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Legal Tender

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How do legal tender laws affect you?

Most of us use money on a daily basis. We use it to buy our food, to pay for our homes and cars, and to get all the other things we want and need to make our lives comfortable and enjoyable.

But how well do we really understand the money we use?

If you have a dollar bill handy, take it out now and read what is printed in the upper left corner:

This note is legal tender for all debts, public and private.

You have probably seen that phrase numerous times throughout your life. But what does it mean?

Is it something that matters to you? Should you should have an opinion about it, for or against? Or is it just something technical, for bankers and politicians—something you shouldn’t have to worry about?

If you are a consumer and you have dollars to spend, maybe it is a good thing for you. It means anyone you want to do buy from is compelled, by force of law, to accept your dollars in trade for the things they sell.

For example, if someone is selling vegetables by the side of the road, they must accept your dollars in trade for the vegetables. They can’t require you to pay in gold, or silver. They can’t make you use bitcoins. They can’t require that you do a little weeding in their garden as payment in trade.

If they specify any of these kinds of payment, rather than official dollars, the government will not enforce their position in any bargain the two of you may agree to. They will be left on their own without the normal protections of civil law.

But what if you are the farmer who has vegetables to sell? And what if you prefer to be paid in some other way rather than in dollars?

Maybe you feel the currency is not reliable. Perhaps you just don’t like to have money around because someone might steal it. You might even believe money is the root of all evil and you are morally opposed to it.

Shouldn’t you be allowed to exchange goods and services with others without being forced to accept some government approved form of payment?

Let us look at an example. It is a little extreme, but it helps to illustrate the point.

Say you have a bushel of apples, and apples are currently selling in your area for about $5/bushel. Someone comes along and agrees to pay you $5 for your bushel of apples. You agree, the valuation is reasonable but what you really want is some oranges. So you ask your customer to give you one bushel of oranges in payment for your bushel of apples. Your customer agrees to the price, but asks if he can have the apples now and bring you the oranges later in the day.

The two of you come to an agreement, and so you jot down a brief contract in writing that says you have sold $5 worth of apples and the payment is required to be made in the form of one bushel of oranges. During the afternoon, it is announced the central banking authority will create an additional trillion dollars of new currency to be injected into the markets as an economic stimulus. World markets instantly react and the price of commodities world-wide rise 100%.

Later on, your customer comes back and offers you $5 to settle his debt. You argue that your contract was for a bushel of oranges, not dollars. You still want him to honor the agreement by making payment in the form specified by your contract.

Unfortunately, he hasn’t yet acquired the oranges he will need in order to pay you. And in light of recent inflation in the citrus market, it would now cost him $10 or more to fulfill the bargain as originally anticipated. But he has a good lawyer who understands legal tender laws. So we points out to you that your contract is not legally enforceable unless you will accept dollars as payment in full.

Your deal was struck when 5 dollars were worth a bushel of oranges, so you have to accept that as payment. It doesn’t matter that the $5 is now only worth a half bushel of oranges. If you refuse to accept the dollars, your customer could simply leave without paying you anything and you would not even be able to appeal to a court for redress, even with a written contract.

Your contract is not legally binding because you did not accept the government sanctioned form of payment, or legal tender.

This is what the words on your dollar bill mean. The dollar must be accepted as payment for all debts, both private and public.

But in a world where individual choice is important, shouldn’t a merchant be able to choose what form of payment he prefers to receive? Shouldn’t people be free to make agreements with each other according to their own individual wants and desires? And shouldn’t they also be able to depend on their civil courts to enforce those private agreements?

How can we really carry on trade in a civil society if we can’t trust that our contracts with others will be honored?

Imagine another somewhat extreme example: Instead of dollars, let’s assume all purchases were suddenly required to be transacted using Ebay’s online payment system, Paypal. Paypal charges a service fee for each transaction so their shareholders would likely be very pleased with this new regulation. But as citizens, would we put up with a law giving such sweeping power to a single monopoly to manage all our trades?

And yet this is exactly what has been going on since 1913 and the creation of the Federal Reserve. It is a monopoly, created with the sanction of government—a central bank which is not accountable to the people nor even to their government.

This bank, along with its affiliates, get the exclusive right to:

  • manage the size of the money supply, to
  • issue new money and lend it into circulation, and to
  • earn interest and fees on all this activity.
No other business can compete with the Federal Reserve because its dollars have been declared by federal law to be legal tender. Everyone has to accept these privately created dollars or they can not count on the civil courts to keep their trading partners honest. This not just a monopoly. Because it forms the core of our very economy, it is the monopoly of all monopolies!

Is it worth it? Or is there a better way?

That probably depends on your values and what you believe about free will. Do you think we should force people to use the product of a single, chosen business?

For example, what if someone invents and patents a new kind of automobile air bag? Is it OK to then force everyone, by law, to purchase one with their new car? Or maybe you think we should instead foster multiple, competing options. That way people can choose for themselves which one they might like to buy.

Certainly, we like to have a choice of what kind of car we will buy. We like to have a variety of grocery stores to choose from. And we certainly like to choose the clothes we will wear and the house we will live in. So why couldn’t we get to choose what kind of money we would prefer to use?

As our economy has developed, many industries have evolved with a wide variety of consumer choices. But in some areas, we have decided to allow monopolies to exist—often for the sake of standardization or uniformity.

For example, it is difficult to have two or more sets of privately managed roads to drive on. It could be awkward to have multiple power grids, water supplies or sewer treatment systems. Sometimes it just makes sense to limit ourselves to one way of doing things even if it results in a monopoly.

In the past, this may have even been true for money. But in today’s world of technology, it is now completely feasible to have multiple competing currencies.

In fact, we already live in a global economy where many different currencies are in use. Why couldn’t we have multiple currencies to choose from even within a single country? The ones founded on the best principles and practices would gradually gain more favor as a result of their own merits. And those built upon a foolish foundation would eventually lose the trust of the people.

It can be demonstrated that money itself is nothing more than a debt or an obligation that someone must fulfill at some later date. Because it is nothing more than a promise, money can’t work correctly unless our civil society has a reliable method for enforcing our commitments to each other.. When someone makes a promise, the receiver of that pledge needs to know he can depend on it. Otherwise, he will quickly learn not to trust such empty promises and money itself will not be possible in that society.

Without money, commerce can only be accomplished by the more awkward process of direct barter and trade. And when commerce becomes more difficult or even impossible, many may resort to plunder or predation.

So if money is really just a promise or obligation, what are the best ways to create and manage it? Must government always be in charge of this process? Or can’t individuals make and keep their own promises to one another?

Should government decree by law that the promise of one and only one banking system is good and enforceable, but other promises, such as those of ordinary citizens, are not to be trusted? This is clearly a monopolistic approach and it employs a level of regulatory force which is really not necessary. It is probably something we would not put up with if we understood what is really happening behind the scenes.

In a society that values choice, anyone should be able to make and keep promises with anyone else. This is a basic part of the right to free association.

Certainly it is appropriate to include some safeguards to ensure that promises are made in an informed and consensual way. For example, minors should not be held to their promises when they lack the experience and wisdom to properly understand what they are obligating themselves to. Likewise, people who make promises based on false or incomplete representations by the other party should not be required to suffer for those choices. But otherwise, shouldn’t consenting adults be allowed to make whatever bargains they wish with one another?

One of the most important promises we make to each other forms the basis for our money. Again, money is a promise. And you can make promises. So then you can literally make money.

This doesn’t just mean earning money, but rather creating it out of nothing but your own future potential productivity. You buy something now on the promise to pay for it later. That debt, or credit can be traded by others as money until it is finally paid off, or redeemed by you.

Today, you have to make your money by dealing with the Federal Reserve through one of its affiliate banks. You agree to go to work each day at your job, and then surrender a portion of your pay back to the bank each month until the debt has been fully paid. In return, they issue a promise of their own back to you. We call this “taking out a loan” or “borrowing money.” But in reality, you are creating money—not borrowing it from the bank.

You create a promise (money) to the bank that you will pay them in the future. This is a private promise, or a note the bank holds in its files. The bank, in turn, creates a promise (money) payable to anyone you designate.

Their money is printed in fancy, government-approved notes or possibly their electronic equivalent, debits or credits in a computer somewhere. In this sense, the bank is certifies or guarantees your private note with one that is more widely accepted—theirs. But they couldn’t have created their official money if you hadn’t created your private money first. So the new money is ultimately something you created, you have guaranteed, and you are now responsible for.

When our civil laws can be depended upon to enforce the keeping of these kinds of promises, they allow us to make money from our own good credit so we can use it to engage in the trades we need to sustain our lives. So why shouldn’t we be able to create money using alternate methods of credit certification besides the monopoly of the Federal Reserve? Perhaps in the past, this may have been a more difficult challenge. But today, there is nothing standing in our way except existing federal regulations such as legal tender laws.

Once you begin to understand the true nature of money, it is natural to wonder if government should be involved in the business of making money at all. After all, if we can make money by our private promises to one another, why do we need the government to do it. But government does have a very legitimate role in the process.

The Constitution charges the Federal government with the responsibility for creating standards for gold and silver coins. And the Founding Fathers had a good reason for doing this. By defining how much gold or silver could be found in each official coin, the government can effectively determine precisely what a dollar is.

There was a time when it was common for people to specify in their contracts that payment could be required in gold or silver. This assured the parties that the value of their promises would not be subject to change simply by government fiat.

But with responsibly managed federal coinage standards, people could rely on a dollar to have a consistent and predictable value. Contracts defined in terms of dollars would be just as valuable as if they had required payment in gold itself.

So government can perform a true service by defining a consistent standard of measure for value just as they might regulate what an inch or a pound is. But it should not be in the business of awarding a monopoly to one bank or another to certify the creation of all private credit. It should not use the force of law to prevent people from making binding contracts outside that monopoly. And they certainly should not relinquish the responsibility for maintaining a standard measure of value for the money.

Imagine if each year, an inch was slightly shorter than it had been the year before! Yet this is exactly what happens to our dollars due to a constant, persistent inflation rate.

Let us explore some other ways government can do a better job of managing our money.

Most of us recognize, government is necessary for a number of good reasons. If we are going to be able to use money at all, government needs to enforce the promises we make to each other. Furthermore, every country is defined by its borders. Within those borders, people have to abide by the laws and they also get to enjoy the associated benefits of increased productivity and safety.

Surely there are people outside our borders who are hostile to our way of life or who might prey upon us if they could. So it is critical for government to defend our borders from foreign invasion—to keep us safe from others on the outside who might bear us ill will. Government is also important to protect us from hostile people within our borders who would be inclined to abridge our rights or plunder our property.

It is clear, government is necessary if we are to enjoy a civil society. And the operations of such a government must be funded somehow. This implies the need of citizens to pay taxes. And the need for taxes is precisely why we need an official government issued currency.

There are several ways in which this can be done.

One way, we might call a “debit based” system. This term should make you think of how your debit card works. For example, you have to put money into your checking account before you can use the debit card to spend it.

Under a national debit-based system of taxation, the government could simply recognize gold, or its equivalent as the official government currency. All taxes would be due and payable in gold. For the moment, let us not digress to debate which method of taxation is best. Instead, we will focus on the idea that people could engage in trade using any kind of currency they might choose. But when it came time to pay taxes, they would have to exchange value somehow for gold and then render that to the government to satisfy their tax obligations.

This approach would gradually begin to direct gold into government accounts. As these reserves began to accumulate, the government might begin to issue gold certificates as a form of currency. As long as a consistent standard for gold coinage was maintained, these certificates could be called “dollars”. Otherwise, they could be denominated in ounces, grams, etc.

Government gold certificates would entitle the bearer to an amount of gold equal to their face value. They could be turned in at any time and the government would have to surrender the appropriate amount of gold.

But more importantly, the government could use the certificates themselves, or more commonly, their electronic equivalent in a computer, to buy the things it needs. This might include roads, bridges, guns, ships and all the other goods and services necessary to fulfill its Constitutionally defined duties.

If the government was sitting on a trillion dollars worth of gold, they could spend a trillion dollars of gold, or gold certificates into circulation. This money would circulate around until someone needed them to pay taxes. Then they would be surrendered back to the government and the cycle would continue. The government could either retire the certificates, or spend them back out into circulation again on new goods and services for the following budgetary period.

If government managers were fiscally responsible (Ha!) they could retire lots of certificates and build up stores of gold that could then be spent in times of war or other national emergency. If they were less responsible, we would tend to spend everything that had been collected. Hopefully, they would never create more money or promises than they actually had gold to back it up. That would be unethical and dishonest (Ha, again!).

Another approach, we might call a “credit based” system. This is more like your credit card. You can spend a certain amount before you actually have to pay for it. You have to satisfy the debt eventually, and there is a cap on what you can spend without first paying it off.

The government can make promises just like regular people can. So it can create credit money too. And it should.

The Constitution says the Federal government can borrow money on the good faith and credit of the American people. That means when it makes money, the responsibility for the promise is passed along to you, the citizen and taxpayer. You are the one who has to go to work each day to produce the goods and services that will satisfy the debt.

Under such a credit-based system, the government could create monetary notes just as before. These would represent a promise to pay something of value just as with the debit system. Such notes might be payable in gold or silver or some other commodity. One excellent choice would be to denominate them in terms of standardized work or labor hours since that is what is ultimately backing them.

Such a credit note might well be called a “tax credit” because it would be a promise that would be used to satisfy federal taxes. Individual citizens would still go to work each day to support themselves. And their pay could be in gold, dollars, chips, or any other complementary currency. But in order to pay federal taxes, one would have to convert value somehow to federal tax credits and use those to pay the obligation.

A credit-based system would make politicians happier than debit system because they could spend the taxes before they actually collected them. But as citizens, we should insist on certain controls. Since we are the people baking the debt, we should not want our government to incur more debt than we could pay off in a single budget year at acceptable tax rates. Otherwise the debt, or the scale of our promise, would just become bigger and bigger each year with no end in sight. Eventually, it would become so large it could not effectively be honored because people would not be willing or able to pay such high taxes. At that point the promise would break down and the money would lose its value.

Since money is a promise and a promise is only as good as the person backing it, an official government currency must be backed by integrity. That integrity is demonstrated by a government willing to live within a balanced budget each year,

The idea behind both of these systems is simple: We don’t need legal tender laws to force everyone to accept government issued currency. The only party who should have to honor a currency is the party who issues it.

The government must accept government-issued money to satisfy its duly-assessed taxes. And a bank or private party issuing a note, must render the promised value when that note is tendered for redemption.

At this point, a few central-bankers out there are shouting at your computers: “But what about the elastic money supply?” “Who will manage the currency and make sure we don’t run out of money?”

Under these proposed systems, the only money created by government is the money needed to support the operations of government. There would be no legal tender laws to require that the rest of us use dollars in our private transactions. The only requirement is that we provide those dollars when paying our taxes. And only the government is required to accept them in satisfaction of taxes.

In every other transaction, people can use whatever kind of currency they want. You could still use a credit card to buy the things you need. In that case, MasterCard or Visa is your official credit certifier—not the Federal Reserve. If a credit card company chooses, as most would, to denominate their transaction in dollars, they can do so. But they could also choose something else such as gold, silver, or some other commodity.

We already live in a world of international currencies. Our credit card systems already manage billions of monetary conversions on the fly. So with the right kind of de-regulation in place, new competitive private credit instruments could be introduced in addition to Visa and MasterCard.

Maybe you would like to hold your assets in gold, corn, or oil futures. You could buy things using your credit card from a business who might choose to hold their assets in corn reserves or pork bellies. When your bill came due each month, your credit company would perform the necessary conversions and deduct the correct value according to what you owe them from the commodity account you have specified.

In addition to freedom of choice in short-term credit like the money created by our credit cards, we could also extend this same notion to long term credit like consumer mortgages. Maybe you don’t want to borrow (create) dollars to buy your next home. Perhaps you are a cattle rancher and would prefer to back your credit with beef.

Maybe you have a job as an engineer and you can promise a couple of hours of your work each day to service the debt on your house. Just find a credit certification company willing to back that risk, and you should be able to it. Wouldn’t it be nice to know the bank could never foreclose on your house as long as you were willing to show up for work each day?

Or wouldn’t it be helpful to know you didn’t have to rely on the price of beef every year to make your mortgage payments? Instead, maybe you could surrender a specified number of cows each year to stay current on your mortgage. And just like regular mortgages, you could purchase additional insurance to cover the risk to your own health or the health of your herd.

Principles are what remind us to do the right thing when the wrong things seems like the right thing. And choice is a powerful principle. It stems from the idea that everyone should be free to choose as they see fit, as long as they will also protect that same opportunity for others.

We live in a world where we can choose what we eat. We can choose where we live. We can choose the color of our cars and the style of our homes. More and more, technology allows us to customize our environment and our living conditions to the way we like best.

So let us apply the principles of choice to our money. Isn’t it time to abolish our old and outdated concepts of how money must be created and regulated? We don’t need, and we shouldn’t want, the government to force us into using its chosen form of money or credit—particularly when it favors an unaccountable and unelected banking monopoly, the Federal Reserve.

As taxpayers, we are responsible to back all the money. Maybe we should take back our right to control it.