Is California Printing Its Own Money?


California flag; via Flickr

Question: Is California printing its own money?

Paul Solman: Funny you should ask. The State of California Franchise Tax Board website currently features this statement: “We will accept registered warrants…towards the payment of tax liabilities.” State taxes, of course, not federal.

But think about it. California is now explicitly printing its own money.

Not to wax theoretical, but let me briefly acknowledge that all money is a form of debt. A main distinction of currency is that in return for its extraordinary convenience —you can carry it around and use it to pay for anything, anywhere — you get no interest while holding it AS currency. California’s “registered warrants,” by contrast, are IOUs paying 3.75 percent per annum. (Economist Jamie Galbraith calls them “CAIOUs” and suggests they be pronounced ka-YOO —“cailloux” — French for “pebbles.”)

But if the CAIOUs can be used to pay bills in California, including TAX bills, then what’s the difference between them and FEDERAL money? And if California can issue its own money, why not New York?

Look, California is desperate. Like so many of us, it lived beyond its means, or taxed below its spending, or both. Three classes are now resisting the reckoning: those who “spent” the money and owe the shortfall (taxpayers); those on whom the money was spent (employees, vendors, other recipients of state funds); and those who loaned the state money (bondholders). Understandably, no class wants to take the hit, or take the hit first. For political reasons at least, the Obama administration is reluctant to come to the rescue, though as an immediate, get-the $-to-the-people program, this would seem to be as effective a stimulus as any.

Hence, the political stalemate. Hence, California’s “we’ll-print-our-own-money” solution.

But as some are beginning to point out, the implications could be enormous. There are already secessionist noises in the land. If states begin issuing their own money, who knows where it might lead? As Marshall Auerback put it yesterday: “It will be viewed as a stop gap measure at first, and then could very well become entrenched as states realize they have a way to escape balanced budget requirements.”