What Is Representative Money?
What became of the expression "solid as a dollar?" The U.S. Department of the Treasury says our currency, called fiat money, is "not redeemable in gold, silver or any other commodity, and receive(s) no backing by anything." So, the solidity or value of the dollar is based only on a federal promise to exchange one paper dollar for another. By contrast, representative money, also called specie money, is anchored by a commodity that has a known value of its own, like gold or silver.
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History
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In ancient Sumaria, merchants traded clay tokens shaped like goats and sheep that were representative of the actual animals. Word IQ.com says, "a key feature of representative money is that its value is very directly perceived by the users of this money, who recognize the utility or appeal of the tokens as they would recognize the goods themselves." In the United States, gold backing of paper money ended in 1933 and silver note redemption terminated in 1964.
Function
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The purpose of all currencies is to provide a recognized trading medium that can be relied upon to represent and maintain the values exchanged. Representative currencies met that standard as did United States Gold and Silver Certificates, which, when originally issued, were redeemable at the Federal Reserve Bank for predetermined amounts of gold or silver.
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Significance
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In 1933, President Franklin Roosevelt ended the gold standard backing our currency by outlawing gold ownership by Americans. President Richard Nixon completed the process in 1971 when foreign countries holding dollars could no longer exchange them for gold. This freed the government to adjust the money supply at its discretion without regard to any underlying precious metal stockpiles or values. Many believe this contributed to inflation and currency devaluation.
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References
Resources
- Photo Credit gold dollar symbol image by goce risteski from Fotolia.com
