Representative money
Representative money refers to money that consists of token coins, other physical tokens such as certificates, and even non-physical "digital certificates" (authenticated digital transactions) that can be reliably exchanged for a fixed quantity of a commodity such as gold, silver or potentially water, oil or food. Representative money thus stands in direct and fixed relation to the commodity which backs it. This is to be distinguished from commodity money which is actually composed of a real physical commodity. It is also distinguished from fiat money, in which the value of the money varies with regard to commodities, according to government dictate (force of arms) in regions where government authority holds sway, or else according to market forces where it does not.
Traditional representative moneys
Representative money is widely believed to have originated in ancient Sumer where small baked clay tokens in the shape of sheep or goats were used to replace barter in trade. Over time, they were sealed in clay vessels which contained a certain number and had that number written on the outside - but it was only possible to verify the number of tokens inside by shaking the vessel and guessing, or by breaking it. At which point, the number written on the outside originally became subject to doubt. Apparently, however, this system was good enough to have discouraged much counterfeiting - penalties for "short-sheeping" or selling the same goat twice were quite severe, and often such activities in ancient societies were thought to offend one or more gods.
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. That is, the effect of holding a token for a barrel of oil must be (to the holder) the same both emotionally and economically as actually having the barrel at hand. This thinking guides the modern commodity markets, although they use screens full of software-based tokens and a sophisticated range of financial instruments that are more than one-to-one representations of units of a given type of commodity. They still, however, guarantee the moving a certain amount of a commodity to, or on behalf of, the owner. This is usually only to a well-known point of delivery.
In the late 19th and early 20th century most currencies were examples of representative money in that they were based on the gold standard in which a currency could be exchanged for a fixed amount of gold, at least in theory. In fact, in many 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.
For example, the United States claimed to have representative money from the U.S. Civil War (when "greenbacks" were first issued) to 1970 when the gold standard was officially abandoned. But U.S. citizens were barred from trading directly in gold, and thus could not go to Fort Knox and redeem their dollars for gold. Such tactics were typical, and characterize the long shift from commodity money to representative money to fiat money.
New proposals for backing of representative money
Representative money is undergoing a revival thanks to theorists of green economics and natural capitalism, some of whom suggest a form of money based on ecological yield. They argue that the outputs of "natural capital" are the only genuine commodities - air, water, and renewable energy we consume being mostly interchangeable when they are free of pollution or disease. However, since such goods cannot be held directly, it is common to suggest that representative money be issued based on enhancing and extending nature's services, giving one the right to receive the yield as benefit. They argue that reframing political economy to consider the flow of these basic commodities first and foremost, avoiding use of military fiat except to protect "natural capital" itself, and basing credit-worthiness more strictly on commitment to preserving biodiversity rather than repayment of debt, as in the current global credit money regime anchored by the Bank for International Settlements, would provide measurable benefits to human well-being worldwide.
Critics of this type of proposal often note that, as with other transitions from commodity to representative money, inadequate substitutes will be made on a "just trust me" basis - as per Gresham's Law which states that bad money drives out good. Other proposals, such as time-based money, rely on the availability of human labour as a commodity, especially within a community, which is presumably harder to guarantee access to, but also harder to steal. Still others deny the utility of commodifying labour as such, and suggest making free time the standard, since physical capital used for leisure, sport, art, theatre, and other forms of play is commodifiable and possible to control.
Some, in environmental economics, argue that the life of the individual human being and the natural ecologies are already both treated as commodities in global markets. They argue that to put a price on both is the most reasonable way to proceed to optimize and increase that value relative to other goods or services. This has led to efforts in measuring well-being, to assign a commercial "value of life", and to the theory of Natural Capitalism - which focuses predictably on energy and material efficiency, i.e. using far less of any given commodity input to achieve the same service outputs as a result. Michael Benedikt has proposed a theory of value along these lines. An example of this view is held by Indian economist Amartya Sen, who discussed the relationship between access to commodities, labour, and "the right to live as we would like" in his 1999 book "Development as Freedom", arguing that human free time was the only real service, and that sustainable development was best defined as freeing human time.
New kinds of representative money
In 1996, non-physical digital gold currency was launched by e-gold as a form of representative money, which uses a long established medium of exchange, namely gold.