By Larry Marsh, Kansas City Star Midwest Voices columnist, 2009
California has reached a crisis point where it has run out of money to pay state employees. Governor Arnold Schwarzenegger and the state legislature have ruled out a tax increase to pay state workers. To deal with this impasse, California is issuing IOUs to its employees. The Bank of America has agreed to accept these IOUs as real money at least until July 10. Should California be allowed to create its own money?
Economists have longed toyed with the idea of each state producing its own money although none of the economists that I know actually recommend it. Neither do I for reasons to be explained below, but some people think it's the perfect solution to regional unemployment. There could be red money for Missouri, blue money for Kansas, green money for Illinois, et cetera. That way each state could run its own monetary policy.
If a state like Michigan were suffering relatively more unemployment than the rest of the country, then it could just print more of its own money. That would increase the demand for goods and services in Michigan to increase employment there. Increasing the federal money supply would generate inflation in areas with low unemployment and tight supplies of goods and services. Letting the states do it instead would allow for a more targeted approach.
The problem with all this is that the US economy is highly integrated. The relatively high Michigan unemployment is largely due to the slowdown in car sales. Creating new money in Michigan is not likely to generate enough new car sales there to make a difference. Too much Michigan money would drive up the prices of other goods and services in Michigan well before it generated the number of car sales needed to reemploy all those auto workers. Furthermore the excess demand is likely to bleed over to other states and drive up prices there as well.
A similar explanation referencing the many specialized products that California produces would reach a similar conclusion.
Unless California wants to break away from the Union and become a separate country, it should back away from creating its own currency.
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The good old days weren't so good.
Many government entities were forced to issue "scrip", instead of money, during the Great Depression. Some government workers were paid entirely in "scrip" bcause the treasuries were bare. Desperate times called for desperate measures and this was just one example of the many things that were done in order to keep going.
FDR, at the national level, tried everything under the sun to get the country moving again. Many of his plans failed but he would just try something else. His "brain trust" was composed of the smartest men in America, working for $1.00 a year, but even they didn't always know what to do next. The WPA, PWA, CCC, provided some folks with employment. The FDIC saved the banking system. Food stamps allowed farmers to dispose of surplus goods. These were examples of success, but there were many examples of failure as well.
We are certainly in tougher times than many people have ever experienced in their life time, but nowhere near that of the Depression. There was no safety net of any kind during that period, no unemployment pay, no workers comp, no social security, no welfare, no medicare, etc. There was nothing. People either found work or else.
I believe that the economic problems of today can be traced to Alan Greenspan and his extended "cheap money" policy. Other economists label it "supply side" excesses. Who knows? We just have to do something about it.
Was wondering...
I was wondering if those IOUs could be considered a Bill of Credit. And if so, they would also be unconstitutional.
California IOU's are FIAT Money
California IOU's are FIAT Money nothing but inconvertible paper money made legal tender by a government decree.
No - By the Constitution
Artcle 1. Section. 10. Clause 1: No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing 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.