The Legal Tender Act of 1873 defines legal tender money as "any coin or currency which, when tendered to a creditor in the discharge of a debt, he is bound to accept at its face value." In other words, legal tender money is any currency that must be accepted as payment for goods or services. The Legal Tender Act does not specify what types of currency must be accepted as legal tender. In practice, this has meant that the types of currency accepted as legal tender vary from country to country.
Did You Know? Legal tender laws effectively prevent the use of anything other than the existing legal tender as money in the economy.
Concept of Legal Tender
Over time, the concept of legal tender has evolved. In most countries today, legal tender is defined as any money authorized by the government to be used for paying debts. This includes both coins and paper money. Legal tender is recognized by means of law as a way to settle a public or non-public debt or meet an economic obligation, including tax bills, contracts, and criminal fines or damage.
Coins and notes come under the legal tender of India. The cash is used universally and required for the price of any type of economic debt is known as legal tender. The term ‘legal tender’ is considered as an offer. It has been derived from the Middle French word ‘tendre’. The Latin meaning of ‘tendere’ is to stretch out, which means to extend.
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How Legal Tender Works?
When a country's government declares certain types of money to be legal tender, it announces that this money must be accepted as a form of payment for all debts, public and private. In other words, businesses and individuals cannot refuse to accept legal tender to pay debts.
The concept of legal tender has a long history. In medieval England, for example, there were many different types of coins in circulation, and each had a different value. This made it difficult to conduct business transactions, so the government established a system of coinage where certain types of coins were declared to be legal tender. This meant they could be used to pay debts, and businesses and individuals were not allowed to refuse them.
The Reserve Bank of India Act, 1934 has given Reserve Bank of India and Central bank the sole right to issue banknotes or currency of the nation. The Act states that the banknote as issued through the crucial financial institution will be established as legal tender at any area in India for the fee of the amount as expressed therein. Therefore, legal tender is the valid money used for the price of the debt and also acknowledged through the law of the land. It ought to be usual for the discharge of debt.
Types of Legal Tender Money
There are four main types of legal tender money: paper money, coins, electronic funds, and checks.
Paper Money:
Paper money is the most common type of legal tender money. Paper money is made by the government and is not backed by any physical commodity. The value of paper money is based on faith in the issuing government. Paper money is created when the government prints paper money and puts it into circulation. The government controls the supply of paper money, and the government determines the value of paper money.
Coins:
Coins are another type of legal tender money. Coins are made of metal and are backed by the government that issues them. The value of coins is based on the metal content. Coins are created when the government mints coins and puts them into circulation. The government controls the supply of coins, and the government determines the value of coins.
Electronic Funds:
Electronic funds are legal tender money that is stored electronically. Electronic funds are typically used for transactions that are conducted online or over the phone. Electronic funds are created when the government creates an electronic account for a user, and funds are transferred into that account. The government controls the supply of electronic funds and determines the value of electronic funds.
Checks:
Checks are legal tender money used to withdraw cash from a bank account or make payments. Checks are typically used for large transactions. Checks are created when a user writes a check and gives it to the payee.
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Importance of Legal Tender Money
1. Legal tender money is a medium of exchange. This means that it can be used to buy and sell goods and services. It is also a store of value, which means that it can be saved and used in the future.
2. Legal tender money is a unit of account. This means that it can be used to measure the value of goods and services. It is also a standard of deferred payment, which means that it can be used to pay for goods and services in the future.
3. Legal tender money is a standard of value. It acts as an economic function of money with additional functions, such as making monetary policy and currency manipulation possible.
4. Legal tender money is a store of value for international trade. This means that it can be used to pay for goods and services in other countries. It is also a unit of account for central banks, which means that it can be used to measure the value of money in the economy.
5. Legal tender money is a standard of deferred payment for government debt. This means that it can be used to pay for government debt in the future
Fiat money vs Legal Tender
The concept of legal tender is important to understand because it affects how money is used in the economy. The value of fiat money is derived from the faith and credit of the issuing government. Fiat money is a government-issued currency which is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.
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Conclusion
In conclusion, legal tender money is any form of currency authorized by the government to be used to pay debts. This includes both coins and paper money. Legal tender money is a medium of exchange and a store of value. It is also a unit of account and a standard of deferred payment. Legal tender money is important for the economy because it affects how money is used.
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