The Changing Role of Legal Tender: An Historical Perspective
Money is a term of art that can be described by its functions. The primary function is that it is a generally accepted means of exchange in terms of a defined unit of account. Another function is that money is a store of value. A wide variety of "things" have been used as money, including credit cards, checks (demand deposits), gold, and silver. Congress and the courts grant some forms of money the special status of being legal tender that creditors must accept as payment for debts. 1 United States coins and currency are legal tender. The phrase "This note is legal tender for all debts public and private" appears on all Federal Reserve notes. Creditors are not required to accept other forms of payment.
The difference between legal tender and other forms of money played a crucial role in our economic history. Simply stated, without legal tender, there would not be a United States today. Over the years, the role of legal tender in our political and economic system has changed. At the present time, legal tender is growing in importance, but for different reasons than it was important before. This chapter examines the historic and current importance of legal tender. The article is divided into five parts. In chronological order, they deal with the Colonial period, the Civil War period, the Great Depression, Current Times, and a Conclusion.
One reason for the establishment and existence of the federal government in 1787 was to pay the debts of the colonies-states. Colonial governments found it difficult to borrow from their citizens because substantial wealth did not exist in liquid form. Wealth was mainly in the form of land and commodities, and there was no banking system. Despite these difficulties, the colonies had to pay for wars and other expenses, so they resorted to fiat money: currency that was not backed by a commodity such as gold. Massachusetts first used fiat money in 1690 and was soon followed by the other colonies. 2
Other forms of money circulated too. These included foreign coins (British,