Legal Tender Status
I thought that United States
currency was legal tender for all debts. Some
businesses or governmental agencies say that
they will only accept checks, money orders or
credit cards as payment, and others will only
accept currency notes in denominations of $20
or smaller. Isn't this illegal?
What are Federal Reserve
notes and how are they different from United
States notes?
What are United States Notes
and how are they diferent from Federal
Reserve notes?
The pertinent portion of law that applies to your question is the ,
specifically Section 31 U.S.C. 5103, entitled "Legal tender," which states: "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."
This statute means that all United States
money as identified above are a valid and
legal offer of payment for debts when
tendered to a creditor. There is, however, no
Federal statute mandating that a private
business, a person or an organization must
accept currency or coins as for payment for
goods and/or services. Private businesses are
free to develop their own policies on whether
or not to accept cash unless there is a State
law which says otherwise. For example, a bus
line may prohibit payment of fares in pennies
or dollar bills. In addition, movie theaters,
convenience stores and gas stations may
refuse to accept large denomination currency
(usually notes above $20) as a matter of
policy.
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Federal Reserve notes are legal
tender currency notes. The twelve Federal
Reserve Banks issue them into circulation
pursuant to the Federal Reserve Act of 1913.
A commercial bank belonging to the Federal
Reserve System can obtain Federal Reserve
notes from the Federal Reserve Bank in its
district whenever it wishes. It must pay for
them in full, dollar for dollar, by drawing
down its account with its district Federal
Reserve Bank.
Federal Reserve Banks obtain the notes
from our
Bureau of Engraving and Printing (BEP).
It pays the BEP for the cost of producing the
notes, which then become liabilities of the
Federal Reserve Banks, and obligations of the
United States Government.
Congress has specified that a Federal
Reserve Bank must hold collateral equal in
value to the Federal Reserve notes that the
Bank receives. This collateral is chiefly
gold certificates and United States
securities. This provides backing for the
note issue. The idea was that if the Congress
dissolved the Federal Reserve System, the
United States would take over the notes
(liabilities). This would meet the
requirements of Section 411, but the
government would also take over the assets,
which would be of equal value. Federal
Reserve notes represent a first lien on all
the assets of the Federal Reserve Banks, and
on the collateral specifically held against
them.
Federal Reserve notes are not redeemable
in gold, silver or any other commodity, and
receive no backing by anything This has been
the case since 1933. The notes have no value
for themselves, but for what they will buy.
In another sense, because they are legal
tender, Federal Reserve notes are "backed" by
all the goods and services in the
economy.
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United States Notes (characterized
by a red seal and serial number) were the
first national currency, authorized by the
and began circulating during the
Civil War. The Treasury Department issued
these notes directly into circulation, and
they are obligations of the United States
Government. The issuance of United States
Notes is subject to limitations established
by Congress. It established a statutory
limitation of $300 million on the amount of
United States Notes authorized to be
outstanding and in circulation. While this
was a significant figure in Civil War days,
it is now a very small fraction of the total
currency in circulation in the United
States.
Both United States Notes and Federal
Reserve Notes are parts of our national
currency and both are legal tender. They
circulate as money in the same way. However,
the issuing authority for them comes from
different statutes. United States Notes were
redeemable in gold until 1933, when the
United States abandoned the . Since
then, both currencies have served essentially
the same purpose, and have had the same
value. Because United States Notes serve no
function that is not already adequately
served by Federal Reserve Notes, their
issuance was discontinued, and none have been
placed in to circulation since January
21, 1971.
The Federal Reserve Act of 1913 authorized
the production and circulation of Federal
Reserve notes. Although the
Bureau of Engraving and Printing (BEP)
prints these notes, they move into
circulation through the Federal Reserve
System. They are obligations of both the
Federal Reserve System and the United States
Government. On Federal Reserve notes, the
seals and serial numbers appear in green.
United States notes serve no function that
is not already adequately served by Federal
Reserve notes. As a result, the Treasury
Department stopped issuing United States
notes, and none have been placed into
circulation since January
21, 1971.
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