Legal tender
May 18, 2012 in Uncategorized
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 Zimbabwerefused to accept them as legal tender after a very short time because hyperinflation in the hundreds of millions per cent per annum made the notes almost worthless. The Zimbabwe Government withdrew the ZimDollar from circulation when the Zimbabwean economy dollarized spontaneously with multi–currencies after the Reserve Bank of Zimbabwe wiped out most of the real value represented by the Zimbabwe Dollar in their economy by printing excessive amounts of extremely high nominal value bank notes till the currency had exchangeability with only one foreign currency, namely the British Pound via the Old Mutual Implied Rate. This happened on 20 November, 2008 when the Reserve Bank of Zimbabweclosed the Zimbabwe Stock Exchange and with it the trade in Old Mutual shares which led to the end of the last form of exchangeability with a foreign currency for the Zimbabwe Dollar.
Fiat money´s nominal value is determined by government fiat or decree. Fiat money’s real value is determined by all the underlying value systems in the economy. Changes in fiat money’s real value over time are indicated by the rate of annual 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, personal cheques and similar non–cash methods of payment are not 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 defined as legal tender.
Nicolaas Smith
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.
ConstantITEMPurchasingPowerAccounting said on May 18, 2012
Hi Ennui,Thanks for the visit and the comment.I think it works as follows (I´m an accountant, not an economist): most economies are not operating at 100 per cent capacity in any area. Thus: anyone with capital and the capacity to generate wealth (run a successful company) can increase GDP. Investors do not risk their capital in a stagnant or declining economy. But, the central bank (in the US) has an obligation to “•conduct the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of MAXIMUM EMPLOYMENT, stable prices, and moderate long-term interest rates.”The Fed thus uses temporary monetary easing (creating fiat money) to increase the availability of credit in the economy. When that credit is applied in profitable businesses, then GDP is increased. Later on the Fed then removes this extra money / credit from the economy when the economy has created conditions to grow sufficiently by itself.
Ennui said on May 18, 2012
Fiat money is a great tool for preventing deflation, together with manipulating interest rates. What I don’t understand is how “printing” more money in itself is supposed to generate growth in GDP terms?