Monday, November 12, 2012

Some Observations on US Legal Tender

Under the Federal law of the US, in the Coinage Act of 1965 (Section 31 U.S.C. 5103, titled “Legal Tender”), we have the following statement:
“United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes and dues. Foreign gold or silver coins are not legal tender for debts.”
31 U.S.C. § 5103,
The consequences of this are that, while US currency and coin (and high powered money as bank reserves) is legal tender and cannot be refused as payment to discharge debt, it is not illegal for the private sector to accept debt instruments, such as cheques, bills of exchange, promissory notes, drafts and bank money (or fractional reserve demand deposit money) as payment, before final clearing takes place.

And another consequence is that private checks, promissory notes, bills of exchange, and drafts are not legal tender. This is why you can refuse to accept a cheque or other debt instrument.

From a historical perspective, it is interesting that one private debt instrument that was accepted as legal tender were National banknotes. The era when National banks existed and their private banknotes were produced was the period from 1864–1935.

But, even in this period, National banknotes were never given the status of full legal tender: at this time, these banknotes were never legal tender for customs payments to the US Treasury, salaries and other debts owed by the US government, or interest payments made on national debt (Patten 1891: 37).


Patten, Claudius B. 1891. The Methods and Machinery of Practical Banking. B. Rhodes & Company, New York.


  1. And usually additional costs to the consumer in using non-legal tender for transactions. Bad money always drives out good money from an area. Legal tender laws always cause good money to not be used in the area because you can't pay taxes with it so people tend to keep it simple.

  2. you are by default considering legal tender bad money, this is a fallacy

    1. Legal tender is usually installed in an area for one reason, to manipulate the money supply. The government needs money but can't pass new taxes so it finds another way to get around the democratic process. By holding monopoly power over the currency, governments can borrow without limit. They can also provide support to finance in the form of credit. What's good about it?

    2. Legal tender is not what you think it is.

      There is no legal tender in Scotland for example. Yet they use the UK pound quite happily for pretty much everything - despite being part of a much larger European Union that uses the Euro.

      Which suggests that your mental model is somewhat upside down.

  3. Legal tender is a medium of payment defined by a political process... even if it's another countries political process. Although there are many kinds of medium of exchange defined by political processes that are not legal tender, legal tender is a very narrowly defined politically created medium of exchange.
    If Scotland's government doesn't pass legal tender legislation it has left it up to people to decide what to use. They chose pounds over anything else because it is a medium of exchange created by a political process in England and my point still stands. If they chose the euro that too would be a medium of exchange created by a political process. Any medium of exchange created by a political process displaces any medium of exchange developing by a market process. Bad money drives out good money out of circulation from the jurisdiction of the issuing government. It's called Gresham's law. The Bank of England authorizes the minting/printing of pounds in Scotland and Ireland. Why would anybody voluntarily use euros when it would be very difficult to complete transactions with it even though it's not forbidden to try?
    Why would anyone use the more robust market derived medium when people will accept worthless pieces of paper issued by a government as payment?
    The good vs bad money is subjective and like everything else is determined by people. Anytime people have choice to spend good money verses bad, they always spend the bad first. They keep the good.

  4. "They chose pounds over anything else because it is a medium of exchange created by a political process in England and my point still stands."

    They chose pounds because that is the only thing that ultimately settles the tax bills in the UK.

    The Euro is acceptable currency across the whole of the British Isles as required by the EU treaties. Yet people don't use it. Which shows that there has to be something more than a political process.

    The rest of your note is into religious territory based on faith in something that doesn't exist. Therefore there is little point debating it.

  5. Tax collecting is a political activity and requiring payment in a specific medium means the required medium will dominate in an area. Why would anyone bother with euros unless they were forced to use them or the UK government employees were willing to take them as payment.
    There is definitely more than the political process going on. The market ultimately rules. If government employees manipulate too much, as happened in the area known as Greece, market forces rip everything apart and the society breaks down. The protests and violence seen in that part of the world are a breakdown of society after the government simply refused to see the reality of what Greece is.

    1. the reality of greece demonstrates what happens when you do not have an organized tax system.

    2. "Why would anyone bother with euros unless they were forced to use them". I don´t see that anyone force,you or anyone else to use euro.You perfectly free to barter with some other gold silver peanuts or whatsoever.
      But if you voluntarily chose to be a part of society in the country you live you have of course the duty pay for the services that you are given in form of taxation.If you don´t accept the "social contract" and pay for the services you perfectly free to leave and settle in a county without any such social contract between man and society.There are a lot such countries on the earth.And the latter part on Greece i simply don´t understand.It disconnected to the first part of your comment.

  6. Lord K: Legal tender doesn't mean you can't refuse it. In practice it means that, but what it usually means is that the creditor cannot further dun the debtor and legal enforcement of his debt is limited after he has refused payment. Was actually in such a bizarre situation once.