Legal Definitions - fractional currency

Fractional currency refers to paper money issued in denominations less than the standard monetary unit of a country. These small-value notes are typically introduced to address a shortage of metallic coins (often due to hoarding or wartime conditions) and to facilitate everyday transactions that require small change.

• Example 1: During the American Civil War, economic uncertainty led citizens to hoard gold and silver coins, creating a severe shortage of small change needed for daily purchases. To remedy this, the U.S. government issued paper notes in denominations such as 3, 5, 10, 15, 25, and 50 cents. These notes were a form of fractional currency, allowing people to make purchases that required less than a dollar without needing scarce metal coins.

• Example 2: Consider a small developing nation experiencing a sudden economic crisis where its citizens lose trust in the banking system and begin hoarding all available metal coins. With no small change circulating, it becomes difficult to buy everyday necessities like a single piece of fruit or a newspaper. To keep the economy functioning, the government might issue temporary paper notes for amounts like one-quarter or one-half of its standard currency unit. These small-denomination paper notes would serve as fractional currency, enabling basic transactions to continue.