Today the state of California was scheduled to start issuing IOUs instead of checks or cash to some of its vendors. Some banks said they would take them. So how is that any different from the rest of us and our money?

It's different from regular money in some respects, but not in all.

It's different in that California expects to redeem the debt certificates with cash before too long. It's also different because the certificates carry a small amount of interest.

But look, if a vendor to the state prisons, say, gets IOUs in payment, goes to deposit them at the bank, and the bank accepts them and credits him with the amount on the certificate, isn't that the same as if the transaction had taken place with "real" money or ordinary checks?

The U.S. government sends out checks all the time - refund checks, benefit checks and payments of various kinds.

The banks routinely accept these even though the national government is deeply in debt, spends far more than it takes in and has no hope of ever meeting its bills without continued massive borrowing for years to come.

A state's ability to borrow is limited by its constitution, whereas the federal government is under no such constraints. By issuing IOUs, though, California is clearly using a form of borrowing, regardless of what its constitution says.

Still, as long as people accept the state's paper as though it was money, and the banks do the same, it becomes the same as real money. If it didn't have a date by which it has to be redeemed, it could circulate for months and even years, until the paper wears out and crumbles, and be used the same as cash.

We accept money as legal tender because the government says it is and we are used to the fact that there is nothing behind it, no silver and no gold, and nothing of tangible value at all.

So let's not sneer at California and its need to issue IOUs because it was running out of cash. The country as a whole has been doing the same for generations. It just operates under different rules. (hh)