Representative money
Representative money refers to money that consists of a token or certificate that can be exchanged for a fixed quantity of a commodity such as gold, silver, water, oil, food etc. Token money may have no commodity value whatsoever. It may also be called “representative money” in the sense that, say, a piece of paper might represent or be a claim on some commodity.[1] Representative money is different than commodity money which is actually made of some real physical commodity. In his Treatise on Money (1930:7), Keynes distinguished between commodity money and representative money, dividing the latter into “fiat money” and “managed money.”
The system of commodity money eventually evolved into a system of representative money. This occurred because gold and silver merchants or banks would issue receipts to their depositors – redeemable for the commodity money deposited. Eventually, these receipts became generally accepted as a means of payment and were used as money. Paper money or banknotes were first used in China during the Song Dynasty. These banknotes, known as "jiaozi" evolved from promissory notes that had been used since the 7th century. However, they did not displace commodity money, and were used alongside coins. Banknotes were first issued in Europe by Stockholms Banco in 1661, and were again also used alongside coins. The gold standard, a monetary system where the medium of exchange are paper notes that are convertible into pre-set, fixed quantities of gold, replaced the use of gold coins as currency in the 17th-19th centuries in Europe. These gold standard notes were made legal tender, and redemption into gold coins was discouraged. By the beginning of the 20th century almost all countries had adopted the gold standard, backing their legal tender notes with fixed amounts of gold.
Some reasons for the Use of Representative Money according to William Stanley Jevons, in his Money and the Mechanism of Exchange book in chapter XVI.10
....'It is well to analyse and state exactly the reasons which may be given for the introduction of pieces of representative money. Several motives may be detected, and they have been of different weight in different cases. The origin of the European system of bank-notes is to be found in the deposit banks established in Italy from four to seven centuries ago. In those days the circulating medium consisted of a mixture of coins of many denominations, variously clipped or depreciated. In receiving money, the merchant had to weigh and estimate the fineness of each coin, and much trouble, loss of time, and risk of fraud thus arose. It became, therefore, the custom in the mercantile republics of Italy to deposit such money in a bank, where its value was accurately estimated, once for all, and placed to the credit of the depositor'[2]
Historic use of representative money
One form of representative money originating in ancient Sumeria where small baked clay tokens in the shape of sheep or goats used to replace bartering actual items in trade.[citation needed]. The earliest known writing for record keeping evolved from a system of counting using small clay tokens that began in Sumer about 8000 BC.[3][4]
Around the 4th millennium BC, the complexity of trade and administration outgrew the power of memory, and writing became a more dependable method of recording and presenting transactions in a permanent form.[5]Sumer developed the first economy, and developed the earliest system of written economic codes or laws, which was comparable to modern post-Keynesian economics, but with a more "anything goes" approach.[6]
In Money and the Mechanism of Exchange's chapter XVI, "Representative Money," William Stanley Jevons wrote in 1875:
... although we now distinguish money according as it is metallic or paper money, because paper has in recent times been universally adopted as the material for representative money, yet it is well to remember that various other substances have been used for the purpose. We may pass, in fact, by gradual steps from the perfect standard coins, whose nominal value is coincident with their metallic value, to worthless bits of paper, which are yet allowed to stand for thousands, or even millions of pounds sterling.[7]
Traditional representative money
The gold standard, based on paper notes that are normally freely convertible into fixed quantities of gold, was the most common form of representative money. At the extreme, what can be called token money may have no commodity value whatsoever. It may also be called “representative money” in the sense that, say, a piece of paper might “represent” or be a claim on the commodity. Gold or silver certificates, for example, which are claims on precise amounts of gold or silver, could be called representative money.[8] A gold standard was adopted by most of the industrialized countries during the 18th and 19th centuries. By the late 19th and early 20th century most currencies were based on the gold standard, and in theory the notes could be exchanged for a fixed amount of gold. In practice however, in most countries, such exchange was discouraged, difficult and likely almost impossible except for a few with access to the commodity markets in major capital cities, or in some cases, any but those in government or with proven foreign exchange needs that were supported by the government.[9]
Most nations of the world shifted entirely to fiat money by 1976. Often, this shift occurred in stages. For example, the United States economy functioned on both fiat money and several types of metal-backed representative money, from 1862 to 1971. In 1862, during the U.S. Civil War, fiat money "greenbacks," backed only by government credit, were first issued. In 1971, the international gold standard (Bretton Woods system) was officially abandoned by the U.S., in an act termed the Nixon shock. However, U.S. citizens were barred from trading directly in gold after 1933, and had not been able to redeem their dollars for gold. Until 1964, U.S. silver certificate dollars (a type of representative money) were redeemable for silver dollars (at that time, the only silver U.S. coin), under a silver standard. After this time, however, U.S. dollars (as Federal Reserve Notes) were not redeemable in any quantity of any precious metal, and thus were no longer a representative money, but entirely a fiat money. Such legal changes in money types are typical, and characterize the long shift from commodity money to representative money to (in the modern day) fiat money.[10]
See also
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References
- ^ [1] Columbia University Dept. of Economics Discussion Paper Series The Birth of Coinage Robert A. Mundell Discussion Paper #:0102-08 February 2002 Page 11. Retrieved September-6-09
- ^ http://www.econlib.org/library/YPDBooks/Jevons/jvnMME16.html Retrieved September-4-09
- ^ Strings of Tokens and Envelopes, Besserat (1996) pages 39-54.
- ^ http://www.sumerian.org/tokens.htm Retrieved September-14-09
- ^ (Robinson, 2003, p. 36)
- ^ Sheila C. Dow (2005), "Axioms and Babylonian thought: a reply", Journal of Post Keynesian Economics 27 (3), p. 385–391.
- ^ William Stanley Jevons, Money and the Mechanism of Exchange, Chapter XVI, "Representative Money," Retrieved June-29-2009
- ^ [2] Columbia University Dept. of Economics Discussion Paper Series The Birth of Coinage Robert A. Mundell Discussion Paper #:0102-08 February 2002 Page 11. Retrieved September-6-09
- ^ Michaels, Walter Benn. "The Gold Standard and the Logic of Naturalism". Representations (9). University of California Press: 105–132. Retrieved 2009-06-18.
- ^ "fiat money." The Columbia Encyclopedia, Sixth Edition. 2008. Encyclopedia.com. http://www.encyclopedia.com/topic/fiat_money.aspx Retrieved Sept-5-09