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Debt riddled California forced to hand out IOUs

California is on the brink of financial meltdown as its governor, Arnold Schwarzenegger, is reduced to paying state bills with IOUs. The state has a $26 billion budget deficit, prompting Schwarzenegger to declare a fiscal state of emergency.

This means thousands of businesses and individuals will be given IOUs to be honoured once the budget is agreed.
More than 28,000 IOUs were issued yesterday, worth a total of £32million, mainly to those expecting income tax refunds. The governor has ordered all state offices to close three days a month to save money, while stalemate is hampering the resolution of this budget crisis as Republicans rule out tax increases and Democrats are against spending cuts.

According to Ellen Brown, writing in her Web of Debt blog, issuing IOUs has just one small problem:

Why couldn’t California do the same thing? The problem with calling its IOUs “legal tender” today is that the ruse violates the U.S. Constitution. Article I, Section 10, says, “No State shall . . . coin money [or] emit bills of credit.” The Cornell University Law School Annotated Constitution gives this definition:

“Within the sense of the Constitution, bills of credit signify a paper medium of exchange, intended to circulate between individuals, and between the Government and individuals, for the ordinary purposes of society.”

Brown has addressed her creative mind to this and has come up with a solution that could have a global application.

The law does not allow the States to issue “bills of credit,” but it does allow them to create another form of money called “checkbook” money. All a State has to do is to form its own bank. Quoting again from the Cornell University Law School Annotated Constitution:

“Bills issued by state banks are not bills of credit; it is immaterial that the State is the sole stockholder of the bank, that the officers of the bank were elected by the state legislature, or that the capital of the bank was raised by the sale of state bonds.”

If private banks can create credit on their books, so can the world’s eighth largest economy. Indeed, there is longstanding precedent for this approach. The State of North Dakota has owned its own bank for nearly a century. North Dakota is one of only two States (along with Montana) that are not currently facing budget shortfalls. North Dakota has beaten the Wall Street credit freeze by generating its own credit. By law, ever since 1919 the State’s revenues have been deposited in its own bank, the Bank of North Dakota (BND). Using the “fractional reserve” lending scheme open to all banks, these deposits are then available to be used as the “reserves” for creating many times their face value in loans. Other banks in the State do not see the BND as a threat, because it partners with them and backstops them, serving as a sort of central bank for North Dakota. BND’s loans are not insured by the Federal Deposit Insurance Corporation (FDIC) but are guaranteed by the State.

Smart Taxes wonders if this could be applied to Irish local authorities, allowing them to set up their own banks backed by the property and services they own and by deposits of government funding for local authority services?

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