Representative Money

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Definition of Representative Money:

Representative money is paper currency that can be redeemed for a fixed amount of the commodity it represents. 

Detailed Explanation:

Paper certificates can be representative money when the paper certificates can be exchanged for the valuable asset, such as gold. Another example of representative money was tobacco notes issued by Virginia and North Carolina in 1715. After all, it was pretty cumbersome to carry or store a large amount of tobacco. The acceptance of representative money requires that the population trusts the certificate as much as the commodity money. This became a problem in the United States when State-chartered banks issued certificates backed by gold in the 18th and 19th centuries. While backed by gold, they were not backed by a sufficient amount of gold to satisfy all the people who wanted to redeem their certificates causing a run on the banks. In 1861, the US federal government issued money backed by government bonds. 

Representative Money chart

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