View random article

What Is Legal Tender?

Legal tender refers to the money that is issued by the government and that is accepted as the main means of payment. The term legal tender is usually applied to the bills and coins that the government makes. The government lays down the rules and regulations that apply to use creation, distribution, and use of legal tender.

The origins of the word “tender” can be traced back to the Anglo-French word “tendre”, which means to offer. The Latin word is “tenere”, which means to hold. In essence, legal tender is offered as payment and when accepted, erases the debt. In this sense, the term legal tender does not apply to modes of payment like credit cards and checks.

By law, no one can refuse legal tender as payment if the debt exists prior to the offering of the legal tender. In some cases, however, legal tender may be refused - if there is no existing debt. This is best understood by looking at two scenarios. Take the example of a vending machine. There is no debt prior to the offering of the legal tender - the goods have not been given yet. As such, the vending machine may be designed to decline large bills. On the other hand, if a person dines at a restaurant and pays at the end of the meal, the establishment cannot decline the payment even if the bill is of the largest denomination. The debt exists prior to the payment and it is the restaurant’s responsibility to find legal tender to give as change.

Featured in Finance