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What is Legal Tender?

Jessica Ellis
By
Updated May 16, 2024
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Legal tender is any form of payment that must be accepted for a debt, according to the laws of the area. Generally, the term refers to government-issued cash money such as bills and coins, as opposed to credit lines, checks, or cards. The laws surrounding legal tender have proved vital in the formation of the fiscal policy of many nations.

During the American federalist debates, those seeking to limit the powers of a central government tried to insist that no central bank should exist, and that government should be prohibited from issuing money. The anti-federalist position was largely defeated, however, and the US Constitution bans individual states from issuing money.

For many years after the Revolutionary War, America used a variety of gold and silver coins for trade. During the Civil War, policies changed due to the immense government debt, and the US government began issuing paper money. In 1965, the United States Supreme Court confirmed that all US-issued money, both paper and coin, is legal tender and therefore must be accepted for debts in the country, while foreign money is not.

In 2002, an ongoing American debate over legal tender boiled to the surface, with the introduction of the Legal Tender Modernization Act into the US House of Representatives. Among other provisions, the act demanded the end of circulation of the penny, valued at one cent in US currency. Proponents of the act argued that pennies are useless as currency and that they cannot be used in vending machines or for many purchases. They also are costly to produce, depending on pollution-heavy industries for the mining of copper and zinc. The bill was never advanced in Congress, and ignored after the close of the year's session.

One of the major debates of the early 21st century was the European adoption of the Euro. Many countries had long histories associated with their own currencies, and the switch to a common European format caused great protests among nationalists. As of 2010, 16 nations, known as the Eurozone, had adopted the currency. Notably, the United Kingdom, Denmark, and Sweden chose to exempt themselves, retaining their own forms.

Although the laws of legal tender demand that any viable currency be accepted in payment of debt, some commercial enterprises refuse large denominations of bills. Food stands, convenience stores, and market booths will commonly refuse any bill worth more than $20 or $50 US Dollars (USD). While this practice seems to violate laws, it actually is legal in many countries. According to most law theories, shopkeepers are allowed to refuse service on any grounds, under a concept called invitation to treat or invitation to bargain. So while you may not have a shopkeeper arrested for refusing your $100 USD bill for a package of potato chips, you can certainly refuse to patronize the store again.

The management of cash is extremely important to most state societies. The day-to-day business of the land is conducted according to the fiscal policy inherent in any economic system. Some historical and societal experts consider the development of tender laws to be a foundation of a functioning society, and the created systems often can give insight into the values and purpose of a nation.

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Jessica Ellis
By Jessica Ellis , Writer
With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica Ellis brings a unique perspective to her work as a writer for SmartCapitalMind. While passionate about drama and film, Jessica enjoys learning and writing about a wide range of topics, creating content that is both informative and engaging for readers.

Discussion Comments

By anon245171 — On Feb 04, 2012

The flaws of our current global money system are best explained in the video clip by Paul Grignon. I recommend people look it up for complete understanding.

By anon137142 — On Dec 26, 2010

Countries based on hard currency have very limited liquidity. This cripples their expansion, and is fatal to survival. Liquidity provided by bills of credit, etc. are of limited utility, as under the Bank of England. Whether the national government or the political subdivisions of a country issue money, it's still going to be criticized as discriminatory.You have to have liquidity.

That was what caused much of the suffering during the Depression; he dollar was sound, but nobody had any(no liquidity). You couldn't trade your potatoes or corn for everything you needed.

By GiraffeEars — On Aug 01, 2010

@ Anon97154- Not to disagree with you, because I do think the banking system is a sham, but the gold-standard and currency systems based on hard currency have their flaws too. They are very uncertain systems, acting unpredictably because they depend on the trading of finite resources. As the population grows there is less currency to go around, and inflation is very low. It is also impractical to move hard currencies from place to place. Imagine buying a business with gold, silver, or copper. It would cost enormous amounts of energy to transport the money back and forth, and the security risks would be immense.

Hard currency systems also slow economic growth because they do not allow countries to implement monetary controls on the economy. A large discovery of a currency mineral can also destabilize global and domestic markets. Instant inflation will result because the discovery will abruptly alter the money supply.

By anon97154 — On Jul 18, 2010

Legal tender laws in the U.S. are inherently discriminatory. The reason is the fractionalized banking system.

A bank in the U.S. can legally lend 10 times the money they have on deposit. This money (for every dollar they have, they can create nine dollars out of thin air) power granted by the federal reserve banks works only because we are forced by the law to accept this currency as legal tender.

If only a rare precious metal was considered legal tender or barter was legal, the banks would no longer have the economic power they presently do. This is coercement, pure and simple. If you or I could lend ten times the cash we have, how would that affect our finances? How would that enable us to be influential in our community and in politics? Would that help us to fraudulently control who was in power and, more importantly, who was not? Of course. And that is why we have legal tender laws. People should be free to demand hard currency for their goods and services.

Jessica Ellis

Jessica Ellis

Writer

With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica Ellis...
Learn more
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