Something (usually greenbacks or the local equivalent) that the State declares must be accepted as a form of payment for debts. (This is controversial because it puts private currency at a severe competitive disadvantage -- see seignorage and fiat money -- not to mention interfering with the freedom of contract.) Proponents point out that it helps guarantee a uniform standard of payment within a particular country.

Legal Tender in the United Kingdom is defined as a " means of payment that should not be refused by a creditor in satisfaction of a debt. "

Legal tender is in a somewhat confused state in the United Kingdom, and has been for many years, possibly for the entire existence of the Union.

To summarise:

Confusing?

Well, not as much as it appears. For a start, nobody really knows this: it's not well publicised (and hence enforced). I've had a great deal of trouble finding out specifics on this. Also, and more importantly, the status of legal tender isn't as important as it appears.

Let me explain this a bit further. You may pay for your goods or services with cash; you may however pay by other means, such as with a Visa card, a cheque, Switch, or with a large bag of chickens, if the payment method is accepted. Therefore the legal tender status of that crisp twenty in your hand is not nearly as important as whether the person you wish to give it to will accept it as payment.

It should be noted that although it is a rarity, it's is not at all unheard of for Scottish and Northern Irish notes to be refused as payment in England (and no doubt other parts of the UK too). In this situation, alas, you have no legal basis to rely on, and will have to use diplomacy or legal tender instead.


Citations:
Scottish law online: http://www.scottishlaw.org.uk/lawscotland/banks.html
Scottish Currency: http://www.saor-alba.fsnet.co.uk/currency.htm
Philately and Numismatics: http://www.cartref.demon.co.uk/eng/collect.htm
Bank of England: http://www.bankofengland.co.uk/banknotes/legaltender.htm
Scottish Banks: http://www.scotbanks.org.uk/

The U.S. Code of Federal Regulations (Coinage Act of 1965) defines legal tender:

"TITLE 31 > SUBTITLE IV > CHAPTER 51 > SUBCHAPTER I > § 5103
Legal tender
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."

The United States Mint has issued, then was not allowed to issue, and now again continues to issue, gold and silver coins. Precious metal coins hold much higher value than the face value printed on them.

If one finds US dimes, quarters or half dollars dated prior to 1964, then know they are worth more than face value. Funnily enough, the same is true of old copper pennies.

The Mint now issues United States Silver Eagle dollar coins. They are worth a lot more than a dollar. The value of a pure ounce of silver has been in the $13 to $20 range over the last few years (now, 09/18/09, a little over $17/ounce).

Imagine that. A $1 coin, defined as legal tender by law, but worth over ten times more than $1. Some U.S. coins from the 1920's and 1930's, less than 100 years old, are now worth millions.

One can also get gold American Eagle coins, made by the U.S. Mint, labeled in various denominations, and worth far more than their face values. The silver and gold coins cost more than their face amount; they are usually valued by weight of metal in troy ounces, plus a small premium.

There was a recent legal decision (circa 2007), concerning people paid with these coins, and where reporting of "income" was done on the basis of the face value of legal tender, rather than the value of the metal. There were dozens of tax violation charges placed against those involved. My recollection is most of the charges were dismissed due to a hung jury.

This is no recommendation to do anything, other than observe the changing value of money. One may also buy gold and silver coins from many other government mints. My favorite is the gold Canadian Maple Leaf.

Update:
Someone here told me, in reference to people using recently minted coins and reporting them for tax purposes at face value, resulting in criminal charges and a hung jury, "(this)... sounds like an urban legend ... would allow almost everyone to evade near(ly) all taxes ..." I felt obliged to add this note.

A few people tried that:

Outside reference Four-month trial ends with no convictions... involved nine defendants

Someone may pay a debt with a newly minted $50 U.S. Gold Eagle coin. The recipients in that case apparently recorded receipt of $50, correct or not.

As to how the coin should be valued, well, an ounce of gold is currently valued at over $1000 (9/19/09). On the other hand, the coin's denomination is clearly $50, and the law says it is legal tender. Imagine someone saying "I will charge you only $50, if you pay by legal tender coin." If one pays a $50 tab with a $50 legal tender coin, purchased for $1000, is one allowed to declare a $950 loss on a tax form? Is this all just a little confusing? Perhaps someone, somewhere, will clear up the confusion.

If you know something more about U.S. law regarding legal tender, and can cite some other reference(s), please contact me. Maybe this write-up can be updated.

Perhaps what's confusing me is my preference for the Canadian Maple Leaf coins. They are not legal tender in the U.S. I just think they look nice.
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“I sincerely believe ... banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” - attributed to President Thomas Jefferson

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