No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.

He equates "emitting bills of credit" with the California IOU's. I'm skeptical given that IOU's have been used at least twice before in California's history. I suspect the key is that acceptance of the California IOU's has always been voluntary. Indeed, I'm of the opinion that as long as creditors are willing to go along, the state can pay with anything it wants.

Think about it for a second. If I owe you $5000.00 and in lieu cash I offer you my car as payment, you can if like, accept payment in that for and the debit is satisfied.

It seems clear to me that what Article I Section 10 is trying to prevent is forcing creditors to accept non-monetary compensation for legitimate debts-something that you do see in a lot of economically dysfunctional countries.

Actually as long as we're here, the very next clause is rather interesting too:

make anything but gold and silver coin a tender in payment of debts,

Does this mean I can demand that my state tax refund be paid to me in gold? I mean this isn't some kind of phony baloney "constitutional right like abortion or gay marriage that supporters insist is implied...despite the fact that there's no evidence for any such thing. This is an actual express provision of the U.S. constitution. It says it right there in black and white. It hasn't been repealed ergo it's valid law.

Well maybe, but my guess is that somewhere along the way there was a court case where it was found that what the founders meant was "the state has to pay you with real money" and the closest thing we have to real money these days is that green stuff the fed keeps churning out to pay Obama's bills.

This is just the sort of thing that makes Ron Paul supporters crazy...ok more crazy. Anyway it's an interesting little constitutional quirk.

Sorry; it's a pet peeve.

Variation of an old Soviet-era joke:

"State employees in California have finally struck an agreement with the Schwarzenegger administration they can all live with. If the state pretends to pay its employees, then they'll pretend to work."

Those two ideas are in a little bit of conflict, but the idea must be that a bond is always paid by current receipts, and no current expenditures are simply turned over.

FWIW, my google results:

Unlike the federal government, the vast majority of states are governed under rules that prohibit them from running a deficit or borrowing to cover their operating expenses. As a result, states have three primary actions they can take during a fiscal crisis: draw down available reserves, cut spending, and raise taxes. States already have begun drawing down reserves; the remaining reserves are not sufficient to allow states to weather the remainder of the recession. The other alternatives — spending cuts and tax increases — can further slow a state’s economy during a downturn which produces a cumulative negative impact on national recovery as well.

I think the semantic question, of whether an IOU is money, is less important to our future than the more fundamental question about what it means for them to run deepening deficits.

We'll be in deeper trouble when we don't just need to worry about the Federal debt but need to add up all the little State ones too!

What we have here is the state trying to meet its past obligations with paper. It's the same problem the Revolutionary soldiers faced when they got home from the war and the states gave them paper IOUs that they could try to sell to the banks for sometimes pennies on the dollar. Its part of what led to the repeal of the Articles of Confederacy.

Bouvier's Law Dictionary, Revised 6th Ed (1856):
Bills of credit may be defined to be paper issued and intended to circulate through the community for its ordinary purposes, as money redeemable at a future day.

I suppose intention is the key here but I find it strange that California can influence banks to purchase the IOUs at face value, in essence to treat them like money and not run afoul of the bills of credit. Also, I doubt CA will accept the IOUs as payment for taxes since that would be treating them like money. Can California move to stop a secondary market in discounted IOUs from developing without the IOUs becoming essentially a currency?

http://www.buycaliforniabonds.com/

Within the sense of the Constitution, bills of credit signify a paper medium of exchange, intended to circulate between individuals, and between the Government and individuals, for the ordinary purposes of society. It is immaterial whether the quality of legal tender is imparted to such paper. Interest bearing certificates, in denominations not exceeding ten dollars, which were issued by loan offices established by the State of Missouri and made receivable in payment of taxes or other moneys due to the State, and in payment of the fees and salaries of state officers, were held to be bills of credit whose issuance was banned by this section