Legal Tender
Legal tender is money that a creditor must accept in settlement of a debt, so that a debtor who offers it in full cannot be sued for non-payment. It does not oblige a shop or anyone else to accept that money for a purchase.
Also called: legal tender status · lawful money · legal tender laws
Legal tender is a narrow legal idea about debts. In the United Kingdom, as the Bank of England explains, it means that if a debt is paid in full in legal tender, and no contract specifies another form of payment, the creditor cannot sue for non-payment. A shop making a sale is not settling a debt, so it may choose what it accepts.
What counts differs by place. In England and Wales, Bank of England notes and Royal Mint coins are legal tender. In Scotland and Northern Ireland only Royal Mint coins are, and the banknotes issued there by commercial banks are not legal tender anywhere. Small coins have limits: 1p and 2p coins are legal tender only up to 20p, and 5p and 10p coins up to £5. In the United States, 31 U.S.C. 5103 makes US coins and currency legal tender for all debts, public charges, taxes and dues, but the Federal Reserve notes that no federal statute requires a private business to accept cash.
Legal tender status is what makes Gresham's Law work, because it forces creditors to take weak money at full value; when people can refuse it, Thiers' Law takes over. It is also why bank deposits (commercial bank money), card payments and stablecoins are not legal tender, although they are money in daily use: they are private claims, accepted by agreement. Whether a central bank digital currency should carry legal tender status is a recurring design question.
In practice
Legal tender rules govern the discharge of debts, not everyday acceptance. In the United States some state laws require certain businesses to accept cash, which is a separate obligation from federal legal tender status.
Example
A builder in England is owed £2,000 under a contract that says nothing about how payment is to be made. The customer can settle in Bank of England notes, and the builder cannot sue because he wanted a bank transfer. A café on the same street can still refuse a £50 note.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Legal Tender, with more detail and background.
Commonly confused with
| Term | How it differs |
|---|---|
| Central bank money | Central bank money is any liability of the central bank, including the reserves banks hold with it. Legal tender is narrower: the notes and coins a creditor must accept to discharge a debt. |
See also
- Gresham's LawGresham's Law is the tendency for overvalued money to stay in circulation while undervalued money is hoarded, melted or exported, when the law forces both to be accepted at the same face value. It is usually summarised as 'bad money drives out good'.
- Central Bank MoneyCentral bank money is money that is a direct liability of the central bank: banknotes and coins, and the balances that commercial banks hold in their accounts at the central bank. It carries no credit risk and is the safest settlement asset.
- Commercial Bank MoneyCommercial bank money is the money that exists as deposits at commercial banks. It is a private bank's promise to pay, created when banks lend, and makes up the large majority of the money that households and businesses actually use.
- CBDCA CBDC, or central bank digital currency, is digital money issued by a central bank and held as a claim on that central bank. It is not a privately issued stablecoin, and it is not the commercial bank money already moving through payment systems.
- Thiers' LawThiers' Law is the reverse of Gresham's Law: when people are free to refuse or discount a weak money, the stronger money drives it out of use. It describes what happens in high inflation, when residents switch to a foreign currency.