Define Legal Tender: Everything You Need to Know
One can define legal tender as the currency of a nation in the form of paper money and coinage.3 min read
One can define legal tender as the currency of a nation in the form of paper money and coinage. Legal tender is considered valid for payment of any financial obligations. The nationally recognized legal tender varies from nation to nation.
What Is Legal Tender?
The federal government determines the value of legal tender. Fiat money is a term used to refer to printed money that has no intrinsic value. Based on its physical makeup, a $20 bill is not more valuable than a $1 bill. Its value comes from the Federal Reserve.
Checks and credit cards are actually not legal tender. They merely represent the legal tender you have in your bank account or available through the credit card company. The United States legal tender, the U.S. dollar, is considered legal for use in many other countries. Frequently, countries with less of their own currency available will accept national legal tenders such as the dollar and euro.
Sometimes countries will accept another country's legal tender if they are near the border or if they have close business relations with each other. Shops and restaurants near the border of the United States and Canada accept both U.S. and Canadian dollars to make it easier for tourists. Certain countries around the world have actually taken the U.S. dollar as their own legal tender rather than their currency because they found the dollar to be more stable in value. This practice is called dollarization or currency substitution.
Gold and silver coins are not legal tender in the U.S., but some states have pushed for that to change. Precious metals can be exchanged for legal tender at some pawnshops and other places, but they are not legal tender in and of themselves. Cryptocurrency is growing in popularity and many are demanding that certain types, such as Bitcoin, be considered legal tender. Some countries are even taking steps to change their national currency to cryptocurrency, like the Petro of Venezuela.
Legal Tender in the United States
There are a few different forms of legal tender accepted in the United States. They include:
- Federal reserve notes (paper cash in the form of $1, $2, $5, $10, $20, $50, and $100 bills).
- Circulating coins.
- United States notes (these came before Federal Reserve notes and can be distinguished by their red seal and serial number rather than the current green seal and number).
- Commemorative coins issued from the U.S. Mint (although many of these coins are more valuable as collectibles than their federal face value).
- Circulating notes of reserve and national banks.
Federal reserve notes and circulating coins are the two most common legal tenders used in the U.S. The Federal Reserve Act of 1913 replaced all other paper currency with Federal reserve notes. They are made of linen and cotton, so their actual value is much lower than their monetary value. This is ideal for a legal tender. You never want the intrinsic value of the tender to be higher than its assigned value.
The value of Federal reserve notes is determined by federal law and the U.S. Treasury Department because of the nation's economic activity. Legal tender only functions properly if the nation's economy is also functioning properly. Federal reserve notes don't have expiration dates, but many do fall out of circulation after so many years of use because they get beat up.
Legal Tender Law
In 1965 the Coinage Act was passed and defined the United States legal tender as U.S. coins and currency. This currency included Federal reserve notes that were circulating from national and Federal reserve banks. The Coinage Act made it official that such currency must be accepted as payments for taxes, dues, public charges, and debts. It also restored the value of U.S. Trade Dollars that had previously been demonetized.
Before the 1965 act, the Coinage Act of 1873 was still in place. This antiquated act accepted minted silver coins as federal currency. Coins could no longer be minted in silver once the value of silver rose because the actual value of the coins became higher than their assigned value. The importance of legal tender law lies in the fact that the government protects the value of your money. If you offer $1,000 as payment for a debt to a creditor, he or she must accept it regardless of his or her views toward you personally or other issues the creditor may have.
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