We have discussed tangible commodity money, now let’s consider money that represents a commodity or real asset with an IOU (keep in mind we are using the traditional but misleading frame for defining money systems by their token).

An IOU can be a receipt for something of value in the present that one person holds for another; its specific return is promised in the future. If I have a protected storeroom and you leave your gold with me, I give you a receipt that says I will hand over the gold upon presentation of the receipt. If the receipt itself is used for money, it is called receipt or representative money, because the receipt represents the gold in storage. With true receipt or representative money, the amount of gold in storage is the amount on the receipt. Whoever maintains the storage is an important person in this system; their power to protect what is stored and their integrity matter greatly.

Referencing the generally accepted method of sorting money systems, this is also called, commodity backed money. In 100% commodity-backed money, the money in use is a receipt for a commodity that exists in the present and that is in storage somewhere.

Today, there are no 100% commodity receipt money systems in widespread, primary use. There probably have not been any for at least the past 700 years, if ever. There is a considerable amount of confusion about what it means for an IOU-money to be backed by gold. By definition, backed should refer to IOU-receipt money, with an equal quantity of gold in storage. However, when many people use the term gold backed money system they are referring to a system in which there may be a very small amount of gold in proportion to the IOU promises to produce it that are in use as money. So, in any discussion about money or banking, when someone uses the term, commodity backed _or _gold backed, beware and be clear. A small amount of gold in storage for a large amount of money is an entirely different money system, discussed in Chapter 4.32.

100% backed, receipt money

Who Decides

Any kind of government can decide to use a 100% receipt money system. The transition from exchanging IOUs between a few individuals and money used by a community happens when the use of transferable receipts becomes widespread. This transition might happen via an authority in power declaring the receipts legal tender - which generally means the receipts can be used to pay taxes for the maintenance of the community and by law must be accepted for payment by everyone. Or, the decision could be made organically by the actions of many individuals who trust the IOU issuer, thereby promoting a widespread practice that turns the IOUs into money. This is called common tender. Legal tender requires authority and law. Common tender only requires the agreement of users.


The token is a written receipt. The earliest known forms of receipt money are clay tablets from Mesopotamia, in use about 3,000–5, years ago. These were receipts for quantities of cattle and grains. Over time more durable pieces of metal were used to represent quantities of cows and bushels of grain. Cheap metal money gave way to precious metal money with a market value of its own, and became commodity money. Then, people began using parchment or paper to represent these stored precious metal monies and money morphed back into receipt money.

Authentic & Trustworthy

Receipt money gets its trustworthiness from the reputation of the issuer of the receipt. Historically a grain silo or its gold storage equivalent required wealth to build and to protect. From the earliest times, the authenticity and trustworthiness of receipt money generally came from those with the greatest wealth and power. Sometimes good character mattered.

Authentication in an IOU money system is literally a matter of record. Counterfeit receipts and cooked books have probably always been an issue, as has the security of the storage facility. How do you know if the commodity that is supposed to be represented by the receipt is really in storage where it is supposed to be? The historical record says many have given in to the temptation for dishonest dealings.

Measure and Store of Value

The issues that pertain to 100% commodity money, apply to representative-receipt money. The commodity price will fluctuate in the marketplace and its value as a medium of exchange will fluctuate; it will be an elastic measure of value. When the commodity is of limited supply, as population and productivity grow, its value will increase.

As a store of value, a receipt is more vulnerable to destruction and loss than a commodity itself like gold. And, once lost or destroyed, there is no longer a connection to the commodity.

Creation & Destruction

Since 100% receipt money is a receipt for a commodity asset, new money is created in the same way commodity money is created. Then it is put into some kind of storage and a receipt is issued for the stored commodity. As long as the number of receipts accurately represents the amount of gold in storage, the issuing of a receipt does not change the amount of money available for circulation.

Commodity-backed money can be destroyed when the commodity backing it is destroyed – in any of the ways commodity money can be destroyed. When a receipt is destroyed or lost, the commodity backing the receipt will still exist. With a lost or destroyed receipt, the commodity will become the property of whoever owns the storage facility, who may then reissue a new receipt to someone else.

who rules?

Wealth and power rule. The same considerations that apply to commodity money, apply to commodity-backed money.

There is one additional consideration. He who can convince you he is a good, reliable, safe store of the commodity has an advantage. And, appearances can be deceptive. Keep this in mind as we move into the next section about future-value money – a kind of money that has had a significant impact on our life and culture.

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