Who Owes What?

Column by Paul Hein.

Exclusive to STR

I recently came across some old news reports from 2009, when, in the early days of July, the media concerned itself with the really significant news: the death of Michael Jackson. However, we were also given a glimpse of other matters, admittedly less important, such as the nation’s perilous finances. What I most vividly remember was the report that financially-strapped California would be attempting to “pay” its bills--at least some of them--with IOUs.

We can imagine the annoyance of those who, owed money by California, received, instead, impressive chits by which California promised to pay, some day, what was owed. But the experience could be salutary if it caused them to think: When was the last time they were NOT paid with IOUs? For many, the answer must be: not in my lifetime.

Federal Reserve Notes--our pocket “money,” is designated by law, to be “obligations of the United States.” I’m not an economist, but to my mind, a piece of paper, used to settle debts, and called an “obligation,” amounts to an IOU. The bills themselves cannot be payment, because they are paper, and there isn’t ten times as much paper in a TEN as there is in a ONE.

Of course, most of California’s creditors were paid with checks, which transfer bank credit--account balances--from one account to another. But bank deposits, according to the Federal Reserve, are “liabilities of commercial banks,” and if you were so silly as to ask the bank to honor its “liabilities,” you would receive only Federal Reserve Notes--thus exchanging one IOU for another.

So what’s new? Californians, and for that matter, everyone else, have been getting “paid” for decades with IOUs, and never thought twice about it. If this latest issue of IOUs triggered some cerebral activity, it would be a wonderful thing!

Without a doubt, some will complain that they cannot spend these California IOUs, at least not right now, or, if they can, only at a discount. They will not be assuaged by being told that the “dollar” which they might prefer--a “good” check, or currency--is worth only about a nickel, compared to the dollar at the inauguration of the Federal Reserve, in 1913. That’s one heck of a discount, but no matter. Today’s complainers were not around in 1913. Their concern is with tomorrow, not yesterday.

Well, then, the answer to their complaint is simple: let the state of California declare its IOUs a legal tender. That, after all, is what makes the ordinary crop of IOUs acceptable, if you stop to think about it (which, sadly, is rarely the case). You can get nothing from the issuer of the “good” IOUs (cash, checks) but you accept them because you know that you can pass them. In other words, though fraudulently labeled “note,” the bills (aren’t bills statements of a debt owed?) can be tendered, despite the fact that they are irredeemable, which would be a crime were they not designated legal to tender. California need only label its IOUs a legal tender, and all would be well. Smiles everywhere!

Don’t tell me, please, that the Constitution denies California this power. Of course it does! So what? Surely you don’t believe that the Constitution carries any weight in America today. Besides, doesn’t that document also declare that the states must use nothing but gold and silver coin as a legal tender for debts? When was the last time that California, or any other state, obeyed that Constitutional mandate? So the state of California is already in violation of the Constitution where legal tender is concerned; what’s another violation on top of that going to do? The sun will still rise every morning.

So let the printing presses in California get busy! Instead of the projected mere IOUs, let them print IOUs labeled “legal tender.” They could be adorned with photos of former governor Schwarzenegger in his youthful, body-building days, all oiled up and muscular. “Slickers” might be a good name for them.

Of course, California would have to accept Slickers in payment of taxes. No problem. If you own the printing press, you can get anything you want! Prosperity would engulf California as the Slickers poured from the presses. Another bubble!

Just move away before the Slickers blow up and turn rancid. Of course, if there were no government demanding acceptance of its phony notes, no one would be such a fool as to work for a piece of paper which somebody labeled “note,” but would not redeem. Without government, no fiat. And, come to think of it, if there were no fiat “money,” there could be no modern government. What a shame!

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Paul Hein's picture
Columns on STR: 150


Paul's picture

Paul, great article. I like the vision of the Schwarzenegger dollar. :-)

One possible correction: "Without government, no fiat." I think bitcoin is fiat, isn't it? Nothing wrong with fiat as long as it is voluntary. Unless you mean by "fiat", not being voluntary. But I think it really means no inherent value?

Looking at dictionary definitions, it appears to mean either of those things. So even without government there will be fiat currencies.