In today’s Financial Times, the always interesting John Kay discusses how it is that Scottish banknotes are accepted as payment for goods and services in London even though, unlike Bank of England notes, the Scottish banknotes are not legal tender in England. And in fitting reciprocity, Bank of England notes are not legal tender in Scotland, but will serve you just as well in Edinburgh as they would in London. Legal tender laws, Kay concludes, are meaningless and irrelevant. What matters, he argues, is convention. When people agree (formally, or, more often, informally by habit and custom) to accept something as money, it is money; when they don’t, it’s not. And legal tender has nothing to do with it. He concludes:
I tip in restaurants or cabs, but not post offices or doctors’ surgeries. Often there is some underlying reason for these practices, although I cannot think of one that applies to the custom of tie-wearing. But in any event it is custom, not reason, that leads me to do it. The Scottish pound is accepted where it is accepted, and not where it is not. There is really no more to it than that.
That paradoxical, and mildly nihilistic, conclusion is, in my view, not quite right. But it contains an important kernel of truth that disposes of the metaphysical delusions of the gold bugs that anything other than gold is not REAL money, and that the only thing that keeps gold from being universally recognized as the one and only true money is the existence of blasphemous legal tender laws. For more on the paradoxical nature of money, see this post from last July.