Representative Money

Representative money is a type of currency that has no intrinsic value itself but represents a claim on a commodity that can be redeemed. Historically, this often meant paper currency that could be exchanged for a specific amount of gold or silver, such as under the gold standard. Representative money differs from fiat money in that a physical commodity backs it, whereas fiat money derives its value from government decree and public trust.

Example

During the gold standard era, U.S. dollars were considered representative money because they could be exchanged for a fixed amount of gold upon request.

Key points

• Currency that represents a claim on a commodity, typically gold or silver.

• Can be redeemed for a specific amount of the commodity.

• Differs from fiat money, which has value based on government backing rather than physical assets.

Quick Answers to Curious Questions

How does representative money differ from fiat money?

Representative money is backed by a commodity and can be redeemed for it, while fiat money has value based on government trust.

What role did representative money play under the gold standard?

It allowed holders of currency to exchange paper money for a fixed amount of gold, providing stability and confidence in the monetary system.

Why is representative money no longer widely used?

Most modern economies have transitioned to fiat money, which offers greater flexibility in monetary policy without being tied to physical commodities.