08/13/2009 05:12 am ET | Updated May 25, 2011

California Currency? A Taste of Things to Come Unless Percora II Helps Us Leave Discredited Economic Dogma Behind

As California's IOUs signal desperation, Roosevelt Braintruster Marshall Auerback suggests that a Pecora-style Commission could help the public recognize the folly of past economic dogmas that led us into this mess.

At first glance, there would appear to be little connection between California's mounting fiscal crisis and the renewed calls for a new Pecora Commission. But just as the original Pecora Commission created the conditions for a final discrediting of the prevailing ideology that had led to the Crash of 1929 and the subsequent Great Depression, so too does California's innovative response to its impending solvency crisis potentially provide a breakthrough which may indeed end the hegemony of today's bankrupt economics, which helped to engender our current financial crisis. The two are also related insofar as that it is only by holding wrongheaded ideas up to public scrutiny that one can create the political momentum to sweep them away once and for all. In both the 1920s and the earlier part of this decade, cozy little deals made outside the public spotlight amongst a group of privileged insiders created a climate which facilitated corporate predation and political corruption.

So let's look at California today within the context of a political climate calling for a Pecora Commission II. According to the San Diego Union-Tribune, Republicans and Democrats alike embraced legislation last Friday that would make California IOUs legal tender for all taxes, fees and other payments owed to the state -- an action that effectively would mean that California is entering the currency business.

While it might appear that the new law seems merely to allow California to deficit spend just like the Federal Government -- in actuality, the effect is far more profound than that. Allowing the IOUs to be an acceptable payment method for state taxes, instantly imparts value to them -- in effect, what you have is a state creating a sovereign currency right under the noses of the Treasury. They are stumbling their way into it, and as they do so, some of the true nature of contemporary money is being revealed. It will be viewed as a stop gap measure at first, and then could very well become entrenched as states realize they have a way to escape balanced budget requirements.

The legislation is below: ...

You can read the rest of Roosevelt Institute Braintruster Marshall Auerback's piece at New Deal 2.0.