The question is not so far-fetched as one might think. With a number of states in the US unable to meet their financial obligations, what are they to do?
They cannot formally issue currency, but they are considering issuing IOUs [h/t to Jack]:
In most states, the debate centers around whether states should be raising taxes to bridge the budget gaps. California Gov. Arnold Schwarzenegger said he wouldn't sign anything that raised taxes or fees beyond what he has already proposed.
State Controller John Chiang has said he would have to start issuing the IOUs on Thursday unless lawmakers took steps to stem the state's red ink by then.
Roughly $3 billion worth of IOUs will be issued in July unless a compromise on closing the deficit is reached quickly. They will be sent to state contractors, college students, welfare recipients, low-income seniors, the disabled and others who depend on or deliver state services. Counties will not get paid for social programs they administer.
[Update: For more on California's IOUs, see this.]
Do you think there is a good chance such IOUs might circulate as currency (albeit at a discount)? I do. I can readily imagine that if I were paid in state-gubmnt IOUs [how about we coin the term "Schwarzen-dollars"?], I'd want to convert them into US legal tender pretty quickly. Would the state gubmnt require banks (or strongly encourage them) to accept Schwarzen-dollars for deposit? If so, how much would the discount be for Schwarzen-dollars?
Would the US Fed and the US Congress balk if the state gubmnt tried to declare Schwarzen-dollars legal tender in the State of California?
More importantly, if they succeed in doing this, what is to stop or limit them and other state gubmnts from doing much more of this in the future?