Roger D. writes: I’ve been interested in coins for forty years, and I recently had a discussion with a friend, and we had a slight disagreement on an issue. There is no bet riding on this, but we’re both interested in the answer. The question is: are all coins ‘legal tender’, or are only certain ones in that classification? Thanks for your help.
It used to be that coins were “the money”. The use of paper money was essentially a receipt for gold or silver. Through the 19th century the United States had a bimetal system (gold and silver money). A major problem with this system was that it was difficult to maintain a parity between gold and silver. At various times, gold dollars and silver dollars were not equal.
There were also problems keeping the value of gold constant. In the early part of the 19th century, United States gold coins actually had more gold than the corresponding value as exchange in Europe. Gold coins disappeared faster than they were being minted. By 1834, Congress had reduced the gold content in coins to their intrinsic value and for the first time the coins freely circulated.
Over the years the trend has been to distance the economy’s value in terms of gold or silver. The last redemption of silver certificates was in June of 1968 and the minting of precious metal silver coins for circulation essentially ended in 1964 (though half dollars had a reduced 40% silver content until 1970, they were driven out of circulation by their silver value).
Today United States coins are essentially tokens and only paper money is legal tender. Cent coins are legal tender up to 25 cents. The ramifications of this are interesting. Since coins are not legal tender, no one is obligated to take them in trade, including the IRS. In fact, merchants can decide what they consider appropriate for payment. I do not see merchants turning down national paper money but they sure could turn away coins or foreign exchange.
Roger replies: Dear Coin Doc: Well, now I’m really confused about ‘legal tender’. I received your reply, which indicated that coins were tokens, and could be refused for payment of debts. I found the following item in an encyclopedia, which takes a different stance. What do you think? Thanks for your help.
“Legal Tender- offer, usually of money, made in satisfaction of a debt or other liability and in accordance with requirements prescribed by law. In the U.S., legal tender most frequently signifies the currency designated by law that a debtor may offer and a creditor is obligated to accept in the settlement of financial obligations. Legislation passed by Congress in 1933 provided that “All coins and currencies of the United States (including Federal Reserve notes and circulating notes of Federal Reserve Banks and national banking associations) heretofore or hereafter coined or issued, shall be legal tender for all debts, public and private, public charges, taxes, duties, and dues. . . .”
Following enactment of the Gold Reserve Act of 1934, by the terms of which gold coins were withdrawn from circulation and the further coinage of gold coins was discontinued, gold coins ceased to be legal tender in the U.S.
The Coin Doc answers: Paper money was always suspect but was to be redeemable in gold or silver as its obligation on the note required. As time has gone by, the ability to convert paper money to precious metal coins has been removed. ‘Remember when dollar notes were silver certificates and were redeemable for silver? Experiments with fiat money began during the Civil war when the North issued non-redeemable Legal Tender Notes (Legal Tender notes or red seals survived until 1966).
The law of 1933 is suspect. The constitution provided that money had to be “specie” which was defined as gold and silver. The authority to remove the convertibility of gold is still being debated today. At least, in the Congressional mind of 1933, there would be a silver currency to satisfy the needs of the Constitution.
By the 1960’s two events changed everything. The elimination of silver from the Coinage of the United States and the end of convertibility of paper money for precious metal coin. Current paper money is produced by the Bureau of Engraving for a private corporation called the Federal Reserve. Coins are manufactured by the mint in base metal. Only paper money has an obligation that it is “legal tender”. The IRS grabbed on to this a few years ago when an irate taxpayer tried to pay his substantial tax bill with a truck filled with current clad coinage and was refused. The refusal held up in court because it was argued that base metal coins were not legal tender.
The confusion over “legal tender” status is clouded further by the fact that the current monetary system is fiat (it is money because the government says it is) but the law still defines a dollar as:
31 USC 314: Standard unit of value: “The dollar consisting of (twenty-five and eight-tenths grains of) gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States (former 31 USC 315), shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard, and it shall be the duty of the Secretary of the Treasury to maintain such parity.”
In the 19th century, base metal coins weren’t legal tender either but that didn’t hurt their acceptability unless you tried to dump large quantities on someone. Stipulations were made from time to time about the number of base metal coins that were “legal tender” (this referred to 1/2 cents, cents, two cent pieces, three cent pieces, and 5 cent nickels).
Don’t confuse “acceptability” with “legal tender status”. Even during the time of Ancient Rome, bronze coins were a wonderful convenience and were accepted because they would commonly be accepted as money but only gold and silver were legal for debts, land, pay in the army and other important monetary events.
If you want to be a purist, NONE of the current coins or paper money satisfies the test of being “legal tender”. If you want to be less of a purist, only Federal Reserve Notes have the obligation that they are legal tender and therefore are acceptable in any amount.