Fiat Money vs. Legal Tender: What’s the Difference?

Fiat Money vs. Legal Tender: an outline

Fiat money doesn't have any intrinsic price. What value it's depends on public confidence within the currency's issuer. Legal tender is any currency declared legal by a government. Several governments issue a fiat currency so build it legal tender by setting it because the customary for repaying debt.

Fiat Money

Fiat money isn't backed by physical commodities, like gold. Instead, it's government-backed. Most paper currencies today are act currencies. Fiat money price relies on the link between supply and demand. Fiat holds value because of people’s faith in that nation’s currency.

In the past, government’s minted coins or currency tied to the value of a physical commodity, that may then be redeemed for a set amount of that commodity. Fiat money can't be redeemed.

The advantage of fiat money is that it provides central banks greater management over the economy, as they will control how much money is written. Inflation might occur once a government creates an excessive amount of of a fiat currency, and also the finances will increase too rapidly as a result. Governments printing an excessive amount of cash will produce hyperinflation.

Legal Tender

Legal tender is any form of payment recognized by a government, used to pay debts or financial obligations, like tax payments. National currencies, like the U.S. dollar, are legal tender. In the U.S., the Treasury is permitted to make and issue dollars to the public. The federal reserve notes and coins are recognized legal tender in the U.S.

Laws guarantee nothing apart from official tender gains enough traction to be used as cash in the economy. Notably, checks and credit cards aren’t legal tender—rather, they are money substitutes.

The U.S. dollar is each fiat money and tender. In 1933, the U.S. federal government stopped permitting citizens to exchange currency for government gold. The gold standard, that backed U.S. currency with federal gold, concluded fully in 1973 once the U.S. also stopped supply gold to foreign governments in exchange for U.S. currency notes. Dollars are now backed by the U.S. government itself. As tender, the dollar is accepted for each public and private debts.

The dollar's value fluctuates with economic conditions and also the federal government's management of interest rates. Since the govt controls the money supply, it's going to print additional dollars and make higher inflation as required to influence economic conditions. As changes in public confidence in the U.S. government occur frequently, the worth of the dollar might change rapidly even without current federal management.

Special Issues

Cryptocurrencies don't seem to be thought of money (i.e. accepted for use) because it doesn't have legal tender. Meanwhile, some currencies, notably the U.S. dollar, are considered tender in countries that issue no currencies of their own. Ecuador, that doesn't issue a legal currency, has used the U.S. dollar as its legal tender since 2000. This apply of using the U.S. dollar as a country’s primary currency is understood as “dollarization.”