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What is legal tender?

Updated on November 28, 2016

Legal tender in commerce and law, is the power to extinguish or satisfy debts. This power is conferred upon money by legislative action. In popular usage legal tender is currency that the law specifies that debtors shall tender (offer) in payment of public or private money obligations.

In another sense, legal tender refers to the actual offer of payment of a debt in legal money. This is termed legal tender of payment, and it requires that the exact amount of a debt be tendered in legal tender money as an unqualified offer to the creditor or his agent. The creditor or his agent is not bound to accept this. Such a refusal of a tender of payment does not discharge the debt, but if a legal tender of payment has been made, no further interest will accrue on the debt.

Creditors and vendors may specify the form or limits of legal tender payment they will accept. This is part of their "contract" with borrowers or buyers, as when a transportation company specifies that bus drivers will not make change and thus require exact payment of fares.

Section 2 of the Gold Repeal Joint Resolution passed by the U.S. Congress on June 5, 1933, declares: "All coins and currencies of the United States (including Federal Reserve Notes and circulating notes of Federal Reserve banks and national banking associations) heretofore or hereafter coined or issued, shall be legal tender for all debts, public and private, public charges, taxes, duties and dues..." National bank notes, gold coins, and gold certificates were shortly thereafter withdrawn from circulation and are no longer legal tender. Silver certificates were withdrawn from circulation in 1968, so that henceforth the only legal-tender paper currency was in the form of Federal Reserve notes.

Some question still remains as to whether it was the intent of Congress to make all coins unlimited legal tender. The United States is exceptional in this respect, because nearly all other nations place a limit on the amounts for which subsidiary coins are legal tender. In Britain, Canada, and certain countries of western Europe, for example, a creditor need not accept a tender of small denominations as payment of a debt beyond a stimulated amount established by law. In the United States as well, from 1879 to 1933, silver coins in denominations of less than $1 were legal tender for amounts up to $10 only, while one-cent and five-cent coins were legal tender only up to 25 cents. No real legal or financial difficulties have been created by the fact that since 1933 even minor coins are legal tender in undefined amounts.

The constitutionality of Congress' declaring U.S. notes to be legal tender for all debts was tested in a series of Supreme Court cases between 1870 and 1884. The decision in Hepburn v Griswold in 1870 was that "greenbacks" were not legal tender for private debts incurred before 1862 and implied that they were not legal tender at any time In Knox v Lee in 1871, however, the court reversed itself and ruled that Congress had the right to issue bills of credit and declare them legal tender in wartime. This interpretation was extended to peacetime as well in the Juilliard v Greenman decision of 1884.

No further challenge has been made of Congress' power to declare what is to be legal tender.

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