What is legal tender? What legal tenders are there?

In the United States, the legal tender status of the US dollar ensures creditors' protection by requiring debtors to repay their obligations in the accepted and widely recognized currency.

Nov 02, 2024 at 12:54 pm

Understanding Legal Tender

1. Definition of Legal Tender

Legal tender refers to currency that is recognized by law as being acceptable for payment of debts and obligations within a particular jurisdiction.

2. Purpose of Legal Tender

Establishing legal tender serves several important purposes:

• Facilitates commerce by providing a common medium of exchange.
• Protects creditors by ensuring that they can receive payment in an accepted currency.
• Controls inflation by limiting the supply of currency in circulation.

3. Types of Legal Tender

The specific types of legal tender vary from country to country. Some common forms include:

• Fiat currency: Currency that is not backed by a physical commodity, such as gold or silver. Its value is determined by government decree and public trust.
• Commodity money: Currency that is directly backed by a physical commodity, such as gold or silver.
• Central bank digital currency (CBDC): Digital currency issued by a central bank that serves as legal tender.

4. Establishing Legal Tender

The authority to establish legal tender typically rests with the government or central bank of a country. This can be done through legislation, regulatory acts, or other legal instruments.

5. Examples of Legal Tender in Different Jurisdictions

• United States: US dollar
• United Kingdom: British pound sterling
• Eurozone: Euro
• Japan: Japanese yen
• China: Chinese yuan