DEFINITION of 'Lawful Money'

Lawful money is any form of currency issued by the United States Treasury, and not the Federal Reserve System. It includes gold and silver coins, Treasury notes, and Treasury bonds. Lawful money stands in contrast to fiat money, in which the government assigns value although it has no intrinsic value of its own and is not backed by reserves. Fiat money includes legal tender such as paper money, checks, drafts and bank notes.

Lawful money is also known as "specie", which means "in actual form."

BREAKING DOWN 'Lawful Money'

Oddly enough, the dollar bills that we carry around in our wallets are not considered lawful money. The notation on the bottom of a U.S. dollar bill reads "Legal Tender for All Debts, Public and Private", and is issued by the U.S. Federal Reserve, not the U.S. Treasury. Legal tender can be exchanged for an equivalent amount of lawful money, but macro-effects such as inflation can change the value of fiat money. Lawful money is said to be the most direct form of ownership, but for purposes of practicality it has little use in direct transactions between parties.

The Federal Reserve Act of 1913, which established the Federal Reserve System and authorizes it to issue Federal Reserve notes, states that “[Federal Reserve notes] shall be obligations of the United States and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues. They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank." However, the Act did not explicitly define what lawful money meant. Since some currencies that could be used by national banking associations as "lawful money reserves" were not considered legal tender, Congress amended the Federal Reserve Act in 1933 to include all U.S. coins and currency as legal tender for all purposes. The 1933 amendment extended the power of legal tender to all types of money, creating a dissension on whether paper money and reserves of the Federal Reserve bank are lawful money. While some argue that Federal Reserve notes are lawful money, others tend to disagree.

Since the US Constitution states “no State shall make any Thing but Gold and Silver Coin a Tender in Payment of Debts,” some believe that this is the definition of lawful money and, thus, any payment medium other than gold or silver is not considered lawful money. In effect, the primary meaning of lawful money is legal tender, but a broader interpretation is frequently applied in certain contexts.

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