The Volokh Conspiracy - California's IOUs and their Depression-Era Predecessors

The Wall Street Journal has an excellent background story today (Saturday/Sunday July 25-26, 2009) on the wide variety of scrips and improvised currencies in the Depression years, with a comparison to the IOUs issued over the last three weeks by the state of California. The bottom line of the story is the California IOUs are not really scrip in the Depression-era sense (and the bottom of the post, hidden, looks a little bit at the legal status of the California IOUs) but it is still a fascinating historical read.

During the Great Depression, hundreds of communities as strapped for cash as California is today circulated their own temporary currencies. An estimated $1 billion in this scrip was issued by towns and counties, not to mention corporations, school boards, newspapers and a few wealthy individuals. Most promissory notes looked like paper currency, but scrip was also printed on leather, metal, fish-skin parchment and, in Tenino, Wash., on slabs of two-ply Sitka Spruce. Two towns in California -- Crescent City and Pismo beach -- circulated scrip printed on clamshells .... In Hood River, Ore., Hal's Tire Service printed $1 bills on scraps of old tires, briefly giving the rubber check a good name.

The improvised currencies in the Depression were largely a reaction to the physical scarcity of currency. Bank holidays decreed by the Federal government, the lack of currency on account of unemployment resulting in fewer workers getting paid in currency, the unwillingness of people either to spend or put the money in banks, and other causes all resulted in a physical shortage of currency. (Argentina has recently gone through a round of scarcity of small change particularly; I don't recall why and am not sure anyone knows.) Various entities, private and public, issued their own - they typically did not last very long but the Journal article, as noted above, goes through the wide range of forms they took, from paper to leather, metal, fishskin parchment, and lots of other things.

The aim of most Depression era scrip was to provide circulating money - and issuers used different theories to ensure circulation. At the one extreme, some places printed up beautiful, money looking notes, on the theory that they looked like money and so would be better regarded. Whereas other places deliberately issued scrip on pieces of wood or other bulky materials on the theory that the stuff was so unwieldy that holders would want to get them in someone else's hands as quickly as possible.

California's scrip is different - it has issued, according to the article, some 194,000 IOUs with a face amount of about $1.03 billion, redeemable on October 2, or sooner if the state comes up with the money. I haven't laid eyes on one, although various of my California resident family have been issued them. The article says that, unlike the Depression era scrip, they are made out to particular individuals for particular amounts - they physically resemble checks, except that instead of saying "pay to the order of" they say "registered warrant."

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The effect of these individualized features is that they are not intended to circulate as currency - in this respect they are not like the Depression-era scrip, which was intended to circulate from person to person:

Since California ran out of cash early this month, it has issued more than 194,000 IOUs, with a total value of $1.03 billion. They are redeemable in U.S. dollars on Oct. 2, or sooner if the state comes up with the money. The legislature on Friday approved a plan to close a $24 billion budget gap, but officials say it could still take a few weeks to analyze the state's cash situation and resume giving creditors checks instead of promises. California IOUs differ from Depression-era scrip in a key respect: They are made out to individual creditors for specific amounts.

If there has been any trading of the warrants in any form of secondary market, I'd be grateful if someone would tell me in the comments. The state's official announcement is here, and here is its official FAQs webpage. The state controller's office says that the warrants will be repaid with interest on October 2 "if there is sufficient cash available"; the interest rate is 3.75% annual. The warrants are "legal negotiable instruments":

A registered warrant is a "promise to pay," with interest, that is issued by the State when there is not enough cash to meet all of the State's payment obligations.

If there is sufficient cash available, registered warrants, or IOUs, will be paid by the State Treasurer on October 2, 2009. If the Pooled Money Investment Board (PMIB) determines there is sufficient cash available for redemption at an earlier date, they may be redeemed earlier than October 2, 2009. These IOUs are issued in the place of regular warrants, or checks. The interest rate, set by the PMIB on July 2, 2009, is 3.75% per year ... Registered warrants, or IOUs, are legal negotiable instruments that are paid with interest.

The SEC has taken the view that the warrants are "securities"; they are not required to be registered because they are "municipal securities." Says the SEC:

The staff of the Securities and Exchange Commission has expressed its belief that California's recently-issued IOUs are "securities" under federal securities law. As such, holders of these IOUs and those who may purchase them are protected by the provisions of the federal securities laws that prohibit fraud in the purchase or sale of securities.

California began issuing the IOUs (called "registered warrants" by California) on July 2 to certain individuals and entities, including citizens who were entitled to a tax refund or vendors who were entitled to payments. The IOUs are obligations of the State of California, are negotiable, and bear interest. The staff's view that the IOUs are securities does not affect California's right to issue or repay the IOUs.

In addition to the antifraud provisions of the federal securities laws, other parts of the federal securities laws also apply to the purchase and sale of the IOUs. Persons acting as intermediaries between buyers and sellers of the warrants may need to register as brokers, dealers or municipal securities dealers, or as alternative trading systems or national securities exchanges.

Broker-dealers, as well as any potential secondary markets, should be aware that the requirements of the securities laws and the rules of the Municipal Securities Rulemaking Board apply to the IOUs.

Finally, although the IOUs are labeled "registered warrants," they are not registered with the SEC. There is no registration requirement that applies because the IOUs are municipal securities.

I am not aware of any comprehensive public legal analysis of their status or regulation, though certainly California legal authorities must have done exactly that in preparing them for issuance (if there is such an analysis out there, i would be grateful to know). There are lots of different kinds of regulatory questions, of course. Questions could include their status as securities; questions of their legal enforcement as obligations of the state of California; the legal ability of the state to issue these warrants in lieu of regular payments; the ability of the warrants to circulate to third parties; whether third parties can be required under some circumstance to accept them for cash (including, for example, the state of California in payment of state taxes or fees); any other securities or banking or lending or other laws under which they might fall; and, at the outer unlikely extreme, their constitutionality as a question of limitations on states issuing their own legal tender (Art. I, Sec. 10) (no, I'm not suggesting any such problem, but any thorough legal analysis would have to consider it).

One of these questions has been answered, besides the securities law matter. On July 7, 2009, the California Franchise Tax Board announced that it will accept the IOUs as a form of payment (I wonder (tongue in cheek) if it should not prudently impose some form of ... discount on its state's own notes). The text of the FTB announcement has its own items of legal interest, from a tax and commercial law standpoint:

The Franchise Tax Board (FTB) announced it accepts California registered warrants (IOUs) as payment of current and past due personal and corporate tax obligations.

To pay a tax liability with an IOU, endorse the IOU on the reverse side with the phrase "Pay to the order of Franchise Tax Board" and your signature then mail it with the tax bill or estimated tax voucher. By law, FTB cannot deposit the IOU until it is payable, but FTB will credit the taxpayer's account on the date the IOU is received to stop the accrual of interest. If the IOU is not sufficient to pay the outstanding balance, taxpayers should send an additional payment for the difference. Otherwise, the taxpayer will receive a bill reflecting the new balance due.

On October 2, 2009, FTB will redeem the IOUs it has received with the Treasurer. If a taxpayer submits an IOU after October 2, FTB will deposit it and then credit the account with the face value of the warrant plus applicable interest.

Taxpayers wanting to receive the accrued interest from their IOUs must hold them until October 2, 2009, the date IOUs are redeemable.

A registered warrant is a "promise to pay," with interest, that is issued by the State when there is not enough cash to meet all of the State's payment obligations. If there is sufficient cash available, registered warrants will be paid by the State Treasurer on October 2, 2009. For more information, see the Treasurer's website STO Registered Warrant Information or the Controller's website California State Controller's Office: Frequently Asked Questions about Registered Warrants (IOUs).

I'd be interested to read the internal California state legal opinions on the various issues (if they've been released and publicly posted I'd appreciate knowing). But in any case do think all this would make a great student note or comment. Alternatively, it would make a great article for a practicing lawyer, aiming to give a black letter law exposition of the issues involved - for a business-oriented law review, a bar commentary journal, or one of the short-article format, specialized business law publications that some law schools put out.

(One of my research assistants reminds me that my very own school, Washington College of Law, American University, has a Business Law Brief - a softcover, short form journal that seeks to provide timely, practical, useful commentary on business law issues (ABA Magazine of the Year 2004-5 - this is a serious magazine). It might be interested in a short, knowledgeable, practical, descriptive article on this topic - it circulates very widely to the business law community. If you are a practitioner or professor who might be interested in this kind of piece, you can email the editor-in-chief, David Wiseman, davidbwiseman at gmail and see if you can work out something; tell him KA sent you.)

Other jurisdictions will likely be headed down the same road as California, so the question of the legal regulation of such IOUs is not going to go away. Bonus question: In what sense does any or all of this suggest that Gresham's Law lives?

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	[Kenneth Anderson, July 25, 2009 at 5:37pm] Trackbacks California's IOUs and their Depression-Era Predecessors The Wall Street Journal has an excellent background story today (Saturday/Sunday July 25-26, 2009) on the wide variety of scrips and improvised currencies in the Depression years, with a comparison to the IOUs issued over the last three weeks by the state of California. The bottom line of the story is the California IOUs are not really scrip in the Depression-era sense (and the bottom of the post, hidden, looks a little bit at the legal status of the California IOUs) but it is still a fascinating historical read. During the Great Depression, hundreds of communities as strapped for cash as California is today circulated their own temporary currencies. An estimated $1 billion in this scrip was issued by towns and counties, not to mention corporations, school boards, newspapers and a few wealthy individuals. Most promissory notes looked like paper currency, but scrip was also printed on leather, metal, fish-skin parchment and, in Tenino, Wash., on slabs of two-ply Sitka Spruce. Two towns in California -- Crescent City and Pismo beach -- circulated scrip printed on clamshells .... In Hood River, Ore., Hal's Tire Service printed $1 bills on scraps of old tires, briefly giving the rubber check a good name. The improvised currencies in the Depression were largely a reaction to the physical scarcity of currency. Bank holidays decreed by the Federal government, the lack of currency on account of unemployment resulting in fewer workers getting paid in currency, the unwillingness of people either to spend or put the money in banks, and other causes all resulted in a physical shortage of currency. (Argentina has recently gone through a round of scarcity of small change particularly; I don't recall why and am not sure anyone knows.) Various entities, private and public, issued their own - they typically did not last very long but the Journal article, as noted above, goes through the wide range of forms they took, from paper to leather, metal, fishskin parchment, and lots of other things. The aim of most Depression era scrip was to provide circulating money - and issuers used different theories to ensure circulation. At the one extreme, some places printed up beautiful, money looking notes, on the theory that they looked like money and so would be better regarded. Whereas other places deliberately issued scrip on pieces of wood or other bulky materials on the theory that the stuff was so unwieldy that holders would want to get them in someone else's hands as quickly as possible. California's scrip is different - it has issued, according to the article, some 194,000 IOUs with a face amount of about $1.03 billion, redeemable on October 2, or sooner if the state comes up with the money. I haven't laid eyes on one, although various of my California resident family have been issued them. The article says that, unlike the Depression era scrip, they are made out to particular individuals for particular amounts - they physically resemble checks, except that instead of saying "pay to the order of" they say "registered warrant." (show) The effect of these individualized features is that they are not intended to circulate as currency - in this respect they are not like the Depression-era scrip, which was intended to circulate from person to person: Since California ran out of cash early this month, it has issued more than 194,000 IOUs, with a total value of $1.03 billion. They are redeemable in U.S. dollars on Oct. 2, or sooner if the state comes up with the money. The legislature on Friday approved a plan to close a $24 billion budget gap, but officials say it could still take a few weeks to analyze the state's cash situation and resume giving creditors checks instead of promises. California IOUs differ from Depression-era scrip in a key respect: They are made out to individual creditors for specific amounts. If there has been any trading of the warrants in any form of secondary market, I'd be grateful if someone would tell me in the comments. The state's official announcement is here, and here is its official FAQs webpage. The state controller's office says that the warrants will be repaid with interest on October 2 "if there is sufficient cash available"; the interest rate is 3.75% annual. The warrants are "legal negotiable instruments": A registered warrant is a "promise to pay," with interest, that is issued by the State when there is not enough cash to meet all of the State's payment obligations. If there is sufficient cash available, registered warrants, or IOUs, will be paid by the State Treasurer on October 2, 2009. If the Pooled Money Investment Board (PMIB) determines there is sufficient cash available for redemption at an earlier date, they may be redeemed earlier than October 2, 2009. These IOUs are issued in the place of regular warrants, or checks. The interest rate, set by the PMIB on July 2, 2009, is 3.75% per year ... Registered warrants, or IOUs, are legal negotiable instruments that are paid with interest. The SEC has taken the view that the warrants are "securities"; they are not required to be registered because they are "municipal securities." Says the SEC: The staff of the Securities and Exchange Commission has expressed its belief that California's recently-issued IOUs are "securities" under federal securities law. As such, holders of these IOUs and those who may purchase them are protected by the provisions of the federal securities laws that prohibit fraud in the purchase or sale of securities. California began issuing the IOUs (called "registered warrants" by California) on July 2 to certain individuals and entities, including citizens who were entitled to a tax refund or vendors who were entitled to payments. The IOUs are obligations of the State of California, are negotiable, and bear interest. The staff's view that the IOUs are securities does not affect California's right to issue or repay the IOUs. In addition to the antifraud provisions of the federal securities laws, other parts of the federal securities laws also apply to the purchase and sale of the IOUs. Persons acting as intermediaries between buyers and sellers of the warrants may need to register as brokers, dealers or municipal securities dealers, or as alternative trading systems or national securities exchanges. Broker-dealers, as well as any potential secondary markets, should be aware that the requirements of the securities laws and the rules of the Municipal Securities Rulemaking Board apply to the IOUs. Finally, although the IOUs are labeled "registered warrants," they are not registered with the SEC. There is no registration requirement that applies because the IOUs are municipal securities. I am not aware of any comprehensive public legal analysis of their status or regulation, though certainly California legal authorities must have done exactly that in preparing them for issuance (if there is such an analysis out there, i would be grateful to know). There are lots of different kinds of regulatory questions, of course. Questions could include their status as securities; questions of their legal enforcement as obligations of the state of California; the legal ability of the state to issue these warrants in lieu of regular payments; the ability of the warrants to circulate to third parties; whether third parties can be required under some circumstance to accept them for cash (including, for example, the state of California in payment of state taxes or fees); any other securities or banking or lending or other laws under which they might fall; and, at the outer unlikely extreme, their constitutionality as a question of limitations on states issuing their own legal tender (Art. I, Sec. 10) (no, I'm not suggesting any such problem, but any thorough legal analysis would have to consider it). One of these questions has been answered, besides the securities law matter. On July 7, 2009, the California Franchise Tax Board announced that it will accept the IOUs as a form of payment (I wonder (tongue in cheek) if it should not prudently impose some form of ... discount on its state's own notes). The text of the FTB announcement has its own items of legal interest, from a tax and commercial law standpoint: The Franchise Tax Board (FTB) announced it accepts California registered warrants (IOUs) as payment of current and past due personal and corporate tax obligations. To pay a tax liability with an IOU, endorse the IOU on the reverse side with the phrase "Pay to the order of Franchise Tax Board" and your signature then mail it with the tax bill or estimated tax voucher. By law, FTB cannot deposit the IOU until it is payable, but FTB will credit the taxpayer's account on the date the IOU is received to stop the accrual of interest. If the IOU is not sufficient to pay the outstanding balance, taxpayers should send an additional payment for the difference. Otherwise, the taxpayer will receive a bill reflecting the new balance due. On October 2, 2009, FTB will redeem the IOUs it has received with the Treasurer. If a taxpayer submits an IOU after October 2, FTB will deposit it and then credit the account with the face value of the warrant plus applicable interest. Taxpayers wanting to receive the accrued interest from their IOUs must hold them until October 2, 2009, the date IOUs are redeemable. A registered warrant is a "promise to pay," with interest, that is issued by the State when there is not enough cash to meet all of the State's payment obligations. If there is sufficient cash available, registered warrants will be paid by the State Treasurer on October 2, 2009. For more information, see the Treasurer's website STO Registered Warrant Information or the Controller's website California State Controller's Office: Frequently Asked Questions about Registered Warrants (IOUs). I'd be interested to read the internal California state legal opinions on the various issues (if they've been released and publicly posted I'd appreciate knowing). But in any case do think all this would make a great student note or comment. Alternatively, it would make a great article for a practicing lawyer, aiming to give a black letter law exposition of the issues involved - for a business-oriented law review, a bar commentary journal, or one of the short-article format, specialized business law publications that some law schools put out. (One of my research assistants reminds me that my very own school, Washington College of Law, American University, has a Business Law Brief - a softcover, short form journal that seeks to provide timely, practical, useful commentary on business law issues (ABA Magazine of the Year 2004-5 - this is a serious magazine). It might be interested in a short, knowledgeable, practical, descriptive article on this topic - it circulates very widely to the business law community. If you are a practitioner or professor who might be interested in this kind of piece, you can email the editor-in-chief, David Wiseman, davidbwiseman at gmail and see if you can work out something; tell him KA sent you.) Other jurisdictions will likely be headed down the same road as California, so the question of the legal regulation of such IOUs is not going to go away. Bonus question: In what sense does any or all of this suggest that Gresham's Law lives? (hide)