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California IOUs: Buying, Selling, and Inherent Value

This article was written by in Banking. 3 comments.


The state of California is in poor fiscal shape. Without an agreed-upon budget, the state has resorted to sending people and businesses IOUs rather than the money owed. California has distributed $335 million in the form of these documents. The IOUs look like checks with “Registered Warrant” printed in the top corner, carry an interest rate of 3.75% and they can theoretically be cashed or deposited in October or earlier if the state comes up with the money.

Many banks and credit unions have been accepting the IOUs for deposit for recipients who are willing to forgo the interest. But on Friday several banks have begun refusing the IOUs. Wells Fargo, Bank of America and JP Morgan Chase no longer accept IOUs issued by the state of California. It is their intention to encourage the government to resolve the budget crisis as soon as possible and they believe this move will put pressure on the state to get closer to resolution.

Individuals who have cash now are taking the opportunity to buy IOUs from people who need the money. A marketplace has popped up. People are buying and selling the IOUs on Craigslist for less than face value, which surprises me as there are enough banks still accepting the IOUs for full deposit. Some buyers are just looking for a guaranteed investment.

Just like any new investment, this process is susceptible to fraud. If you find yourself in possession of an IOU that is not addressed to you, make sure you have a notarized bill of sale; otherwise, according to the California state treasurer, the state may not honor the transferred agreement. The Securities and Exchange Commission is getting involved, too.

Paper money was originally intended as an IOU, to be exchanged for something of “inherent” value, such as silver, at some other time. Eventually it became accepted that objects of “inherent” value were not needed as long as everyone had faith in the paper money. These IOUs from California would not be much different if everyone believes the government will eventually pay up and banks would accept them for deposit.

Published or updated July 13, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 3 comments… read them below or add one }

avatar Journey

IOUs are terrible. I hope California can get its act together ASAP!

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avatar Eric

Sigh, as a Californian, I only know this all too well.

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avatar KingofthePaupers

Jct: There’s nothing wrong with small denomination California State IOUs if anyone can pay their taxes with them. When Argentina”s government workers were faced with cuts, their unions talked 6 state governments into paying them with small-denomination state bonds which could be used to pay for state services and taxes by everyone.
When the local currency is pegged to the Time Standard of Money (how many dollars per unskilled hour child labor) Hours earned locally can be intertraded with other timebanks globally! In 1999, I paid for 39/40 nights in Europe with an IOU for a night back in Canada worth 5 Hours. U.N. Millennium Declaration UNILETS Resolution C6 to governments is for a time-based currency to restructure the global financial architecture.
Too bad California IOUs won”t be accepted in payment for state taxes and services like state bonds were in Argentina. Too bad California IOUs will be denominated too big to use as local currency. Too bad Argentina people were smart enough to avoid the tent-cities catastrophe and California people are too stupid to follow their example.
See http://youtube.com/kingofthepaupers
We now read that state lawmakers back bill to make IOUs legal tender!!!
Great that Argentina people were smart enough to avoid the tent-cities catastrophe and California people are now going to follow their example.
I’ll take back every joke I ever made about Girlieman Governor Musclehead if he engineers the California state currency lifeboat.

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