A Currency for California

This story is five days old, but it strikes me as something that deserves more attention — there’s a bill being considered in the California Assembly that would have the state accept state-issued IOUs as payment for taxes. That would, of course, give the IOUs some real value to anyone who owes taxes. And that, in turn, means that all kinds of business owners and others would have reason to offer to buy IOUs from IOU-recipients provided they could get some kind of discount. Which is another way of saying that California would be essentially creating a new currency, which James Galbraith suggests over email that we call the “CAIOU” pronounced like “cailloux” (French for pebble), and the discount would be the exchange rate.

In most places I think this would be totally non-viable. But California is very large and California metro areas don’t tend to involve inter-state commuters (it’s not like New York or Philly or DC, in other words) so you could actually imagine this working. And monetizing the state’s debt is something that could look very appealing to legislators once they realize it might be doable. Which doesn’t mean it’s a good idea. For one thing, what California’s already done with the IOUs arguably violates the Constitution’s ban on states creating currency. Thus far, nobody’s inclined to try to do anything about it, but pushing the envelop might force the federal government to try to do something in order to maintain the credibility of its own debts.