Definition, Economic Uses, and Illustrations of Legal Tender
Explain Legal Tender.
Anything that is accepted by law as a way to pay for a public or private debt or fulfill a financial commitment, such as contracts, taxes, penalties, or damages, is known as legal currency. Almost everywhere, the national money is accepted as legal tender. Legal tender must be accepted by a creditor in order to satisfy a debt.
Read More: $2 Legal Tender Note
The main reason cryptocurrencies are not widely used as money is that they are not recognized as legal cash. But in June 2021, El Salvador became the first nation in the world to accept bitcoin as cash.
A measure that would have made gold and silver coins legal tender in Arizona in addition to the current US money was vetoed by the state’s governor in May 2013.
Noteworthy Information
Certain currencies, like the euro and the US dollar, are accepted as legal tender in nations that either don’t issue their own money or have decided that the steady dollar is a better option than their own. For instance, in 2000, Ecuador accepted the US dollar as legal money when its own currency, the sucre, quickly declined to the point that $1 was equivalent to 25,000 sucres.
Legal currency often comes in two basic types. A government can accept tax payments and execute contracts denominated in market-determined commodity money, like gold, by just ratifying it as legal tender. As an alternative, a government may proclaim a worthless token or tainted good to be legal tender, in which case it becomes a fiat currency.
Legal tender’s economic function
Legal tender has several uses. It serves as a store of value, a unit of account, a medium of indirect exchange, and a standard for postponed payment when utilized by market players by default.
Legal tender laws are supported by the argument that markets typically do not provide money that is the best possible combination of amount, quality, and type and that legal tender makes money more useful by lowering transaction costs. In particular, having legal tender can reduce transaction costs associated with using several competing currencies and allow for flexibility in the money supply. One approach to a unified currency is the imposition of legal tender.
Monetary policy is also made feasible by the legal tender. From the issuer’s perspective, legal tender makes it easier for the banking system to issue fiduciary media in order to fulfill trade demands and permits the issuer to manipulate, debase, and devalue the currency in order to collect seigniorage.
Gresham’s Law states that in the absence of legal tender regulations, good money tends to drive out bad money, making monetary policy, seigniorage, currency manipulation, and fiduciary media issuance far more difficult.
Digital Money and Lawful Tender
The need for other payment methods to be accepted as legal cash is rising due to the growth of online and international commerce. Notable examples of these other payment methods include bitcoin and other prominent cryptocurrencies. These may still be years away, though, and they do not constitute legal money in the United States or the majority of other nations given official opposition to such alternatives save in a few isolated instances.
Cryptocurrency acceptance is widely available on the internet and is entirely lawful. Because cryptocurrencies are considered to be unofficial rivals of legal money, their use is primarily restricted to the gray and black markets, or to speculative ventures.
There are a few outliers, though. Venezuelan President Nicolas Madura issued an order in 2018 to all federal institutions to adopt the petro, a new electronic money, as legal tender in the face of a catastrophic hyperinflation.
Based on their own assessment of the worth of its natural resources, the Venezuelan government controls the petrodollar in a central manner. It was stated that Venezuela’s mineral, oil, and natural gas reserves supported the petro. Despite being recognized as legal cash, the petro is not widely used as money in Venezuela, and the country’s experiment with it has not shown much success.
Additionally, the small Republic of the Marshall Islands (RMI) said that it will accept the sovereign, a new cryptocurrency, as legal cash. The decentralized peer-to-peer cryptocurrency market will be the basis for the sovereign’s current value. In the RMI, the US dollar serves as both money and legal tender at this time, and it will do so in addition to the new legal currency once the government starts printing sovereigns.
Explain Legal Tender. Anything that is accepted by law as a way to pay for a public or private debt or fulfill a financial commitment, such as contracts, taxes, penalties, or damages, is known as legal currency. Almost everywhere, the national money is accepted as legal tender. Legal tender must be accepted by a creditor…