Friday, June 19, 2009

California Can Not Print Money

Well, technically the State of California does have the ability to print money. To do so however, would seem to directly contradict Article 1, Section 10 of the United States Constitution. The most inconvenient paragraph of Section 10, at least insofar as California is concerned, states the following:
"Section 10. No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility."

Sure, we understand that certain bits of this paragraph appear slightly outmoded. For instance, the stipulations regarding payments in gold and silver have been ignored for some time now. However, we think there is a pretty strong consensus that a State is forbidden from issuing its own currency, in an official capacity, and replacing the dollar as the chosen means by which commerce is to be conducted. Surprisingly, this is a path that California appears on the brink of heading down. Some readers may ask "Who said anything about California coining its own money?". Well, clearly the State has chosen an alternate set of terminology by which to describe it's actions.

That California is in a state of fiscal disarray shouldn't be news to anyone by now - short sighted tax policy (property tax freeze), profligate spending, serving as one of the epicenters of the housing collapse and a gridlocked State legislature have all but assured an inevitable day of reckoning for the State. Also well publicized is the fact that California may run out of cash by the end of July, at which point the State will proceed to issue IOU's to those it does business with. (S&P eloquently referred to the IOU's as "registered warrants" in its justification for placing California's general obligation debt on CreditWatch negative.) We would argue that these IOU's are tantamount to coining money; after all, a dollar bill itself is no more than an IOU from the federal government. We doubt however that this distinction will ever be brought to light, as recent events (think Chrysler) would seem to suggest that financial distress is ample justification for a government to trample across years of legal precedent.
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