If some sort of money is legal tender that's good, right? Doesn't it basically mean it's official and approved?
Certainly it does denote official and approved. Whether that means something good or not is where things get a bit sketchy.
And there is a flip side. Suppose some sort of money,let's say it is privately issued, is not legal tender. Doesn't that imply it's a tad illicit, lacking an official seal of approval, maybe even illegal?
Legal Tender means a status conferred by government enactment on a Currency which imposes an obligation on creditors and, in some interpretations, persons offering goods and services in exchange for consideration, to accept payment in that Currency.
There is perhaps one merit to be identified in this designation of something as Legal Tender. All other aspects are bad news.
The possible merit mirrors the premise expressed by John Maynard Keynes in the first paragraph of the first page of his "A Treatise on Money" in which he ranks money’s role as an accounting/pricing unit as “the primary concept in a Theory of Money”. Given the role of convention, that is, the desirability of generalized embrace of a particular unit, he and others appear to assume as a direct logical implication that the duty falls to the State to “determine and declare” that unit. So in keeping with that premise, the State, by declaring its money to be Legal Tender enables society to all be on the same page economically. Yay!
I will examine this body of premises elsewhere. To preview, I disagree with the notion that the unit of account function of money is preeminent over other aspects of its utility. I also argue that the State's performance as the official provider of money leaves much to be desired.
But back to the dark reality of Legal Tender.
Legal Tender declarations have been enacted all too often when a State has taken actions to degrade its money to the detriment of creditors.
Suppose someone is owed a specific number of units of a particular money. The State then alters the definition/nature of that money such that the money becomes less valuable than it was status quo ante. The creditor has no recourse but to accept the same number of units in repayment even though the units no longer represent the same thing as when the debt was incurred.
This has occurred several times in the United States, most notably in 1862, 1933 and 1971.
One is hard pressed to name any national currency that has not been forcibly re-jiggered to the detriment of creditors. But I am unaware of any case where creditors recovered debasement-induced damages through legal action. In fact, at least in the US, any strategy to mitigate the risk of loss of value due to an anticipated decline in value of USD by holding some alternative money, if successful, may well result in a capital gains tax hit.
There have been many episodes throughout history when this Legal Tender mindset was extended to compel anyone seeking to sell a good or service to accept the State-mandated money for payment. This is often done in conjunction with price controls that criminalize attempts to adjust prices to offset the monetary debasement.
For example in post-revolutionary France, 1793-94, under the Convention nationale:
"In August the law of April enforcing the use of assignats as the means of payment was strengthened. It became an offence to... differentiate between coin and assignats in any transaction, or to refuse payment in asignats.... By a decree of the 8th September the death penalty itself was imposed." Currency and Credit, Ralph George Hawtrey, 1919.
Summing up this introduction to Legal Tender, any sort of money that needs Legal Tender designation to force people to accept it obviously has something wrong with it. Conversely, if a brand of money offers valid advantages over other monetary options people will naturally embrace its usage eventually unless forcibly prevented.
Specific Performance
Standing in opposition to the imperative of Legal Tender is the principle of Specific Performance.
Specific Performance means the obligation of a debtor to repay a debt with a medium specified as an acceptable means of repayment in the contract by which the debt was memorialized.
This issue of Specific Performance may become a matter of great importance with relation to debt obligations denominated and payable in gold. There are certain to be at least some gold loans (unallocated storage, gold bank deposits, gold "leases") where even though the loan instrument may stipulate repayment in physical gold the debtor will renege and assert a right to repay in some alleged equivalent amount of lawful money. This is why many commentators are concerned by the enormous leverage ratio between so-called "paper gold" and the underlying stock of bullion.
There may also be cases where an obligor, even though fully capable of Specific Performance, is compelled to pay using lawful money.
Yet another facet, felt by some to represent an insurmountable obstacle to the emergence of privately issued money, is the risk that issuers of debt instruments such as bonds denominated and payable in the privately issued Currency could elect to "Legal Tender" their bond holders in the event that the privately issued Currency appreciates relative to conventional money.
In all cases, Specific Performance embodies respect for the sanctity of contract while the spirit of Legal Tender is to subordinate the rule of law to legality.
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