Engineer's Finance

Representative money is symbolic money. it does not consist of coins or rupees, but of tokens or certificates. These tokens or certificates can be exchanged for a fixed quantity of gold, silver, water, oil or food. Representative money is directly linked to the commodity that backs it.

Representative money is widely believed to have originated in ancient Sumer. Small baked clay tokens in the shape of sheep or goats were used instead of the real animals in the barter system. Later, in the middle ages representative money was popular with pilgrims. They would deposit an amount of gold in a monastery in Europe, and were given an equivalent in banking notes. They could then cash in these notes for the same amount of gold at another monastery of the same order, once they had arrived in the holy lands. The notes would have been worthless to any highway robbers and therefore, the pilgrims did not have to worry about being robbed while they were traveling.

In the late 19^th and 20^th century, most currencies were example of representative money as they could be exchanged for a fixed amount of gold. the whole idea of representative money started with the monastery. People started trusting the monastery and they gave their gold in order to get the money. this is what we also do, our bank notes are just a promissory note issued by the RBI governor who promises to pay the bearer the amount of rupees that is printed on the note. It is just a piece of paper if the promise is not upheld.

The current way of transaction was better for most of the people as they could safely park the gold in a safe place and use these promissory notes. Over time, this became most widely used practice and till this day, the promissory notes are printed based on the amount of gold that is in reserves.