What Is Lawful Money?
Let me explain to you what lawful money is—it's any form of currency issued directly by the United States Treasury, not by the Federal Reserve System. This includes gold and silver coins, Treasury notes, and Treasury bonds. You should know that lawful money contrasts with fiat money, where the government assigns value to something that has no intrinsic worth and isn't backed by reserves. Fiat money covers legal tender like paper money, checks, drafts, and banknotes.
Lawful money is also referred to as 'specie,' which simply means 'in actual form.'
Key Takeaways
- Lawful money is currency issued by the United States Treasury, such as gold and silver coins, Treasury notes, and Treasury bonds.
- Fiat money, which consists of paper money and checks, is not lawful money but is considered legal tender.
- The difference arises from the U.S. Constitution, which specifies gold and silver as the legal form of tender for debts, hence the varied interpretation since new forms of payments came into circulation.
- The Federal Reserve Act of 1913 gave the Federal Reserve the right to issue Federal Reserve Notes, which are backed by the U.S. government and are redeemed in lawful money, but did not specify what lawful money meant.
- In 1933 Congress amended the Federal Reserve Act to include all U.S. coins and currency as legal tender, to avoid any confusion about what type of money is legally permissible.
Understanding Lawful Money
Oddly enough, the dollar bills you carry in your wallet aren't considered lawful money. Look at the notation on the bottom of a U.S. dollar bill—it reads 'Legal Tender for All Debts, Public and Private,' and it's issued by the U.S. Federal Reserve, not the U.S. Treasury.
Legal tender can be exchanged for an equivalent amount of lawful money, but factors like inflation can alter the value of fiat money. I see lawful money as the most direct form of ownership, but practically speaking, it has little use in everyday transactions between parties.
History of Lawful Money
The Federal Reserve Act of 1913 established the Federal Reserve System and authorized it to issue Federal Reserve notes. It states that these notes are obligations of the United States and must be accepted by banks for taxes and public dues. They shall be redeemed in lawful money on demand at the Treasury or any Federal Reserve bank.
However, the Act didn't explicitly define what lawful money meant. Since some currencies used as reserves weren't legal tender, Congress amended the Act in 1933 to make all U.S. coins and currency legal tender for all purposes.
This 1933 amendment extended legal tender status to all types of money, which has created disagreement about whether Federal Reserve notes and reserves are truly lawful money. Some argue they are, while others disagree.
Confusion Over Lawful Money
The U.S. Constitution states that no state shall make anything but gold and silver coin a tender in payment of debts, so some people believe this defines lawful money, meaning anything else isn't lawful. In practice, lawful money primarily means legal tender, but broader interpretations come up in certain contexts.
Because there's no legal definition provided, the term has caused a lot of confusion, especially in legal and banking fields. For all intents and purposes, lawful money should equate to legal tender, but it doesn't always work that way, confusing students of law and banking.
Professionals think Congress should pass a simple statute clarifying what lawful money is, making sure it includes all forms of U.S. currency, especially since gold and silver aren't used regularly anymore.
Keep in mind that lawful money is separate from money classifications like M0, M1, M2, and M3, which cover all money in the U.S. economy.
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