Foreign Currency: Claims, Judgments and Damages

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Fiat money, legal tender and alternative money

Fiat money and legal tender

Fiat money

15.1 The present units of money in the currency of the United Kingdom are the pound sterling and the penny or new penny,1 the values of which are supported by government decree and public faith in their worth. Paper money issued by the Bank of England is no longer convertible into gold at the demand of the holder, but derives its value in England and Wales by having been designated as legal tender.2 As such, it is fiat or fiduciary money, having no, or a negligible, intrinsic worth.3 Similarly, as seen in , whereas for many centuries international exchange rates reflected the fact that the coins of different countries were in essence just different names for various quantities and grades of precious metal, nowadays sterling coins in daily use are no longer composed of precious metals, nor are they backed by a physical commodity.4 Their practical value arises in the same way as with banknotes, as a medium of exchange enabling their owner to acquire goods and services, because other people also see them as desirable for the same reason; and

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because, within specified limits for certain coins, they have been designated as legal tender. Similar considerations apply to the official currencies of all other nations, A Bank of England note bears a promise, signed by the Chief Cashier on behalf of the Governor and Company of the Bank, to pay the bearer on demand the sum in pounds specified on the note’s face. But in whatever way such promise is fulfilled, the bearer will simply receive another form of fiat money. In effect, the promise amounts to a statement that the note is legal tender. A consequence is that day-today payments made in sterling bank notes entail the transfer of bearer rights against the Bank of England. 15.2 The economist John Maynard Keynes described fiat money as

Representative (or token) Money (i.e. something the intrinsic value of the material substance of which is divorced from its monetary face value) - now generally made of paper except in the case of small denominations - which is created and issued by the State, but is not convertible by law into anything other than itself, and has no fixed value in terms of an objective standard.5

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