The main difference between the old United States Note (USN) and the FRN is that the USN was issued debt-free directly by the U.S. Government, and the Government now issues IOUs as collateral when it wants to "borrow" its own currency in the form of FRNs or bank deposits from private banks. Can you believe that? For 109 years, longer than any other form of U.S. paper money has existed including the FRN, the United States issued its own debt-free currency as it was Constitutionally mandated to do. Then, it abandoned the Constitution and gave the authority to "coin money" and "regulate its value" to a cartel of private banks instead. Plus, it agreed to pay interest for the privilege of "borrowing" those private banknotes that the banks create for the cost of paper and printing. What a racket!
The Federal Government is now running a TRILLION dollar deficit, not a measly 26 billion dollar deficit like California, and has been doling out hundreds of billions of dollars to the financial industry like so much confetti. So, what do the Government IOUs look like? You know what they are. They are Treasury Notes, i.e., T-bonds and T-bills. Fancy names for IOUs. And, what do personal and business IOUs look like? They are also known as "loan documents". That's right. T-bonds and T-bills are nothing but Federal IOUs. And, personal and business loan documents are nothing but personal and business IOUs. In exchange for all these IOUs, the banks issue FRNs, or create bank "deposits". Every time you write a check or deposit a check you are shuffling about dollars, and those dollars are nothing but bank markers you get the privilege of using in exchange for somebody paying interest on some kind of IOU.
As a matter of definition, any instrument that represents dollars and circulates as a form of money is called "currency". So, why do the banks take Federal IOUs, personal IOUs, and business IOUs and issue currency and say they will refuse California IOUs? That is the question you should be asking. The answer is simple but it is not obvious. They are afraid of competition from the individual States of the United States. It's one thing to control Congress via the Federal Reserve Act, the Federal Reserve System of banks, the national debt, and political contributions. It is another to control every State Government in the Union. The oligarchs and their political clout have successfully prevented the Federal Government from issuing its own currency, but they do not wish to fight every State.
The more I think about it, the angrier it makes me. Bank of America, Citigroup, Wells Fargo, J.P. Morgan Chase, and the other major banks who say they will refuse the California IOUs are all major shareholders of the Federal Reserve System. The same banks are refusing to loan a paltry $26 billion or so to California, despite having received trillions in bailouts and loans from Government and the Federal Reserve System itself. The financial crisis is the main reason why California had to issue IOUs in the first place, and the same banks and same system that caused the financial crisis to begin with are now refusing to lend to California and refusing it's IOUs. If the major banks and the Fed will not help California deal with the problem the major banks and the Fed created, if the banks will not take California's interest bearing money (its IOUs), then I suggest that we do not take their money (checks written against Fed bank accounts), and we start to learn how to get by without them. Here are my suggestions:
1) Write to Governor Schwarzenegger, and tell him you want California to start its own State bank, like North Dakota did, and put all State tax receipts in it.
2) If you have a checking or savings account with: Bank of America Corp., Citigroup Inc., Wells Fargo & Co. J.P. Morgan Chase & Co., or other Fed member bank, move that account to a local credit union, and when California charters a State bank, move it to the State bank. At least with the local credit union, you might get better service and better interest rates, the profits stay local, and you are partially withdrawing your support from the Federal Reserve System.
3) If you have a mortgage owned by: Bank of America Corp., Citigroup Inc., Wells Fargo & Co. J.P. Morgan Chase & Co., or other Fed member bank, refinance it with your local credit union, so you will not be making mortgage payments to a Fed bank.
4) Refuse to accept any check written against a: Bank of America Corp., Citigroup Inc., Wells Fargo & Co. J.P. Morgan Chase & Co., or other Fed member bank account, except as required by law.
It might be a while before California charters that State bank, but you can move your money or most of your money to a credit union, refinance your mortgage with a credit union, and start refusing checks from the major banks immediately if you wish to poke your finger in the eye of the Fed and the major banks right now. In most cases, people are not required to accept bank checks as payment for anything. You can list the banks you will not take checks from, or you can just say, "No bank checks". But, keep accepting checks from credit unions though as long as they are the next best alternative to a State bank.
Two large special cases in which you might be forced to accept payment in the form of checks from Fed banks are: wages and rent, although in many cases you can demand payment of wages in cash. California Labor Code section 212(a)(1) prohibits payment of wages by check unless the check is "negotiable and payable in cash, on demand, without discount, at some established place of business in the state, the name and address of which must appear on the instrument." In other words, if the check cannot be immediately cashed (and the larger the check, the less likely a bank will cash it on demand), then you may insist on being paid your wages in cash. If the check can be cashed immediately without discount, and the name and address of the place where you can cash it are written on the check, then you are obligated to accept it. Regarding rent, a landlord in California normally cannot refuse a bank check and require payment in cash. However, a landlord can require payment in cash for three months if he receives a check from his tenant that is dishonored by his bank. That can happen if the tenant overdraws his account or stops payment on a check.
There might be other reasons than the ones I've given concerning why California IOUs cannot become a viable long-term alternative currency, but that does not imply we should not accept them in the short term and keep trying to devise a better monetary mousetrap in the meantime. California did over-commit itself financially, but it did not create the financial crisis. A State of the Union certainly deserves more support from the Federal Government than a private banking cartel.