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What is Representative Money?
Key Takeaways
- Representative money is a form of currency that represents something of value. This can be a token or certificate.
- People have been using different types of representative money backed by commodities for hundreds of years.
- Tobacco notes were issued between the 15th and 18th centuries. These could be exchanged for real tobacco.
- Fiat money and representative money are not the same. Fiat money refers to physical money (paper or coins) and is backed by the government that issued it.
- These days, representative money can be backed by a commodity, cash in the account of an issuer, or even a line of credit.
History of Representative Money
The concept of using representative money backed by a physical commodity can be traced back many hundreds of years.
For example, tobacco notes were issued in the US between the 15th and 18th centuries that could be exchanged for actual tobacco.
The economist, Professor William Howard Steiner, also referred to representative money in the books he wrote early in the last century. He claimed that the term was once used to signify that a certain amount of bullion was stored in the Treasury while the equivalent paper in circulation not only represented it but could be converted into the metal when required.
How Do We Use Representative Money
Representative money can take a variety of forms.
For example, a certificate or token can be exchanged at any time for the underlying commodity, according to the Federal Reserve Bank of St Louis.
It stated: “Instead of carrying the gold commodity money with you, the gold might have been kept in a bank vault and you might carry a paper certificate that represents-or was “backed”-by the gold in the vault.”
Over time, people have grown to trust paper certificates as much as the gold itself, particularly if it’s being held by a trustworthy organisation.
“Representative money led to the use of fiat money-the type used in modern economies today,” it added.
Modern Day Representative Money
Although times may have changed considerably over the years, there is still a place and need for representative money in our society.
For example, modern examples of this theme include cheques and credit cards. These are taken as payment by people because these items represent access to the required funds.
According to Statista, the number of payment cards in circulation worldwide grew by nearly one billion between 2022 and 2023.
Representative Money vs. Fiat Money
We have already covered how representative money is a form of currency that represents something of value. But how does this compare to fiat money?
Well, fiat money is a government-issued currency that isn’t backed by a commodity. It’s physical money and examples are the British Pound, the Euro, and the US Dollar.
The actual paper and coins aren’t actually worth anything. The value of fiat money is determined by the government that has issued them.
The US dollar has been the world’s principal reserve currency since the end of the Second World War and is widely used in international trade.
These are some of the main differences:
- Fiat money isn’t tied to a physical commodity or asset. The value is derived from the government that has issued the money.
- Governments can control the amount of fiat money in circulation by increasing the amounts being printed.
- It can’t be exchanged for a physical asset, although it’s generally very widely accepted as a form of payment around the world.
Representative Money Pros and Cons
Let’s now look at the positives and negatives when it comes to Representative Money.
- It’s more convenient to use a representative token than to carry around the actual commodity in your pocket
- Being tied to a physical object means it’s less likely to suffer from depreciation, as the government can’t just print more
- People can have faith that it’s worth something if the certificate held is tied to something physical in a vault
- If the physical asset being used is in short supply, this will affect the money
- There is the possibility that representative money may be volatile if there are violent changes in the value of the underlying asset.
- A major downside is that representative money may not accurately reflect other factors, such as population size
The Bottom Line
The most accurate representative money definition is that it’s a form of currency that represents something of value. It often takes the form of a token or certificate that can be exchanged for an actual physical commodity, such as gold.
Representative money has been used in various forms for hundreds of years, and the modern day equivalent is cheques and credit cards.
Representative money has various pros and cons. For example, while it’s convenient to use, there can be supply issues and volatility.
FAQs
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References
- William Steiner (Newspapers)
- No title foundMoney and Banking – William Howard Steiner (Google Books)
- Functions of Money – The Economic Lowdown Podcast Series (St. Louis Fed)
- Number of payment cards in circulation worldwide 2017-2023, with a forecast for 2028 (Statista)
