What is Legal Tender in the U.S.?

The issue of what is legal tender in the U.S. has confronted America right from 1776 to today. Over the centuries, what was considered legal tender in the U.S. has changed.

In order to look at this history, it is necessary to define what is meant by legal tender. Most definitions refer to a form of money recognized by laws or courts as a means to settle public or private debt.

When the U.S. declared independence in 1776, there did not exist any circulating U.S. coins. The Continental Congress and the various colonies/states issued their own scrip, many of which referred to their redeemability for “Spanish milled dollars or the value thereof in gold or silver.”

When the U.S. Constitution was adopted in 1789, there were still not yet any circulating U.S. coins. But a significant provision in Article One, Section 10 reads, “No state shall ... make any Thing but gold and silver Coin a Tender in Payment of Debts.”

Today, the United States Code 31 U.S.C 5103 defines legal tender as “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.” A notation to this current statutory language adds, “This restores to 31.5103 the reference to public charges, taxes, and dues because they are not considered to be debts.”

Before the U.S. Mint was established in 1792, 100 percent of circulating specie in America were foreign coins. Alexander Hamilton, the first Secretary of the Treasury, proposed that foreign coins circulate freely for three years until the U.S. Mint could fully supply America’s coinage needs.

The U.S. Mint took decades to produce enough coins to meet commercial demand. Laws giving foreign coins legal tender status in the U.S. were renewed in 1806, 1816, 1819, 1823, 1827 and 1834. Even in 1830, researcher David A. Martin reports that about 25 percent of all circulating coins in America were of Spanish origin. It wasn’t until about 1850 that the U.S. Mint struck sufficient coinage to meet domestic demand.

The Coinage Act of 1857 repealed all prior acts “authorizing the currency of foreign gold or silver coins.” From then on, these coins could be exchanged at the U.S. Treasury so that they could be recoined by the U.S. Mint. Despite this demonetization, the transition was not smooth. For decades, foreign coins continued to circulate as a medium of exchange in rural areas of America’s interior lands.

Over the past few decades, the question of what Americans could be forced to accept as legal tender payments has become more important. With the rise of electronic payment forms, the use of actual coins and currency as well as checks has declined. Further, during the COVID pandemic lockdowns, several businesses and other institutions changed what forms of payment they accepted specifically to avoid receiving coins and currency (that might have a contagious virus or bacteria on them).

With the future prospect of large numbers of people living off of the Earth in space habitats or on other planets or moons, the issue of what is legal tender will continue to evolve.