http://volokh.com/archives/archive_2009_07_19-2009_07_25.shtml#1248557870osted by Kenneth Anderson:
California's IOUs and their Depression-Era Predecessors
http://volokh.com/archives/archive_2009_07_19-2009_07_25.shtml#1248557870 The Wall Street Journal has an [1]excellent background story today
(Saturday/Sunday July 25-26, 2009) on the wide variety of scrips and
improvised currencies in the Depression years, with a comparison to
the IOUs issued over the last three weeks by the state of California.
The bottom line of the story is the California IOUs are not really
scrip in the Depression-era sense (and the bottom of the post, hidden,
looks a little bit at the legal status of the California IOUs) but it
is still a fascinating historical read.
During the Great Depression, hundreds of communities as strapped
for cash as California is today circulated their own temporary
currencies. An estimated $1 billion in this scrip was issued by
towns and counties, not to mention corporations, school boards,
newspapers and a few wealthy individuals. Most promissory notes
looked like paper currency, but scrip was also printed on leather,
metal, fish-skin parchment and, in Tenino, Wash., on slabs of
two-ply Sitka Spruce. Two towns in California -- Crescent City and
Pismo beach -- circulated scrip printed on clamshells .... In Hood
River, Ore., Hal's Tire Service printed $1 bills on scraps of old
tires, briefly giving the rubber check a good name.
The improvised currencies in the Depression were largely a reaction to
the physical scarcity of currency. Bank holidays decreed by the
Federal government, the lack of currency on account of unemployment
resulting in fewer workers getting paid in currency, the unwillingness
of people either to spend or put the money in banks, and other causes
all resulted in a physical shortage of currency. (Argentina has
recently gone through a [2]round of scarcity of small change
particularly; I donât recall why and am not sure anyone knows.)
Various entities, private and public, issued their own - they
typically did not last very long but the Journal article, as noted
above, goes through the wide range of forms they took, from paper to
leather, metal, fishskin parchment, and lots of other things.
The aim of most Depression era scrip was to provide circulating money
- and issuers used different theories to ensure circulation. At the
one extreme, some places printed up beautiful, money looking notes, on
the theory that they looked like money and so would be better
regarded. Whereas other places deliberately issued scrip on pieces of
wood or other bulky materials on the theory that the stuff was so
unwieldy that holders would want to get them in someone elseâs hands
as quickly as possible.
Californiaâs scrip is different - it has issued, according to the
article, some 194,000 IOUs with a face amount of about $1.03 billion,
redeemable on October 2, or sooner if the state comes up with the
money. I havenât laid eyes on one, although various of my California
resident family have been issued them. The article says that, unlike
the Depression era scrip, they are made out to particular individuals
for particular amounts - they physically resemble checks, except that
instead of saying âpay to the order ofâ they say âregistered warrant.â
([3]show)
The effect of these individualized features is that they are not
intended to circulate as currency - in this respect they are not like
the Depression-era scrip, which was intended to circulate from person
to person:
Since California ran out of cash early this month, it has issued
more than 194,000 IOUs, with a total value of $1.03 billion. They
are redeemable in U.S. dollars on Oct. 2, or sooner if the state
comes up with the money. The legislature on Friday approved a plan
to close a $24 billion budget gap, but officials say it could still
take a few weeks to analyze the state's cash situation and resume
giving creditors checks instead of promises. California IOUs differ
from Depression-era scrip in a key respect: They are made out to
individual creditors for specific amounts.
If there has been any trading of the warrants in any form of secondary
market, I'd be grateful if someone would tell me in the comments. The
state's official announcement is [4]here, and here is its o[5]fficial
FAQs webpage. The state controller's office says that the warrants
will be repaid with interest on October 2 "if there is sufficient cash
available"; the interest rate is 3.75% annual. The warrants are "legal
negotiable instruments":
A registered warrant is a âpromise to pay,â with interest, that is
issued by the State when there is not enough cash to meet all of
the Stateâs payment obligations.
If there is sufficient cash available, registered warrants, or
IOUs, will be paid by the State Treasurer on October 2, 2009. If
the Pooled Money Investment Board (PMIB) determines there is
sufficient cash available for redemption at an earlier date, they
may be redeemed earlier than October 2, 2009. These IOUs are issued
in the place of regular warrants, or checks. The interest rate, set
by the PMIB on July 2, 2009, is 3.75% per year ... Registered
warrants, or IOUs, are legal negotiable instruments that are paid
with interest.
The SEC has taken the view that [6]the warrants are "securities"; they
are not required to be registered because they are "municipal
securities." Says the SEC:
The staff of the Securities and Exchange Commission has expressed
its belief that Californiaâs recently-issued IOUs are âsecuritiesâ
under federal securities law. As such, holders of these IOUs and
those who may purchase them are protected by the provisions of the
federal securities laws that prohibit fraud in the purchase or sale
of securities.
California began issuing the IOUs (called âregistered warrantsâ by
California) on July 2 to certain individuals and entities,
including citizens who were entitled to a tax refund or vendors who
were entitled to payments. The IOUs are obligations of the State of
California, are negotiable, and bear interest. The staffâs view
that the IOUs are securities does not affect Californiaâs right to
issue or repay the IOUs.
In addition to the antifraud provisions of the federal securities
laws, other parts of the federal securities laws also apply to the
purchase and sale of the IOUs. Persons acting as intermediaries
between buyers and sellers of the warrants may need to register as
brokers, dealers or municipal securities dealers, or as alternative
trading systems or national securities exchanges.
Broker-dealers, as well as any potential secondary markets, should
be aware that the requirements of the securities laws and the rules
of the Municipal Securities Rulemaking Board apply to the IOUs.
Finally, although the IOUs are labeled âregistered warrants,â they
are not registered with the SEC. There is no registration
requirement that applies because the IOUs are municipal securities.
I am not aware of any comprehensive public legal analysis of their
status or regulation, though certainly California legal authorities
must have done exactly that in preparing them for issuance (if there
is such an analysis out there, i would be grateful to know). There are
lots of different kinds of regulatory questions, of course. Questions
could include their status as securities; questions of their legal
enforcement as obligations of the state of California; the legal
ability of the state to issue these warrants in lieu of regular
payments; the ability of the warrants to circulate to third parties;
whether third parties can be required under some circumstance to
accept them for cash (including, for example, the state of California
in payment of state taxes or fees); any other securities or banking or
lending or other laws under which they might fall; and, at the outer
unlikely extreme, their constitutionality as a question of limitations
on states issuing their own legal tender ([7]Art. I, Sec. 10) (no, I'm
not suggesting any such problem, but any thorough legal analysis would
have to consider it).
One of these questions has been answered, besides the securities law
matter. On July 7, 2009, the [8]California Franchise Tax Board
announced that it will accept the IOUs as a form of payment (I wonder
(tongue in cheek) if it should not prudently impose some form of ...
discount on its state's own notes). The text of the FTB announcement
has its own items of legal interest, from a tax and commercial law
standpoint:
The Franchise Tax Board (FTB) announced it accepts California
registered warrants (IOUs) as payment of current and past due
personal and corporate tax obligations.
To pay a tax liability with an IOU, endorse the IOU on the reverse
side with the phrase "Pay to the order of Franchise Tax Boardâ and
your signature then mail it with the tax bill or estimated tax
voucher. By law, FTB cannot deposit the IOU until it is payable,
but FTB will credit the taxpayerâs account on the date the IOU is
received to stop the accrual of interest. If the IOU is not
sufficient to pay the outstanding balance, taxpayers should send an
additional payment for the difference. Otherwise, the taxpayer will
receive a bill reflecting the new balance due.
On October 2, 2009, FTB will redeem the IOUs it has received with
the Treasurer. If a taxpayer submits an IOU after October 2, FTB
will deposit it and then credit the account with the face value of
the warrant plus applicable interest.
Taxpayers wanting to receive the accrued interest from their IOUs
must hold them until October 2, 2009, the date IOUs are redeemable.
A registered warrant is a âpromise to pay,â with interest, that is
issued by the State when there is not enough cash to meet all of
the Stateâs payment obligations. If there is sufficient cash
available, registered warrants will be paid by the State Treasurer
on October 2, 2009. For more information, see the Treasurerâs
website STO Registered Warrant Information or the Controllerâs
website California State Controller's Office: Frequently Asked
Questions about Registered Warrants (IOUs).
Iâd be interested to read the internal California state legal opinions
on the various issues (if they've been released and publicly posted
I'd appreciate knowing). But in any case do think all this would make
a great student note or comment. Alternatively, it would make a great
article for a practicing lawyer, aiming to give a black letter law
exposition of the issues involved - for a business-oriented law
review, a bar commentary journal, or one of the short-article format,
specialized business law publications that some law schools put out.
(One of my research assistants reminds me that my very own school,
Washington College of Law, American University, has a [9]Business Law
Brief - a softcover, short form journal that seeks to provide timely,
practical, useful commentary on business law issues (ABA Magazine of
the Year 2004-5 - this is a serious magazine). It might be interested
in a short, knowledgeable, practical, descriptive article on this
topic - it circulates very widely to the business law community. If
you are a practitioner or professor who might be interested in this
kind of piece, you can email the editor-in-chief, David Wiseman,
davidbwiseman at gmail and see if you can work out something; tell him
KA sent you.)
Other jurisdictions will likely be headed down the same road as
California, so the question of the legal regulation of such IOUs is
not going to go away. Bonus question: In what sense does any or all of
this suggest that [10]Gresham's Law lives?
([11]hide)
References
1.
http://online.wsj.com/article/SB124846739587579877.html 2.
http://www.time.com/time/world/article/0,8599,1859249,00.html 3. file://localhost/var/www/powerblogs/volokh/posts/1248557870.html
4.
http://www.sco.ca.gov/eo_news_registeredwarrants.html 5.
http://www.sco.ca.gov/5935.html 6.
http://www.sec.gov/news/press/2009/2009-154.htm 7.
http://www.law.cornell.edu/constitution/constitution.articlei.html 8.
http://www.ftb.ca.gov/aboutFTB/press/2009/Release_37.shtml 9.
http://www.wcl.american.edu/blb/ 10.
http://en.wikipedia.org/wiki/Gresham's_law 11. file://localhost/var/www/powerblogs/volokh/posts/1248557870.html
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