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.”
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?
California's AG (IIRC) said that they will only be redeemed to persons other than those named on the warrants if the transfer is notarized. That really disrupted on any attempt to use them as scrip (which neatly avoided any claims California was issuing Constitutionally-prohibited "bills of credit"), and complicated efforts to trade in them.
Neat trick there, get out of paying the interest by accepting only at face value, then cancelling the interest if redeemed by a state agency since that would just shift money around the pile.
Despite the fact that the instruments are labled as "negotiable," and everyone knows that California's basically insolvent, wouldn't that more or less preclude anyone from ever becoming a holder in due course of the instrument?
As a query, what kind of longevity would these items hold? (six months? unlimited? - like Confederate money not worth anything under the New Administration?)......
Though it isn't a full book on scrip, the book The Power "to Coin" Money: The Exercise of Monetary Powers by the Congress includes pretty good historical discussions of the exercise of monetary powers by folks other than the Congress as well.
It seems scrip was issued a lot more often than I would've guessed. Among other cases, there was extensive issuance of scrip and tokens during the Civil War (not hugely surprising), the Presiding Bishop of the Mormon Church circulated scrip from 1888 through 1908 to alleviate a currency shortage in Salt Lake City, and during the panic of 1907, scrip was issued amounting to 4.5% of the money supply (all these examples from pp. 164-169). There's some decent discussion of the legalities as well, but much of it amounts to, "a good deal of this was probably illegal, but nobody wanted to think about enforcing such laws during a panic".
I don't think the NJ rule is typical, but in the states I'm familiar with becoming one is a similarly easy process. It's like a two page application along with a small fee and some proof of ID. Most banks have one on staff, most law firms have one of their secretaries or paralegals apply to be one.
And on that basis I would think CA's warrents would run into trouble, especially with suppliers who likely have contracts specifying to be paid in US dollars by such and such date. Wonder if they'll start trying to negotiate fallback positions against state property rather than face this situation again. Even more so since from what I've seen the budget solution is mostly putting off the reckoning rather than tightening the belt.
Of the $26b or so, $15b was cuts, mostly to education (smaller cuts to prisons and social services).
Perhaps Nieporent is correct about NJ, but that's unusual. I know a number of attorneys (not corporate lawyers, obviously--small office or solo) who encourage their secretaries to get the stamp. Every free-standing bank branch usually has one (not supermarket branches). Usually, at least one secretary or mail-room person in a large company obtains the license.
So, yes, it is easy to find one. This makes me wonder if KA has any sense of reality. Does he know the price of milk?
On the original subject, I don't understand all the fascination with the CA IOUs. It's not like it's the first time since the Depression that this happened. In 1992 Wilson and the Dems had a budget impasse--largely due to Wilson's demand to circumvent CA Constitution and shortchange the education budget. When the budget closed in June, the state started issuing IOUs, which the banks first agreed to cash. By September, they only offered not to foreclose on mortgages and to extend other loans without penalties, but they stopped cashing the IOUs. In November, the courts finally ordered Wilson to compromise.
Interestingly, UC faculty got paid during that period, but not all staff and grad students (except those funded by grants directly).
"Despite the fact that the instruments are labled as "negotiable," and everyone knows that California's basically insolvent, wouldn't that more or less preclude anyone from ever becoming a holder in due course of the instrument?"
You can't be a HIDC if you have notice of a defense to the underlying debt. Insolvency, however, isn't a defense.
Perhaps a rich man like Sorros or the even the richest man in the world (who just happens to be mexican) may take this idea and buy up all these scripts at discount prices. In a short time I am sure the initial receivers of these scripts would rather have some money now then the possibility of full return later. Then the State's debt can be owned by a few rich people, or even one rich man, and he can then lay legal claim to the State. True, a State can't leave the union, but is there really a law that says a State can't be owned by one person?
As I recall, the banks were redeeming them for face value, effectively discounting the interest accrued between issuance and redemption. Doesn't the FTB do the same?
Wikipedia says that Ontario has tried cracking down on its use because merchants were using CTM as a tax dodge.
Newspapers have them, because they have to certify publication of legal ads, but normally they don't offer notary services to outsiders.
I am startled by the question's appearance on a legal blog. Years ago, I used to get a notary's magazine thrown over the transom which was full of horror stories about how careless or fraudulent notaries got themselves and/or people who used them in trouble.
Apparently, there's more to being a notary than just stamping papers because the lawyers were out to drink beer.
As I recall California law used to provide that interest on a judgment was ten per cent and that interest on a contractual obligation where no interest was specified in the contract was also ten per cent. I seem also to recall a statute providing that contractual obligations of Califonia public agencies were intrepreted and enforced according to the same rules as those of private individuals.
It has been decades since I researched these points, but I wonder how such basic law, if my memory serves me properly, could have changed without considerable controversy. Libertarian implications, hmm?
I would figure they would just go with the general rule that where a specific statute and general statute provide for different things the specific statute controls.
http://www.csanotes.com/1861_notes.htm
Thanks. The news reports I've read and seen just say the state has issued or is issuing the IOU's. I didn't know there is an enabling statute. I appreciate the suggestion that there is one. But if there is, what about the state's ability to alter its preexisting contactual obligations, by statute or otherwise except in bankruptcy?
they just default and the creditors are screwed. That whole 11th amendment immunity thing.
Both law firms I worked for had many notaries amongst their secretaries. Similarly, the corporation for whom I worked in-house had notaries amongst their patent paralegals. Most of my friends who are solos, especially in the field of estate planning, became notaries (notarized signatures of witnesses on wills speeds the probate process).
The Art. I sec. 10 para. 1 challenge mentioned in passing above was the first thing I thought when CA began issuing these IOUs. Does requiring any transfers be notarized make them not a "tender in payment of debts", and thus avoid such a challenge?
Here's an article on it by an economist:
"A new form of currency could help us in economic crisis:
How a complementary currency helped save Switzerland from economic ruin in the 1940s—and could do the same for us today."
by Bernard Lietaer, Ode Magazine, April 2009 issue
http://www.odemagazine.com/doc/62/new-currency-for-crisis/
an interesting system--would anyone care to weigh-in on this?
Possible inspiration for dealing with the current crisis?
Unless the FTB puts some sort of expiration date on this, 3.75% annually isn't really a bad investment these days if you need something a bit more guaranteed than the stock market. If you do business in CA, sitting on some of these IOUs for a few years might end up earning you a better rate of return than a number of other things you might be doing with the money...
When the local currency is pegged to the Time Standard of Money (how many dollars per unskilled hour child labor) Hours earned locally can be intertraded with other timebanks globally! In 1999, I paid for 39/40 nights in Europe with an IOU for a night back in Canada worth 5 Hours. U.N. Millennium Declaration UNILETS Resolution C6 to governments is for a time-based currency to restructure the global financial architecture.
See http://youtube.com/kingofthepaupers
Too bad California IOUs won’t be accepted in payment for state taxes and services like state bonds were in Argentina. Too bad California IOUs will be denominated too big to use as local currency. Too bad Argentina people were smart enough to avoid the tent-cities catastrophe and California people are too stupid to follow their example.
If they make IOUs legal tender, I'll take back every joke I ever made about Girlieman Governor Musclehead if he engineers the California state currency lifeboat.
If you have a comment about spelling, typos, or format errors, please e-mail the poster directly rather than posting a comment.
Comment Policy: We reserve the right to edit or delete comments, and in extreme cases to ban commenters, at our discretion. Comments must be relevant and civil (and, especially, free of name-calling). We think of comment threads like dinner parties at our homes. If you make the party unpleasant for us or for others, we'd rather you went elsewhere. We're happy to see a wide range of viewpoints, but we want all of them to be expressed as politely as possible.
We realize that such a comment policy can never be evenly enforced, because we can't possibly monitor every comment equally well. Hundreds of comments are posted every day here, and we don't read them all. Those we read, we read with different degrees of attention, and in different moods. We try to be fair, but we make no promises.
And remember, it's a big Internet. If you think we were mistaken in removing your post (or, in extreme cases, in removing you) -- or if you prefer a more free-for-all approach -- there are surely plenty of ways you can still get your views out.