Legal tender money investopedia forex

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In the U. Creditors are required to accept them as payment offered to discharge a debt; however, except where prohibited by state law, private businesses may refuse to accept some or all forms of cash tender provided that a transaction has not already occurred and debt has not been incurred by the customer. By default and design , legal tender laws prevent the widespread adoption of anything other than the existing legal tender as money in the economy.

A check, or a credit swipe, is not legal tender; it functions as a money substitute and merely represents a means by which the holder of the check can eventually receive legal tender for the debt. Cryptocurrencies are not generally accepted for use as money largely because they lack legal tender status. However, El Salvador became the first country in the world to accept bitcoin as legal tender in June In May , the governor of Arizona vetoed a bill that would have made gold and silver coins legal tender in the state, in addition to existing U.

Special Considerations Some currencies, such as the U. For example, Ecuador adopted the U. Adopting the U. In general, a legal tender can be in two fundamental forms. A government can simply ratify market-determined commodity money , such as gold, to be legal tender and agree to accept tax payments and enforce contracts denominated in that commodity. Alternatively, a government can declare an adulterated commodity or valueless token to be legal tender, which then takes on the characteristics of a fiat currency.

Economic Function of Legal Tender Legal tender serves several purposes. By default, it is used by market participants to fulfill the functions of money in the economy: a medium of indirect exchange, a unit of account, a store of value, and a standard of deferred payment. Proponents of legal tender laws argue that markets generally fail to produce the optimal type, quality, and quantity of money and that legal tender enhances the usefulness of money as a means to reduce transaction costs. Specifically, having a legal tender can allow flexibility in the money supply and a single currency can eliminate the transaction costs associated with the use of multiple competing currencies.

The imposition of legal tender is one way to achieve a single currency. The legal tender also makes monetary policy possible. From the point of view of the issuer, legal tender allows the manipulation, debasement, and devaluation of the currency by the issuer to obtain seigniorage and facilitates the issuance of fiduciary media by the banking system to meet the needs of trade.

In the absence of legal tender laws, Gresham's Law would make monetary policy, seigniorage, currency manipulation, and fiduciary media issuance much more difficult as good money tends to drive out bad money in that case.

Cryptocurrency and Legal Tender The popularity of cross-border and online shopping is increasing the demand for more forms of money, such as popular cryptocurrency alternatives like bitcoin , to be recognized as legal tender.

Key Takeaways Fiat money is a government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed. Most modern paper currencies, such as the U. One danger of fiat money is that governments can print too much of it, resulting in hyperinflation.

Fiat currency came about when governments would mint coins out of a valuable physical commodity, such as gold or silver, or print paper money that could be redeemed for a set amount of a physical commodity. Fiat, however, is inconvertible and cannot be redeemed simply because there is no underlying commodity backing it. Because fiat money is not linked to physical reserves, such as a national stockpile of gold or silver, it risks losing value due to inflation or even becoming worthless in the event of hyperinflation.

In some of the worst cases of hyperinflation , such as in Hungary immediately after WWII, the rate of inflation can double in a single day. Furthermore, if people lose faith in a nation's currency, the money will no longer hold value.

This is much different from a currency backed by gold, for example; it has intrinsic value because of the demand for gold in jewelry and decoration as well as in the manufacturing of electronic devices, computers, and aerospace vehicles. History of Fiat Money in the U.

The U. Legal tender is basically any currency that a government declares to be legal. Many governments issue a fiat currency, then make it legal tender by setting it as the standard for debt repayment. Earlier in U.

The federal government stopped allowing citizens to exchange currency for government gold with the passage of the Emergency Banking Act of