Representative money

Representative money refers to money that consists of token coins a token or certificate that can be exchanged for a fixed quantity of a commodity such as gold, silver or potentially water, oil or food. This is to be distinguished from commodity money which is actually made of that real physical commodity.

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.

More recently, some Green economists have suggested a form of money based on ecological yield. As natural capital yields nature's services, investing in it via environmental finance would give one the right to receive the yield as benefit. This is in effect an abstraction of owning land that makes it economically irrational to damage it.

Other proposals, such as time-based money, reflect a modern service economy, and rely on the availability of human labour within a community, or free time as a standard, as suggested by Amartya Sen in Development as Freedom. These are forms of representative money that give the holder the right to have work done on their behalf, or be left alone to do as they like, possibly with physical capital that is owned by the community. The complex relationship between access to commodities, labour, play, well-being and "the right to live as we would like" renders it more likely that future representative money will have something to do with our human life time in some way, as, this is the only thing that is absolutely irreplaceable in our experience. Michael Benedikt has proposed a theory of value along these lines.