American Legal Tender Rules and Risk Allocation
Files
Description
In an increasingly cashless society, rules concerning the acceptance of legal tender initially seem irrelevant. If few people transact in legal tender, then of what interest are the doctrines that govern its use? On reflection, however, it is precisely the context in which multiple forms of payment proliferate that the rules of legal tender gain significance. The coexistence of multiple forms of payment gives rise to questions about which payment systems may be acceptable; which, if any, must be accepted; and the nonmonetary implications of the answers to those questions. The underlying ambiguity about what legal tender means complicates these issues. In this article I consider how these issues can be clarified by looking at legal tender rules as risk allocation devices. Payment systems vary significantly in the way that they allocate risk among the parties. Some payment devices can be countermanded by the payor. Personal checks are of this nature, and credit card charges can be reversed as unauthorized or as made without sufficient consideration. Other payment devices, such as cashier’s checks, are more difficult to countermand. Cash payments are final when received by the payee. A dissatisfied payor of cash must bring an action against the recipient rather than assert a right to countermand the payment. Checks also involve a risk that they are drawn on insufficient funds. Personal checks place that risk on the payee. Financial institutions that issue bank checks in return for a personal check take the risk of insufficiency, but the payee of the bank check does not (except for the unlikely event of bank insolvency). Cash payments, of course, eliminate the payee’s risk that the payor will be insolvent. Legal tender rules are not typically considered in terms of risk allocation. Discussions of legal tender tend to refer to other purposes, such as creating a common medium of exchange or allowing a government to create fiat money that signals and facilitates economic stability. I do not mean to suggest that these objectives are irrelevant to an understanding of legal tender. But in the modern American economy, the questions that have arisen about the meaning and scope of legal tender take those functions for granted. The more contemporary issues that address the capability of parties to use alternatives to legal tender in a transaction may better be considered through the lens of risk allocation than through the more traditional understandings of legal tender. For purposes of United States law, the relevant doctrine begins with a statutory mandate: “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.” The effect of the statutory mandate seems relatively simple: A debtor may discharge a debt by offering the creditor an amount of United States coins and currency of a face value equal to the amount of the debt, notwithstanding that what the debtor is offering—pieces of paper—has no intrinsic value and is not supported by a promise to exchange it for specie or a valuable commodity. The statute eliminates any distinction between money that is lawful and money that constitutes legal tender—a distinction that existed in United States statutes prior to 1933. By elevating notes to the status of legal tender, the statute places the weight of law behind the convention of accepting currency for debts, which is itself predicated on little more than trust that there exists some subsequent creditor who will accept the same form of payment to discharge a debt or some subsequent seller who will accept it in return for goods or services. While that observation may seem prosaic today, the capacity of the federal government to confer legal tender status went unexercised for the first century of the nation’s existence and was quite controversial when Congress ultimately acted. The delay may have been a function, in part, of the fact that the United States Constitution is a document of grant, not a document of limitation. Thus, the federal government is not permitted to take any action unless it can find a grant of authority in the Constitution. In particular, Congress cannot create rules concerning legal tender unless it can find some textual authority in the Constitution for doing so. After expressly debating the pros and cons of paper currency, the Framers opted to grant Congress explicit powers to borrow, coin, and regulate the value of money, but omitted express mention of whether Congress could declare money to be legal tender. States, on the other hand, were absolutely prohibited from coining money, emitting bills of credit or making anything but gold and silver coin legal tender. The overwhelming concern at the Constitutional Convention was that paper money would generate inflation and disturb individual claims to money, defined as metallic coin with intrinsic value. This fear was predicated on the disastrous hyper-inflation that had followed the issuance of Continental dollars between 1775 and 1779.
Source Publication
The Euro as Legal Tender: A Comparative Approach to a Uniform Concept
Source Editors/Authors
Robert Freitag, Sebastian Omlor
Publication Date
2020
Recommended Citation
Gillette, Clayton P., "American Legal Tender Rules and Risk Allocation" (2020). Faculty Chapters. 722.
https://gretchen.law.nyu.edu/fac-chapt/722
