Legal tender or forced tender is an offered payment that, by law, cannot be refused in settlement of a debt, and have the debt remain in force.[1] Currency is the most common form of legal tender.
The origin of the word is from Middle English tendren, from Anglo-French tendre (verb form), meaning to offer. The Latin root is tenēre (to hold), and the sense of tender as an offer is related to the etymology of the English word extend (to hold outward). [2] The noun form of a tender as an offering is a back-formation of the noun from the verb.
Legal tender is variously defined in different jurisdictions. Formally, it is anything which when offered in payment extinguishes the debt. Thus, personal cheques, credit cards, debit cards and similar non-cash methods of payment are not usually legal tender. The law does not relieve the debt until payment is accepted. Coins and notes are usually defined as legal tender. Some jurisdictions may forbid or restrict payment made other than by legal tender. For example, such a law might outlaw the use of foreign coins and bank notes, or require a license to perform financial transactions in a foreign currency.
In some jurisdictions legal tender can be refused as payment if no debt exists prior to the time of payment (where the obligation to pay may arise at the same time as the offer of payment). For example vending machines and transport staff do not have to accept the largest denomination of banknote. Shopkeepers can reject large banknotes — this is covered by the legal concept known as invitation to treat. However, restaurants that do not collect payment until after a meal is served would have to accept that legal tender for the debt incurred in purchasing the meal.
The right, in many jurisdictions, of a trader to refuse to do business with any person means a purchaser cannot demand to make a purchase, and so declaring a legal tender in law, as anything other than an offered payment for debts already incurred, would not be effective.
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In Australia, the creation of legal tender, in the form of notes and base metal coins, is the exclusive right of the Commonwealth Government. According to the Commonwealth Of Australia Act - Sect 115,[3] which states: "A State shall not coin money, nor make anything but gold and silver coin a legal tender in payment of debts." Under this provision the Perth Mint, owned by the Western Australian Government, still produces gold and silver coins with legal tender status, the Australian Gold Nugget and Australian Silver Kookaburra. These, however, although having the status of legal tender, are almost never circulated or used in payment of debts, and are mostly considered bullion coins.
Australian notes are legal tender, as established by the Reserve Bank Act 1959[4] for all amounts. Australian coins for general circulation, now produced at the Royal Australian Mint in Canberra, are also legal tender, under the provisions of the Currency Act 1965,[5] but only for the following amounts:
The one cent and two cent coins have been withdrawn from circulation since 1994, but they remain legal tender.
According to the Reserve Bank of Australia,[6] the legal framework[7] for legal tender in Australia is somewhat unclear. The Reserve Bank Act 1959[4] and Currency Act 1965[5] establish that it is not legally required to accept legal tender, even for an existing debt, although failure to do so may be prejudicial in future legal proceedings.
In 1901 notes in circulation in Australia consisted of bank notes payable in gold coin and issued by the trading banks, and Queensland Treasury notes. Bank notes circulated in all States except Queensland, but were not legal tender except for a brief period in 1893 in New South Wales. There were, however, some restrictions on their issue or other provisions for the protection of the public. Queensland Treasury notes were issued by the Queensland Government and were legal tender in that State. Notes of both categories continued in circulation until 1910, when the Australian Notes Act 1910 and Bank Notes Tax Act 1910 were passed by the Commonwealth Parliament. The Australian Notes Act 1910 prohibited the circulation of State notes as money and the Bank Notes Tax Act 1910 imposed a tax of ten per cent per annum on 'all bank notes issued or re-issued by any bank in the Commonwealth after the commencement of this Act, and not redeemed'. These Acts put an end to the issue of notes by the trading banks and the Queensland Treasury. The Reserve Bank Act 1959[4] expressly prohibits persons and states from issuing 'a bill or note for the payment of money payable to bearer on demand and intended for circulation'.
Canadian dollar banknotes issued by the Bank of Canada are legal tender in Canada. However, commercial transactions may legally be settled in any manner agreed by the parties involved with the transactions. For example, convenience stores may refuse $100 bank notes if they feel that would put them at risk of being counterfeit victims; however, official policy suggests that the retailers should evaluate the impact of that approach. In the case that no mutually acceptable form of payment can be found for the tender, the parties involved should seek legal advice.[8]
Euro coins and banknotes became legal tender in most countries of the Eurozone on January 1, 2002. Although one side of the coins is used for different national marks for each country, all coins and all banknotes are legal tender throughout the eurozone. Therefore, it is possible to find Irish euro coins in Greece and Finnish euro coins in Portugal, for instance. Although some eurozone countries do not put 1 cent and 2 cent coins into general circulation (prices in those countries are by general understanding always set in whole multiples of 5 cent), 1 cent and 2 cent coins from other eurozone countries remain legal tender in those countries.
European Regulation EC 974/98 limits the number of coins that can be offered for payment to fifty.[9] National laws may also impose restrictions as to maximal amounts that can be settled by coins or notes.
Historically, legal tender was enacted the first time in 1870 for all notes and coins of the Banque de France. Anyone refusing such monies for their whole value would be prosecuted (French Penal Code art. R. 642-3).
According to the Economic and Monetary Union Act, 1998 of the Republic of Ireland which replaced the legal tender provisions that had been re-enacted in Irish legislation from previous British enactments, No person, other than the Central Bank of Ireland and such persons as may be designated by the Minister by order, shall be obliged to accept more than 50 coins denominated in euro or in cent in any single transaction.
The Decimal Currency Act, 1970 governed legal tender prior to the adoption of the euro and laid down the analogous provisions as in United Kingdom legislation (all inherited from previous British law), namely: coins denominated above 10 pence became legal tender for payment not exceeding 10 pounds, coins denominated not more than 10 pence became legal tender for payment not exceeding 5 pounds, and bronze coins became legal tender for payment not exceeding 20 pence.
The Indian rupee is the de-facto legal tender currency in India. The Indian rupee is also legal tender in Nepal and Bhutan, although the Nepalese rupee and Bhutanese ngultrum are not legal tender in India. The value of both the Nepalese rupee and Bhutanese ngultrum are pegged with the Indian rupee. [10]
In previous times, the Indian rupee was regarded as an official currency of other countries, including the Straits Settlements (now Singapore and parts of Malaysia), Kuwait, Bahrain, Qatar, and the Trucial States (now the UAE).
In 1837, the Indian rupee was made the sole official currency of the Straits Settlements, as it was administered as a part of India. In 1845, the British replaced the Indian rupee with the Straits dollar after administration of the Straits Settlements separated from India earlier in that same year.
After partition of India and Pakistan in 1947, the Pakistani Rupee came into existence, initially using Indian coins and Indian currency notes simply overstamped with the word "Pakistan". New coins and banknotes were issued in 1948.
The Gulf Rupee, also known as the Persian Gulf Rupee (XPGR), was introduced by the Government of India as a replacement for the Indian rupee for circulation exclusively outside the country with the Reserve Bank of India Amendment Act May 1, 1959. This creation of a separate currency was an attempt to reduce the strain put on India's foreign reserves by gold smuggling.
Two states, Kuwait and Bahrain eventually replaced the Gulf rupee with their own currencies (the Kuwaiti dinar and the Bahraini dinar) after gaining independence from Britain in 1961 and 1965, respectively.
On 6 June 1966, India devalued the rupee. To avoid following this devaluation, several of the states using the rupee adopted their own currencies. Qatar and most of the Trucial States adopted the Qatar and Dubai riyal, whilst Abu Dhabi adopted the Bahraini dinar. Only Oman continued to use the Gulf rupee until 1970, with the government backing the currency at its old peg to the pound. Oman later replaced the Gulf rupee with its own rial in 1970.
New Zealand has had a complex history of legal tender. At the creation of the colony after the signing of the Treaty of Waitangi in 1840 there was no legal tender in New Zealand, because although the Treaty authorised the British Crown to govern, the laws of the England had not been formally adopted by the new colony.
The English Laws Act 1858 retrospectively adopted the laws of England, and through the UK's Coinage Act 1816 British coins were confirmed as legal tender in New Zealand. Unusually until 1989 the Reserve Bank did not have the right to issue coins as legal tender. Coins had to be issued by the Minister of Finance.
The history of bank notes was considerably more complex. In 1840 the Union Bank started issuing bank notes under provisions of British law but these were not automatically legal tender.
In 1844 Ordinances were passed making the Union Bank banknotes legal tender and authorising the government to issue debentures in small denominations, thus creating two sets of legal tender. These debentures were circulated but were traded at a discount to their face value because of distrust of the colonial government by the settler population. In 1845 the Ordinance was disallowed by the British Colonial office and they were recalled, but not without first causing a panic amongst holders of the debentures.
In 1847 the Colonial Bank of Issue became the only issuer of legal tender. In 1856 however the Colonial Bank of Issue was disbanded and through the Paper Currency Act 1856 the Union Bank was confirmed once again as an issuer of legal tender. The Act also authorised the Oriental Bank to issue legal tender but this bank ceased operations in 1861.
Between 1861 and 1874 a number of other banks including the Bank of New Zealand, Bank of New South Wales, National Bank of New Zealand and Colonial Bank of New Zealand were created by Acts of Parliament and authorised to issue bank notes backed by gold, however these notes were not legal tender.
The 1893 Bank Note Issue Act allowed the government to declare a bank's right to issue legal tender. This enabled the government to make such a declaration to assist the Bank of New Zealand when in 1895 the bank encountered financial difficulties that could have led to its failure.
The 1914 Banking Amendment Act gave legal tender status to bank notes from any issuer and removed the requirement that banks authorised to issue bank notes must redeem them on demand for gold (the gold standard).
In 1933 the Coinage Act created a specific New Zealand coinage and removed legal tender status from British coins. In the same year the Reserve Bank of New Zealand was established. The bank was given a monopoly on the issue of legal tender. The Reserve Bank also provided a mechanism through which the other issuers of legal tender could phase out their bank notes. These banknotes were convertible into British legal tender on demand at the Reserve Bank and remained so until the 1938 Sterling Exchange Suspension Notice that suspended provisions of a 1936 amendment of the 1933 Reserve Bank of New Zealand Act.
The 1964 Reserve Bank of New Zealand Act restated that only notes issued by the Reserve Bank were legal tender. The Act also ended the right of individuals to redeem their bank notes for coin, effectively ending the distinction between coin and notes in New Zealand. The Act came into force in 1967 establishing as legal tender all New Zealand dollar five dollars banknotes and greater, all decimal coins, the pre-decimal sixpence, the shilling, and the florin. Also passed in 1964 was the Decimal Currency Act which created the basis for a decimal currency which was also introduced in 1967.
As at 2005 banknotes were legal tender for all payments, $1 and $2 coins were legal tender for payments up to $100, and 5c, 10c, 20c, and 50c silver coins were legal tender for payments up to $5. These older style silver coins were legal tender until October 2006, after which only the new 10c, 20c and 50c coins, introduced in August 2006, will be legal.[11]
The Singapore dollar is legal tender in Brunei since a Currency Interchangeability Agreement was signed on 1967-06-12. Brunei dollar banknotes (but not coins) are widely accepted throughout Singapore and represent a "customary tender".[12]
The Swiss franc is the only legal tender in Switzerland. Any payment consisting of up to 100 Swiss coins is legal tender; banknotes are legal tender for any amount.[13]
The sixth series of Swiss bank notes from 1976, recalled by the National Bank in 2000, is no longer legal tender, but can be exchanged in banks for current notes up until April 2020.
The Swiss franc is also the legal tender of the Principality of Liechtenstein, which is joined to Switzerland in a customs union.
The Swiss franc is also the currency used for administrative and accounting purposes by most of the numerous international organisations that are headquartered in Switzerland.
In the 19th century, gold coins were legal tender to any amount, silver coins were not legal tender for sums over 2 pounds, nor bronze for sums over 1 shilling.
This provision was retained in revised form at the introduction of decimal currency, and the Coinage Act 1971 laid down that coins denominated above 10 pence became legal tender for payment not exceeding 10 pounds, coins denominated not more than 10 pence became legal tender for payment not exceeding 5 pounds, and bronze coins became legal tender for payment not exceeding 20 pence.
Bank of England notes are the only banknotes that are legal tender in England and Wales and are issued for in the amount of £5, £10, £20 and £50. United Kingdom coinage is legal tender, but in limited amounts for coins below £2.[14][15]
Scottish and Northern Irish bank notes are issued by retail banks rather than a national central bank, and as such are technically promissory notes rather than legal tender. Furthermore, Bank of England notes are legal tender only within England and Wales and therefore also have the legal status of promissory notes in Scotland and Northern Ireland. However, general agreement between banks within the United Kingdom is to treat all notes as legal tender. (See British bank notes.)
In the United Kingdom, only coins valued 1 pound Sterling, 2 pounds, and 5 pounds Sterling are legal tender in unlimited amounts throughout the territory of the United Kingdom. In accordance with the Coinage Act 1971,[16] gold sovereigns are also legal tender for any amount. Although not specifically mentioned on them, the face values of gold coins are 50p, £1, £2 and £5, a mere fraction of their worth as bullion. The United Kingdom legislation that introduced the 1 pound coin left no United Kingdom-wide legal tender banknote.
Currently, 20 pence pieces and 50-pence pieces are legal tender in amounts up to 10 pounds; 5-pence pieces and 10-pence pieces are legal tender in amounts up to 5 pounds; and 1-penny pieces and 2-pence pieces are legal tender in amounts up to 20 pence.[17]
The U.S. Constitution, Art. I Sec. 10 Cl. 1, states, in part:
No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; ...
Before the Civil War (1861 to 1865), silver coins were legal tender only up to the sum of $5. Before 1853, when US silver coins were reduced in weight 7%, silver coins had exactly the value in silver (from 1830 to 1852). Two silver 50 cent coins had exactly $1 worth of silver. A Gold US Dollar of 1849 had $1 worth of gold. With the flood of gold coming out of the California mines in the early 1850's, the price of silver rose (gold went down). Thus, a 50 cent coins of 1840 to 1852 were worth 53 cents if melted down. The government could increase the value of the gold coins (expensive) or reduce the size of all US silver coins. With the reduction of 1853, a 50 cent coin now had only 48 cents of silver. That is why the $5 limit of silver coins for Legal Tender... paying somebody $100 in the new silver coins would be giving them $96 worth of silver. Most people prefered bank check or gold coins for large purchases.
During the early American Civil War, the federal government first issued United States Demand Notes (the first greenback notes) which were NOT redeemable in gold and silver coins but could be used to pay "all dues" to the Federal Government. Since land purchases and duties on imports was only payable in gold (or the new DEMAND NOTES), the Demand Notes were bought by importers and land speculators for about 97 cents on the gold dollar and never lost value. 1862 greenbacks (Legal Tender Notes) at first traded for 97 cent on the dollar but gained/lost value depending on fortunes of the Union Armies. The value of Legal Tender Greenbacks swung wildly but trading was from 85 to 33 cents on the gold dollar.
This resulted in a situation in which the greenback "Legal Tender" notes of 1862 were fiat, and so gold and silver were held and paper circulated at a discount. see: Gresham's Law. The 1861 Demand Notes were a huge success but robbed the customs house of much needed Gold Coin (for interest on most bonds back then were paid in GOLD. A money-strapped Congress which had to pay for the war eventually adopted the Legal Tender Act of 1862, issuing United States Notes backed only by treasury securities, and compelled the people to accept the new notes at a discount and prices rose except for those who had gold/silver coins.
Litigation resulted from debts incurred before the Civil War (when Gold coins were common) and 5 years later, the debtor wanted to pay the debt in full with "Legal Tender" (only worth 55 cents on the gold dollar). Bank deposits were often in "current funds (paper money)" or Gold coin. Check were written to be cashed in "gold coin" or "current funds."
The United States Supreme Court, with Samuel Chase (former US Treasurer and on the US $1 1862 greenback) ruled the practice of legal tender unconstitutional in Hepburn v. Griswold in 1869, but later reversed it's ruling within a month when confusion in the markets caused everybody not to accept "Legal Tender" note at all. The Court held that paper money, even that not backed by specie such as the United States Notes can be legal tender, in the Legal Tender Cases, ranging from 1871 to 1884.
On the other hand, coins made of gold or silver may not necessarily be legal tender, if they are not fiat money in the jurisdiction where they are preferred as payment. The United States Coinage Act of 1965 states (in part):
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
This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor in the U.S. There is, however, no Federal statute that requires private businesses, persons, or organizations to accept it as payment for goods and/or services.[18]
Coins and banknotes may cease to be legal tender if new notes of the same currency substitute them or if a new currency is introduced replacing the former one. Examples of this are:
Individual coins or banknotes may be demonetised and cease to be legal tender, for example, the pre-decimal United Kingdom farthing or the Bank of England 1 pound note, however the Bank of England does redeem all Bank of England banknotes for legal tender at its counters in London (or by post) regardless of how old they are. Banknotes issued by retail banks in the UK are not legal tender, however one of the criteria for legal protection under the Forgery and Counterfeiting Act is that banknotes must be payable on demand, therefore withdrawn notes remain a liability of the issuing bank without any time limits.
In the case of the euro, coins and banknotes of former national currencies were considered as legal tender from January 1, 1999, until February 28, 2002 (in some cases). Legally, those coins and banknotes were considered non-decimal sub-divisions of euro.
When the Iraqi Swiss dinar ceased to be legal tender in Iraq it still circulated in the northern Kurdish regions and despite lacking government backing it had a stable market value for more than a decade. This example is often cited to demonstrate that the value of a currency is not derived purely from its legal status.
This is also true of the paper money issued by the Confederate States of America during the American Civil War. Though Confederate currency became worthless by its own terms after the war, since it could only be redeemed a stated number of years after a peace treaty was signed between the Confederacy and the United States (which never happened as the Confederacy was defeated and dissolved), the value of Confederate currency today as a historical and collectible item is usually much greater than its face value.
Demonetisation is currently prohibited in the United States; the Coinage Act of 1965 (quoted in the previous section) applies to all U.S. coins and currency regardless of age. The closest historical equivalent in the U.S., other than Confederate money, was from 1933 to 1974, when the government banned most private ownership of gold bullion, including gold coins held for non-numismatic purposes; but today, even surviving pre-1933 gold coins are legal tender under the 1965 act.
Banknotes and coins may be withdrawn from circulation, but remain legal tender. United States banknotes issued at any date remain legal tender even after they are withdrawn from circulation. Canadian 1- and 2-dollar bills remain legal tender even though they have been withdrawn and replaced by coins, while Canadian $1000 bills remain legal tender although they are removed from circulation as they arrive at a bank. However, Bank of England notes that are withdrawn from circulation generally cease to be legal tender although they remain redeemable for current currency at the Bank of England itself or by post. All paper and polymer issues of New Zealand banknotes issued from 1967 onwards (and 1- and 2-dollar notes until 1993) are still legal tender; 1- and 2-cent coins are no longer used in Australia and New Zealand.
Sometimes currency issues such as commemorative coins or transfer bills may be issued that are not intended for public circulation but are nonetheless legal tender. An example of such currency is Maundy money. Some currency issuers, particularly the Scottish banks, issue special commemorative banknotes which are intended for ordinary circulation. As well, some standard coins are minted on higher-quality dies as 'uncirculated' versions of the coin, for collectors to purchase at a premium; these coins are nevertheless legal tender. Some countries issue precious-metal coins which have a currency value indicated on them which is far below the value of the metal the coin contains — these coins are known as "non-circulating legal tender" or "NCLT".