California's IOUs and the Constitution

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As an armchair economist, I always find it interesting to watch a state collapse into financial coma. This year's budget crisis in California is especially captivating: In addition to its financial and economic aspects, it also raises fascinating questions under the US constitution. At least that's how it appears to this armchair jurist. I'm interested in getting some input from real jurists.

The US Constitution provides: "No State shall [...] make any Thing but gold and silver Coin a Tender in Payment of Debts." US Constitution, Article 1, Section 10. California, depleted of cash, is currently paying its bills in dollar-denominated IOUs, which it intends to redeem starting October 2, 2009. Is California violating the US constitution?

On a closer look, this question seems to expand into three separate ones:

In the sense of the US constitution, what is the legal tender here? Is it California IOUs, or is it US dollars (which the IOUs are denominated in)?
If the legal tender is California IOUs, how does that not violate the US constitution?
If the legal tender is US dollars, how is California not breaching its contracts, which presumably specify a payment of dollars now, and not on October 2?

I would be grateful for any light you could shine on this.

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[+4] - joefromchicago - 07/20/2009[quote="Thomas"]On a closer look, this question seems to expand into three separate ones: [list][*] In the sense of the US constitution, what is the legal tender here? Is it California...

@Thomas,

California-US Constitution=situational paradox

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@dyslexia,

How so?

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The rest of the nation could help California out of it's financial mess as long as all 55 of
California's electoral college votes are null and void in the next two presidential elections.

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@Thomas,

Thomas, I'm not putting words in dys' mouth, but I think it ironic that the Social Security Trust fund is full of IOU's. So, if the Federal Gov't does it, I guess California feels they can.

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@Thomas,

Thomas wrote:

On a closer look, this question seems to expand into three separate ones:

In the sense of the US constitution, what is the legal tender here? Is it California IOUs, or is it US dollars (which the IOUs are denominated in)?

If the legal tender is California IOUs, how does that not violate the US constitution?

If the legal tender is US dollars, how is California not breaching its contracts, which presumably specify a payment of dollars now, and not on October 2?

I would be grateful for any light you could shine on this.

1 & 2. California is not (I presume) making its IOUs legal tender. It would be up to each individual creditor whether to accept a state-issued IOU in payment of a debt. If California passed a law making it mandatory for creditors to take the IOUs in payment of state debts, however, there might be a problem -- not necessarily with the legal tender clause of the constitution, but with the contracts clause.

3. It very well may be violating its contracts. But then a state like California can probably get away with breaking its contracts, considering how its employees and contractors are dependent upon the state for their livelihoods. Big debtors can often impose onerous terms on their creditors simply because of their enormous debts. As the saying goes: "if I owe $100,000 to the bank, that's my problem. If I owe $100 million to the bank, that's the bank's problem."

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California's IOUs and the Constitution

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