Legal Tender - Demonetisation

Demonetisation

Coins and banknotes may cease to be legal tender if new notes of the same currency substitute them or if a new currency is introduced replacing the former one. Examples of this are:

• The United Kingdom, adopting decimal currency in place of pounds, shillings, and pence in 1971. Banknotes remained unchanged (except for the replacement of the 10 shilling note by the 50 pence coin). In 1968 and 1969 decimal coins which had precise equivalent values in the old currency (5p, 10p, 50p) were introduced, while decimal coins with no precise equivalent (½p, 1p, 2p) were introduced on 15 February 1971. The smallest and largest non-decimal circulating coins, the half penny and half crown, were withdrawn in 1969, and the other non-decimal coins with no precise equivalent in the new currency (1d, 3d) were withdrawn later in 1971. Non-decimal coins with precise decimal equivalents (6d ( = 2½p), 1 and 2 shillings) remained legal tender either until the coins no longer circulated (1980 in the case of the 6d), or the equivalent decimal coins were reduced in size in the early 1990s. The 6d coin was permitted to remain in large circulation throughout the United Kingdom due to the London Underground committee's large investment in coin-operated ticketing machines that used it. Old coins returned to the Royal Mint through the UK banking system will be redeemed for legal tender without time limits, but coins issued before 1947 have a higher value for their silver content than for their monetary value.
• The successor states of the Soviet Union replacing the Soviet ruble in the 1990s.
• Currencies used in the Eurozone before being replaced by the euro are not legal tender, but all banknotes are redeemable for euros for a minimum of 10 years (for certain notes, there is no time limit).

Individual coins or banknotes can be demonetised and cease to be legal tender (for example, the pre-decimal United Kingdom farthing or the Bank of England 1 pound note), but the Bank of England does redeem all Bank of England banknotes for legal tender at its counters in London (or by post) regardless of how old they are. Banknotes issued by retail banks in the UK are not legal tender, but one of the criteria for legal protection under the Forgery and Counterfeiting Act is that banknotes must be payable on demand, therefore withdrawn notes remain a liability of the issuing bank without any time limits.

In the case of the euro, coins and banknotes of former national currencies were considered as legal tender from 1 January 1999 until 28 February 2002 (in some cases). Legally, those coins and banknotes were considered non-decimal sub-divisions of the euro.

When the Iraqi Swiss dinar ceased to be legal tender in Iraq, it still circulated in the northern Kurdish regions, and despite lacking government backing, it had a stable market value for more than a decade. This example is often cited to demonstrate that the value of a currency is not derived purely from its legal status (but this currency would not be legal tender).

This is also true of the paper money issued by the Confederate States of America during the American Civil War. Although Confederate currency became worthless by its own terms after the war, since it could only be redeemed a stated number of years after a peace treaty was signed between the Confederacy and the United States (which never happened as the Confederacy was defeated and dissolved), the value of Confederate currency today as a historical and collectible item is usually much greater than its face value.

Demonetisation is currently prohibited in the United States and the Coinage Act of 1965 applies to all US coins and currency regardless of age. The closest historical equivalent in the US, other than Confederate money, was from 1933 to 1974, when the government banned most private ownership of gold bullion, including gold coins held for non-numismatic purposes. Now, however, even surviving pre-1933 gold coins are legal tender under the 1964 act.