What is Representative Money with Examples?

What is Representative Money with Examples?

What is representative money?

Representative money is a token or certificate and it represents the value of a commodity. Usually people create the representative money using the papers. We accept the representative money as a type of money and they are conveniently used for carrying out transactions.

For instance, the gold might have been stored in a bank vault and you might carry a paper certificate that reflects or was “backed” by the gold in the vault rather of carrying the actual gold commodity money. It was agreed that the certificate might at anytime be exchanged for gold. Additionally, carrying the certificate was safer and simpler than carrying the actual gold. People eventually began to place equal trust in the paper certificates and the gold.

You may be interested in to read more,

What is the money demand curve with shifters of it?

Money Market Graph with Demand, Supply and Equilibrium

Money Demand Definition and Three Motives of Demand for Money

7 Main Characteristics of Money

What are the main three functions of money?

Money supply formula: How to calculate money supply?

What is Commodity Money? – All the Things You Need to Know

Representative money examples

Representative money examples in history

1. We can see the first example of representative money in the ancient China. In this time, the commodity warehouses stored the goods and issued the certificates of deposit by guaranteeing the portion of the goods to the owner of the goods.

2. The majority of economies during modern history have been built on the gold standard, which consists of government-issued coins and banknotes that are backed by precious metals like gold and silver. For instance, the value of a pound would be equal to 1/600th of an ounce of gold if England fixed the price of gold at £600 per ounce. England remained to the gold standard, a monetary system in which a nation’s currency is closely correlated to its gold holdings, up until about the middle of the 20th century. After World War I, the UK gave up the gold standard in 1931.

3. Representative money examples from US history

Type of representative moneyTime period of it used
Tobacco notes1730 – 1776
Checks1762 – Today
Silver certificates1858 – 1964
Gold certificates1865 – 1933

Modern representative money examples

representative money examples

Basic Cheques

Credit cards

Bank drafts

Money orders

government-produced money backed by a physical commodity such as precious metals

What is the difference between commodity money and representative money?

Commodity money has intrinsic value because it has a value in addition to its worth as money, like salt in the Mediterranean region, silk in China, or gold and silver globally. For instance, silver has various industrial applications, while gold is widely used in jewelry.

Paper money that can be exchanged for a specific quantity of a precious metal, typically gold or silver, is known as representative money. Due to its low weight and the ability to print much larger denominations that weigh no more than a single unit of currency, paper money is practical.

You may be interested in to read more,

What is Commodity Money? – All the Things You Need to Know

What are the disadvantages of representative money?

Acceptance of them depended on the reputation of the issuer

The biggest problem associated with representative money is acceptance of representative money depended on the reputation of the issuer. This is why the people in early America accepted banknotes, because the bank stood ready to redeem their notes in specie, which were gold or silver coins. When the public discovered that some banks had printed more notes than they had currency, people rushed to the bank to exchange their notes for cash before the bank ran out. In the 18th and 19th centuries in America, these “runs on the bank,” as they were known, were common because many governments did a terrible job of overseeing the banks that they chartered. The federal government eventually began printing its own notes in 1861, backed by bonds held in the United States Treasury.

They have less ability to control the economy.

If an economy is in recession, the government needs to apply expansionary economic policies and if an economy is in inflation, the government needs to apply contractionary economic policies. But representative money does not allow the government to control the money supply of the economy. So, it is difficult to apply economic policies to influence the economy.

They are not an accurate measure of value

As examples, using representative money we can measure the entire wealth of a country by calculating the total amount of gold that a country has. But representative money does not consider factors such as level of economic participation, size of the population, and amount of social goods such as education and health goods

Similar Posts

One Comment

Leave a Reply

Your email address will not be published. Required fields are marked *