The Legal Tender furphy
The claim
I was discussing a current issue with a radio announcer (from a Queensland country town*) recently and he asked whether there were any other odd features of the Constitution. He said "I keep hearing that nothing but gold and silver coins are legal tender". I've heard this one from time to time too - it features on a few American web sites, and occasionally flares up in Australia. It's one of the old standards in court pleadings drafted by self-represented litigants, and in America is now being given a run by people connected with the "Tea Party". As with most of these furphies, it's not always clear what the consequences are supposed to be - that the litigant doesn't have to pay his** debts, or that he** can insist on paying with a heap of gold and silver coins, or that the whole currency is invalid with unspecified consequences for the litigation and for the nation as a whole.
(* Most of the furphies seem to circulate more strongly in Queensland country towns than elsewhere - not so much in the far outback, but in the "provincial" districts between the capital and the far outback. If you live between, say, Caboolture and Rockhampton, sooner or later someone will try to persuade you that you don't have to pay taxes, obey Family Court orders, or whatever else, because the Constitution is invalid, the currency is invalid, or some other equally specious reason. Ignore them, and if they seem at least half-rational suggest that they should read this site. If they seem less than half-rational, just tell other people to ignore them.
**I have said "his" and "he" because it seems that most of those who spread these furphies are grumpy middle-aged males.)
The grain of truth
Section 115 of the Constitution says:
A State shall not coin money, nor make anything but gold and silver coin a legal tender in payment of debts.
(There is a broader list of laws that the States cannot make in the US Constitution, Art 1, sec 10. It includes legal tender among many other things.)
So indeed some governments, in both Australia and the US, cannot make anything but gold and silver legal tender. But which ones? Even before you, the intelligent reader, get to the next heading, you should be able to work out where this is going. Note the first two words - "The States". So you hardly need me to tell you - there's another level of government that can do it.
The overlooked factors
As you will have already worked out, the "other level of government" that can make laws about legal tender is the federal government - in Australia, the Commonwealth government.
In Australia the Commonwealth Parliament has a long list of powers (much longer and more detailed than the American list) in section 51, and that includes:
- (xii) currency, coinage, and legal tender;
- (xiii) banking, other than State banking; also State banking extending beyond the limits of the State concerned, the incorporation of banks, and the issue of paper money; and
- ...
- (xvi) bills of exchange and promissory notes;
These powers give the Commonwealth general control of our currency and banking system. It regulates banks and cheques (a cheque is a particular form of the more general thing, a "bill of exchange"), has set up the Reserve Bank and the Mint, and is specifically authorised to make laws not only about coinage but also the issuing of paper money and the definition of legal tender. [Why paper money is not in the same paragraph as coinage and legal tender is one of the great mysteries of the Constitutional drafting process, but it is there in the next paragraph, and perhaps more importantly legal tender is there. While I'm being picky, why aren't bills of exchange and promissory notes right next to banking either? Answer: the drafters chucked items into section 51 as they occurred to them, without being too fussy about how they were grouped. This means that readers of the Constitution, like readers of any statute, have to be aware that something they read in one place may be qualified or expanded by something in a quite different place - see general harangue about statutory interpretation.]
Now most of the powers granted to the Commonwealth are "concurrent" powers - the States can also legislate in those fields, though, once the Commonwealth has legislated on a topic, inconsistent State laws have to give way under sec 109. However, the point of sections like sec 115 (and Art 1 sec 10 in the US) is to keep the States right out of some parts of the federal government's business - to make the federal legislature's power exclusive. Once the Commonwealth had made laws about legal tender any inconsistent State law would have been made invalid anyway, so sec 115 may not be all that necessary. Its real effect is that it effectively stops the States from issuing any paper money of their own, because that would be pointless if they can't declare it to be legal tender. So why not just say "... nor may a State make laws about legal tender"? I think because they already had laws about certain amounts of gold and silver coins being legal tender, and the drafters didn't want to do anything that might make those laws invalid before the Commonwealth had enacted its laws. (Also, there were words in the US Constitution that were easy to copy.)
Verdict
It's a 
. The Commonwealth government issues coins under Part III of the Currency Act 1965 and notes under Part V of the Reserve Bank Act 1959. Section 16 of the Currency Act provides that coins, up to certain totals depending on the denomination of the coin, are legal tender for the payment of money, and section 36 of the Reserve Bank Act provides generally that notes are legal tender. These are clearly valid laws under the paragraphs of the Constitution cited above. There may be other issues:
- there are economic arguments about how much "paper" (plastic) money the Reserve should issue, and a few old-fashioned folk may still believe in the "Gold Standard".
- There are practical issues - if someone tenders $100 in "silver" (cupro-nickel) coins you're entitled to refuse it but maybe it's simpler to accept it, and
- even the experts at the Reserve have doubts about whether you can be forced to accept payment in legal tender (eg, a million dollars in 5-dollar bills?), and point out that clearly you can specify in advance how a debt is to be paid,
but there is no constitutional issue.
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This page was last updated on the 21st August 2011.
