Friday, 23 April 2010

Legal tender

Money derives its nominal value from being declared by government to be legal tender. It does not mean economic entities will accept it as money. Zimbabwe declared 100 trillion Zimbabwe Dollar notes as legal tender, but the population in Zimbabwe refused to accept it as legal tender after a very short time because hyperinflation in the millions of per cent per annum made the notes worthless. The Zimbabwe Government withdrew the ZimDollar from circulation when they dollarized their economy with multi-currencies after the Reserve Bank of Zimbabwe wiped out all the real value represented by the Zimbabwe Dollar in their economy by printing excessive amounts of extremely high nominal value bank notes.

Fiat money’s real value is determined by all the underlying value systems in the economy. Changes in money’s real value over time are determined by the rate of inflation or deflation. Money has the legal backing of being legal tender. Legal tender is an offered payment that, by law, cannot be refused in settlement of a debt. Credit cards, debit cards, personal cheques and similar non-cash methods of payment are not usually legal tender. The law does not relieve the debt until payment is accepted which explains the practice in some economies of making out receipts for most payments. Bank notes and coins are usually defined as legal tender.

Kindest regards

Nicolaas Smith

Copyright © 2010 Nicolaas J Smith

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