What Is Legal Tender Money And What Is Fiat Money?
Legal Tender Money-
Money that is backed by the government and has a legal sanction by the government is called legal tender or legal tender money.
When the government issues an order describing what is money, that becomes legal tender money.
Everybody is bound to accept legal tender money in exchange of goods and services and it cannot be refused by anybody in payment for transactions.
What are the examples of legal tender money?
Indian currency notes and coins are legal tender money as they are legally binding.
So Are Cheques Legal Tender?
No. Cheques are not legal tender because a person can legally refuse to accept payment through cheques.
Likewise, Bank drafts, Postal Orders and Bills of Exchange also do not fall under the category of legal tender money.
The legal tender status granted by the government of the country to money can be limited or unlimited.
Fiat Money –
Any money that is backed by the order (fiat) of the government to act as money is referred to as Fiat money.
What is a Fiat?
The currency notes which are issued by the Reserve Bank of India are termed as Fiat paper money which signifies they are issued by the Fiat (order) of the government.
Because the government has ordered and sanctioned it to be money, it is to be accepted by everybody in exchange for goods and services and discharge and in the discharge of debt.
The Fiat money is also called legal tender as it circulates via transactions on fiat, which means on the command of the government.
Fiat money is not backed by a physical commodity or financial instrument.
What Are The Examples Of Fiat Money?
The Indian rupee, the US dollar, the Euro and the British Pound are some examples of Fiat money.
Fiat money is issued without any backing of silver, gold or other reserves, therefore fiat money cannot be converted into anything other than itself.