Unconstitutional IOUs from California

I am once again amazed at the apparent illiteracy of our elected officials as it relates to our United States Constitution–both Democrats and Republicans.

The Republican Governor of California has authorized his State Controller to issue “registered warrants” (CLICK HERE). The State Controller also refers to them as IOUs on this web page. In his words, “Registered warrants are negotiable instruments.” Further in anticipating questions:

6. Will my financial institution honor a registered warrant?
Recipients of registered warrants should contact their financial institution to determine whether they will honor the registered warrant before the redemption date.

7. What happens if my financial institution will not accept the registered warrant?
You may decide to open an account at another financial institution that will accept registered warrants, or you will have to hold the warrant until it matures on October 2, 2009.

In brief, they intend for these warrants to circulate as money, with banks deciding on its tender status (whether or not to honor them as cash dollars). Indeed as question 7 indicates, the State wants you to switch banks if your bank doesn’t honor the IOU as money. This has gotten the attention of the Federal Reserve — see their statement on this here. The Fed also anticipates these warrants as functioning as money and is giving guidance on the topic.

Wow…the apparent ignorance of how this absolutely violates the United States Constitution — Article I, 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 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. (emphasis added)

Seems pretty clear to me. So, the question is: what constitutes a “bill of credit?” Well, the United States Supreme Court has dealt with this issue, to define a bill of credit. The source of case law goes back to Craig v. Missouri (1830). In deciding for the majority, Chief Justice Marshall defined bills of credit in the Constitutional sense.

In its enlarged, and perhaps its literal sense, the term ‘bill of credit’ may comprehend any instrument by which a State engages to pay money at a future day; thus including a certificate given for money borrowed…To ‘emit bills of credit’ conveys to the mind the idea of issuing paper intended to circulate through the community for its ordinary purposes, as money, which paper is redeemable at a future day.

But it is contended, that though these certificates should be deemed bills of credit, according to the common acceptation of the term, they are not so in the sense of the constitution; because they are not made a legal tender. The constitution itself furnishes no countenance to this distinction. The prohibition is general. It extends to all bills of credit, not to bills of a particular description.

As far as my research can carry me, this is still considered to be the Constitutional “gold standard” upon which “bills of credit” are defined. It seems quite clear to me, that given Marshall’s definition, the California IOUs absolutely should be considered bills of credit and as such should be considered to violate Article I, Section 10 (as above). I am shocked and amazed that nobody has questioned this, yet.

When one attempts to understand WHY this prohibition on States’ ability to issue fiat money or bills of credit, one has to go to our Founders’ other writings to get an answer. The dangers of combining large government spending with the ability to print paper money (without backing) is inherently dangerous. Therefore, the Founders designed our system of government to have very limited Federal spending and place the power to coin money and regulate its value in that limited Federal government. State governments, our Founders thought, would be where most spending would reside and they would be specifically prohibited from printing money (or anything that can function as money). James Madison put it best in Federalist 44:

The extension of the prohibition to bills of credit must give pleasure to every citizen in proportion to his love of justice, and his knowledge of the true springs of public prosperity. The loss which America has sustained since the peace, from the pestilent effects of paper money, on the necessary confidence between man and man; on the necessary confidence in the public councils; on the industry and morals of the people, and on the character of Republican Government, constitutes an enormous debt against the States chargeable with this unadvised measure, which must long remain unsatisfied; or rather an accumulation of guilt, which can be expiated no otherwise than by a voluntary sacrifice on the altar of justice, of the power which has been the instrument of it. In addition to these persuasive considerations, it may be observed that the same reasons which shew the necessity of denying to the States the power of regulating coin, prove with equal force that they ought not to be at liberty to substitute a paper medium in the place of coin. Had every State a right to regulate the value of its coin, there might be as many different currencies as States; and thus the intercourse among them would be impeded; retrospective alterations in its value might be made, and thus the citizens of other States be injured; and animosities be kindled among the States themselves. The subjects of foreign powers might suffer from the same cause, and hence the Union be discredited and embroiled by the indiscretion of a single member. No one of these mischiefs is less incident to a power in the States to emit paper money than to coin gold or silver. The power to make any thing but gold and silver a tender in payment of debts, is withdrawn from the States, on the same principle with that of striking of paper currency.

Lovers of the Founders’ principles and genius should be appalled at the lack of understanding of Constitutional authority by the State of California and everywhere else in our Country if these IOUs are allowed without Constitutional challenge. The case is clear.