Legal Tender

No, it's not an official grade of meat. Like: “This filet is legally tender, but I still can't cut it with a steak knife.” And it's not the name of a magazine that will get you on an FBI watch list if you subscribe to it.

Legal tender refers to money. Like the dollars and cents you have in your pocket. The actual bills and coins that allow you to buy stuff. Legal Tender is a medium of exchange that's been recognized by the government as the acceptable form of payment in that jurisdiction.

First, medium of exchange. The term refers to something that everyone accepts as a form of payment. It allows an economy to move past the bartering stage. Think money, of course...but also things like gold. Or wampum. Or cigarettes in an old prison movie.

Everyone recognizes value, and so will trade goods or services for the item. It's a way to transfer and store value.

So yeah, legal tender is a kind of medium of exchange. The legally accepted form. The government has said, "in our country, this will be the medium of exchange." In the U.S., it's dollars. In the EU, it's the euro. In the U.K., the pound. In South Africa, the rand. And so on.

You're on a cruise ship that sinks way out in the ocean. You and some of the other vacationers wash up on a desert island.
Everyone starts doing different jobs. One guy builds shelters out of palm leaves and some sticky stuff that he scrapes off of rocks. Other people fish or catch crabs. Uh...crabs you can eat.

You make a delicious drink out of coconut milk, honey and the fermented juice from a weird orange berry you found growing in a cave. At first, people trade things by barter. This works...but only up to a point.

To trade your coconut drink for food, you need to find a fisherman who wants some of what you've got to offer. If no one with fish wants coco-drink today, well...no fish for you.

Eventually, people start stringing seashells together to make special necklaces. These necklaces get traded for anything you want. Now, everytime you give someone your drink, you get a string of shells. You can then use the shells to buy fish. It’s no longer necessary to find someone with fish who wants some coco-drink. You can sell the drink to the shelter builder for a set of shells and then use the shells to buy the fish.

The shells become the medium of exchange. After a while, you give up hope of rescue. You decide to form your own country. You elect leaders. Build yourself a palm tree and rock-glue parliament house.

First act: Turn the strings of sea shells into official currency. You make them legal tender.

The island government now can regulate the number of shell strings that get made. The same way the Federal Reserve and the Treasury Department print currency and regulate the dollars that circulate through the economy.

You’ve been selling out of coconut and you’ve built up quite a pile of shells. Now, if you get rescued, first step (after a shower, of course), check the foreign currency exchange market for the shell-string to dollar exchange rate...