The Biggest Obstacle to Texan Independence

Suppose you were a patriotic Texan, planning on how to make your state independent. As Tinkzorg likes to put it, in politics (not just in war), the professionals think mostly about logistics. This comprises two parts. First, the grassroots aspect of how do you build up enough internal support to make independence a concrete aim of a sufficient number of Texans. On this aspect, the people you want are (in Henry Sumner Maine’s phrase) “the wire-pullers”, the successful manipulators of public opinion, and the people capable of building organizations to expand out such messages and grow power. I have no skill nor inclination in that regard.

But there is a second aspect that’s more interesting to me. How do you plan in advance for likely hostile responses from USG? If such responses don’t happen once your Texan mob/democratic expression of sovereignty arises, happy days! In that case, the first step of building support is the only one that matters. But since you probably won’t have too many cracks at this, one needs to plan for how to overcome Yankee resistance.

I suspect that said resistance initially won’t be military. It may not be military at all. The reason this whole thing is interesting is that the level of committed energy seems so low on both sides. This is true across most of the western world. The number of people in Texas willing to die to ensure their state’s freedom is likely very low. But so is the number of New Yorkers or Californians willing to die to keep Texans in the union. So inertia rules the day at the moment. It’s like a market that’s very illiquid in both buyers and sellers. Small changes in demand or supply can result in large price swings in either direction, which is what makes it a live issue. Sure, the Californians hate the Texans. But this version of “Fuck you, Dad!” could just as easily manifest as “Fuck you, I won’t [let you] do what you tell me”, or “Fuck you, you’re not invited to family thanksgiving anymore”.

The default Yankee instinct, however, is probably power and control. It is impossible to have a federal, live-and-let-live model of each state making up their own mind on gay rights, or abortion, or most politically charged issues (including, once upon a time, slavery). And while not every issue resolves itself at the level of the Supreme Court, progressive soft power is directed at solving the monstrous corollary to MLK. That is, if injustice anywhere is a threat to justice everywhere, then only total global domination of the levers of power is sufficient to ensure my security in the Upper East Side, or Georgetown, or Malibu. It’s for my own safety, and the cause of justice, you see, that I must rule you.

If you add this up, the likely USG response is probably to apply unpleasant non-military pressure, and try to make life maximally unpleasant for Texans in a way likely to cause them to either relent, or just blame matters on the independence supporters.

So what are those ways, and how might you circumvent them?

One guide is to look at what they do to foreign states they don’t like, and want to apply pressure to. Of the toolkit they like the most, it’s sanctions, and especially financial sanctions. In the recent case of Russia, USG threatened to cut off their banks from the SWIFT system. This would leave them isolated from US financial institutions, and force other countries’ banks to effectively decide (presumably on threat of the punishment being extended to them too) whether they’d rather do business with US banks or Russian ones. Whatever you think about the long-term consequences of the Fed’s print-a-palooza, right now, that’s not a difficult decision for a Swiss Bank.

(As an aside, if I were the Chinese, I would think about making an explicit threat that if the US cut off Russia, Chinese banks would only do business with Russian banks and not US ones. Let the US find out if it’s actually cutting off Russia from America, or cutting off America from the rest of the world).

But assuming the Chinese gambit doesn’t happen, for Russian banks, being cut off from SWIFT would be seriously inconvenient, but probably wouldn’t precipitate a domestic banking collapse. Inside Russia, their customers can still withdraw their rubles just fine. In the Republic of Texas, cutting off all Texas banks would potentially precipitate a bank run / panic, if people worry that their US dollars are about to be replaced with some new currency that’s worth less. Though if withdrawals are simply frozen or drastically limited (as Greece did briefly in 2012 in the run-up to their vote on whether to leave the Euro), things would probably be okay in the short run.

Weirdly, things would get funky based on the fact that the concept of “Russian banks” is much more coherent than “Texan banks”. Mostly what you have is Texan branches of national or regional banks. The big question is who controls the computer systems. If you’re, say, Bank of America in North Carolina, and the federal men with guns (or just a furious Fed banking regulator) call up and demand that you turn off all the computers of all branches in Texas, you’ll probably comply (unless the systems don’t make that straightforward to do, which is quite possible). Of course, Texas has USAA and Comerica and the rest of the banks headquartered there, which also operate regionally or nationally. Presumably men with guns will be doing the same thing there, dictating what those banks have to do.

The standard way to solve this problem of bank runs in the past was to print up a new currency quickly, and order the banks to start paying deposits only in the new currency, which we’ll call Texars. There is some difficulty in printing sufficient volume of not-easily-forgeable currency in a raging hurry, but presumably you can make do in a pinch. Effectively you confiscate local dollar deposits and forcibly convert them to Texars. People will be pissed, but eventually they’ll adjust.

But I think that it’s a mistake to focus on bank runs and bank stability as the main obstacles in the modern era. These are problems, but they’re manageable problems. Rather, what’s harder to actually solve is payment rails. Most money is already electronic, primarily through credit and debit cards. And for anything online, this is the only game in town. A currency is both a store of value and a medium of exchange, but between the two aspects, the latter is a much more acute problem if it starts to fail. Hurt the banks, the banking industry suffers, and people worry about their savings. But if you cut off payment mechanisms, pretty much all business grinds to a halt. People don’t need to access all their savings immediately, but they do need to be able to fill up their car at the gas station. If they can’t do that, this probably guarantees either capitulation, or military escalation. If you’re Free Texas, you don’t want either. You want to be able to maintain business as usual, and dare USG to go kinetic first, hoping that they don’t have the stones. And every day they wait, you can solidify your local control.

The single biggest obstacle to Free Texas right now is the hegemony of Visa and Mastercard. The extent of the power that these firms have over everyday commerce is colossal and not widely appreciated. They run your credit cards and debit cards, which have moved from being ways to extend credit to ways to pay for anything, anywhere. Not only that, but the US has past form on successfully pressuring these companies to cut off foreign businesses they don’t like (Pokerstars, Tradesports, etc.). They would absolutely do this with Free Texas, probably as their opening salvo.

The challenge is that any electronic payment system needs both a digital currency in question, a mechanism for transferring that currency between buyer and seller, and the technology in each store and consumer’s wallet to make such transfers. When you spell it out this way, you can see why this is incredibly difficult to conjure up in a hurry. Much, much harder than printing up new banknotes and forcing everyone to take them. This also poses a problem even to people who want to use things like Bitcoin. Even if you did everything on the lighting network so there were very low fees and short confirmation times, how long is it going to take for every gas station or website in Texas to be set up to accept this kind of payment? How long is it going to take to get every boomer or retirement home resident to get a wallet capable of spending it at said gas station? How long is it going to take them to get the actual bitcoin to spend? What happens if you're the last grandma in line to convert their dollars over to bitcoin, and the price of bitcoin has gone up 50% from the massive influx of demand?

In some sense, you need the incredibly hard ask of a payment system that can be turned on at the drop of a hat once you declare independence. The crude version is just reverting to cash under newly printed Texars. This will probably work for an initial period of emergency, but you need some way of rolling things out, and it’s not clear that the task gets obviously easier after a few weeks. Not only that, ideally the system can be developed with plausible deniability for its true purpose.

I have only vague ideas about how to do this, and I don’t know which one is best. But I am strongly convinced that this honestly may be the single most important problem to figure out a solution to.  A significant part of the challenge is that many of the initial steps look like a huge needless expansion in wasteful reporting and intrusive data collection.

One such component is that you probably need to set up daily reporting requirements for all bank branches in Texas to a parallel system. You could maybe do this through some local institution you had control over (the Dallas Fed, maybe? Probably too converged), or some new regulatory agency. Every day, banks must report their closing balances for all customers to the State of Texas. This ensures that when you declare independence, you at least have a snapshot of what amount to credit everyone’s account with in Texars. You would probably want to also measure people’s equity holdings too – it’s doubtful you can stop USG expropriating these, but at least if you have records, you can figure out some kind of compensation scheme. Most likely, I would reassign expropriated Yankee-owned shares in every publicly traded Texan firm to Texas residents that had lost equity holdings from the Yankee confiscation. People might not be thrilled that their shares in Microsoft have been converted to shares in Texas Instruments or whatever, but it’s sure better than nothing.

From there, you’ll need to decide what the payment system is. This is where I’m less sure. There are various options, with their own levels of difficulty.

You could try to repurpose the existing Visa and Mastercard networks. The advantage here is that the tech is already out there, both in terms of cards and payment machines. Existing bank relationships with national banks (both cardholder and merchant) could be set up with existing Texas banks. The problem is the Visa and Mastercard networks, which is how the banks communicate with each other. You could create your own one of these and somehow repurpose the machines to transmit through it. Maybe I’m wrong here, but I suspect that reverse engineering this stuff as the State of Texas may be harder than reinventing things from square one.

My guess is that the easier setup (though still extremely hard!) is to actually just set up a central bank digital currency from scratch. In other words, the Texas Central Bank keeps a central database of all dollar amounts that people have in bank deposits (which, remember, it has records of already). A “central bank digital currency” in its most minimal form is just a computer at the Texas Central Bank (TCB hereafter) that anyone can open up an account with. If the Fed let you and I open up the same kinds of Fed accounts with it that Citibank has, America would already have a central bank digital currency.

In other words, we currently have an extraordinarily cumbersome payments processing system because we launder the entire thing between thousands of banks that all need to communicate with each other, verify balances, etc. But if you were redesigning the system from scratch, and especially if you need a system that you can get up and running quickly, you don’t want to duplicate all this stuff. Just let the TCB store all the accounts. Then payment processing is just transferring trivially from one register in a database to another register in the same database.

In this framework, the process is at least simplified – instead of trying to run things through the combination of every bank’s existing legacy IT infrastructure, you just need a way for each consumer and merchant to communicate with the TCB. The simplest way to do this is with an app. Download it, and use the camera to take photos of your Texas drivers license, plus your face next to your ID, plus whatever sequence of random requirements are selected (e.g. take a photo with your ID where you close your left eye, put your right index finger on your nose etc.). Then you’ve got access to your existing bank balance.

Want to pay for a purchase? The vendor generates a QR code that contains the amount of the purchase, and the account to have it credited to. You use your phone on the app to take a photo of the QR code. An alert comes up – do you wish to send $12.95 to “McDonalds Plano, TX”? Click yes, take a photo of your face to confirm your identity, and the purchase is complete.

In this version, the role of banks is significantly scaled back. You go to a bank if you actually want to deposit your money into a savings product with a higher rate of interest, with the money being lent out to borrowers. If you want an actual credit card, you have some arrangement with the bank where they pay for your stuff at the TCB using their own funds, and you pay them back on whatever arrangement you negotiate with the bank. I suspect the demand for this service specifically is actually quite low, and a lot of current credit card demand is really just demand for easy electronic payments. Sure, there are airline miles and other reward programs, but this is just a roundabout way to maintain the duopoly of Visa and Mastercard by effectively fleecing cash-paying customers by a small amount. If all this nonsense disappeared, the system would probably be better off. 

In the medium term, you're going to have the problem that taking all this money out of the banking system will likely increase interest rates, by reducing the amount of funds banks hold at any time that they can loan out. That's a problem (unless you're an Austrian economist, in which case it's a feature), but it's not an immediate problem, and can be mitigated down the line with TCB monetary policy or direct lending to banks. There’s nothing to stop consumers keeping more money in an actual bank earning interest by making risky loans. But if you just want to make and receive payments, you can now do it without a bank. There’s also a longer run risk of centralisation of all money in the hands of the new Texas government. I suspect this already exists with current banks, but people just don't think about it much (ask Conrad Black, when they froze all his assets before his trial which made it difficult to mount an expensive legal defense).

At first, there will be a challenge figuring out the various anti-fraud measures, dispute resolution stuff that banks have worked out for ages. Even getting the whole thing into the hands of consumers is hard, and making sure it scales But it’s at least feasible. The challenges are basically:

-Design an app

-Design a database that stores all the balances.

-Design an API for stores to generate transactions  

-Get customers and businesses to download the app

Then every transaction just requires two people holding smartphones, which they already have. Figuring this out from the business end might be a little complicated, but the consumer end at least doesn’t require sending plastic cards to every person in Texas, or new payment machines to every business. The minimum viable product is that each restaurant has one guy holding a smartphone that implements all their transactions until they can redesign their IT systems to make it smoother.

I mean, this is a several year project! I don’t mean to minimize how hard it is. It's also a long way from the core competency of any government, let alone a future government. It seems likely that you'd need to develop it in secret with some rich, sympathetic Texan fintech CEO or something similar. But the hard work is all doable beforehand. Once it’s go time, you just need everybody to download the app (though you should assume that they’ll also prevent you pushing it to App Store or Google Play, and have plans in place for that).

This isn’t the only variant on the plan. I’m sure crypto boosters can imagine some kind of crypto version where you fork Bitcoin and airdrop tokens to all the existing bank account holders. I suspect the challenges of getting this up and running are quite a bit harder than my version, but who knows.

I am actually less wedded to the specific solution that I propose than I am sure that the problem is probably the most important problem to be solved. As far as I can tell, there hasn’t been a new breakaway country that set up in the age of digital finance against the wishes of USG. If you want to be the first, you would do well to ponder the paraphrased version of Jonathan Swift:

“They have his soul,
Who have his payment rails.”