Welcome to the world of fiat currencies! How does paper hold any value if it's not backed by anything? Well, that's where concepts such as legal tender come in.
The fiat system, which we still use today, has governments assign value to a currency, declaring it a legal tender. This means that a government decides whether a medium of payment will be recognized for financial transactions, trade settlement, or commerce in a country or jurisdiction.
The legal tender concept is just another manifestation of the perception of value characteristic of money. The key difference here is that with commodity money, there is a tangible resource to which the money supply can be pegged. And with fiat money, the money (or the quantity of money in circulation) is a much more discretionary subject to central banks' policies. Therefore, the margin...
