except gold or silver legal tender for debts. This is what answers the question in the OP in the negative.
States can print currency, use it in some circumstances to pay their own debts, and accept it in payment of state taxes. All of these have been done many times–during the Depression, during the Civil War, and during Reconstruction. (Any time when state finances were strained.) But states cannot force private individuals to accept their scrip in payment of debt, which is what prevents it from becoming money.
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