Money is constantly evolving and comes in a variety of different forms, representative money being one of them. Keep reading to find out what this concept means and how it works!
What Is Representative Money?
Representative money, also referred to as receipt money, is a type of printed or digital currency that represents something valuable, yet lacks inherent worth.
The value of representative money is based on the issuing entity’s promise to redeem it for the underlying asset, which can be a physical commodity, another currency, or any other asset that is considered valuable.
What You Need To Know About Representative Money
The concept of representative money can be traced back to the ancient empires of China, Egypt, and India, where commodity warehouses in palaces and temples issued certificates of deposit that served as a means of proving a claim on a portion of the stored goods.
The representative money definition was also applicable in the United States in the 19th century when banks would issue notes that were backed by gold or silver. These banknotes were known as “gold certificates” and “silver certificates”, and were redeemable for the corresponding precious metal upon demand.
Note that these examples could be considered a type of commodity-backed money. However, the key distinction here is that, essentially, they represent a claim on commodities rather than being directly tied to them, which makes them valid illustrations of representative money.
In modern times, some examples of representative money include cheques, credit cards, money orders, and bank drafts.
Representative money provides more flexibility than many other types of money because it can be created and distributed more easily. This allows for faster adjustments of the money supply for the sake of meeting the needs of the economy.
However, representative money also has some potential drawbacks. For instance, the entity backing the currency may manipulate its value or fail to fulfill its promise to redeem it.
