Eumelanin, or dark pigment, can darken skin, eyes, and hair. Phaeomelanin, or red pigment, can cause red hair. What few people realize is that pigment is not just skin deep. There is also pigment in the brain and nervous system.
Skin Color Originates in the BrainThis is a shocking and surprising statement, but it is true. Pigment cells, called melanocytes, begin in the embryo as part of the brain. Then, some of them migrate to the skin. Others stay in the brain. Pigments are closely related to neurotransmitters, which the brain uses to manifest emotions, thoughts, and actions. Surprisingly, skin and brain start out in the fetus as part of the same organ, called the neural crest.
Here is an excellent explanation from BIOLOGICAL PERSPECTIVES ON HUMAN PIGMENTATION, by Ashley H. Robins. Cambridge, Cambridge Universtiy Press, 1991. pages 5-6:
"The conflict was eventually resolved by the extensive and elegant grafting experiments of Mary Rawles in mice. She established beyond doubt that mammalian melanocytes are not part of the epidermis but originate from the NEURAL CREST (Rawles, 1953)."
Rawles, M.E. (1953). Origin of mammalian pigment cell and its role in the pigmentation of hair. In PIGMENT CELL GROWTH, ed. M. Gordon, pp. 1-15. New York: Academic Press.
"In the embryo all brain and nervous tissue ultimately develops from cells of the neural plate. The neural plate gives rise to the neural tube and, after closure of the neural tube, to a band of cells known as the neural crest. The neural crest gives rise to different types of cells, including the dorsal root ganglia of the spinal cord, the adrenal medulla and certain components of peripheral nerve fibres (Schwann cells). But, of importance to this discussion, the neural crest also generates those cells that are destined to differentiate into the melanocyte series. Prospective melanocytes, known as MELANOBLASTS, arise from the neural crest in the second month of human embryonic life and migrate to the head region along either side of the spinal cord to the skin. They enter the dermis, epidermis and hair follicle, and differentiate into melanocytes. These cells populate the dermis in increasing numbers between weeks 10 and 12 of development. From 12 to 14 weeks they usually make their first appearance in the epidermis, although epidermal melanocytes have been identified in the embryo at as early
as 8-10 weeks (Sagebiel & Odland, 1972)."

Sagebiel, R.W. & Odland, G.F. (1972). Ultrastructural identification of melanocytes in early human embryos. In PIGMENTATION: ITS GENESIS AND CONTROL, ed. V. Riley, pp. 43-50. New York: Appleton-Century-Crofts.
"Melanin synthesis occurs from the fourth or fifth foetal month, although the first signs of it have been detected in a 10-week embryo (Sagebiel & Odland, 1972). The dermal melanocytes decrease in number during gestation and have virtually disappeared at birth with the exception of certain sites, notably the lumbosacral area of some individuals, where their presence manifests as the 'Mongolian spot'" Mongoloid babies are born with brown spot on their backs which eventually disappears.
Pages 128-129: "Mongolian spot"
"This is an area blue-black pigmentation, situated over the lower part of the back and the buttocks, which is present at birth (Fig. 8.5). It represents the persistence of melanocytes in the dermis, the blue colour being an optical effect due to Tyndall scattering (see p. 72). The Mongolian spot was so called because it was originally thought to occur exclusively in Mongoloid people, but although it does exist in about 95 percent of Mongoloid infants, it is also observed in a similar proportion of Negroid babies and in 75 per cent of 'Cape Coloured' newborns. Although it is occasionally seen in dark-complexioned European Caucasoids, it never occurs in blond chidren with blue eyes."

In colonial Mexico, the Mongolian spot was used to distinguish whites from Mestizos. Children with the spot were called "purple tails" and put in a lower social class. In South Africa, the presence of the spot was used to distinguish white-looking Cape Coloured from real Whites.
"In addition to the skin, melanoblasts are disseminated from the neural crest to other sites--most important of these are the uveal tract of the eye (which includes the iris but not the retina), the inner ear, mucous membranes (particularly of the mouth) and leptomeninges (membranes enveloping the brain and spinal cord). The retinal pigment layer of the eye also contains melanocytes, but these derive from the outer layer of the optic cup and not from the neural crest."

Pigments, Hormones, Neurotransmitters Have Common OriginThis is a very complex subject. I will try to distill some very interesting information from pages 32-41 of BIOLOGICAL PERSPECTIVES ON HUMAN PIGMENTATION by Ashley H. Robins. Cambridge, Cambridge University Press, 1991.
The pituitary gland produces a prohormone called pro-opiomelanocortin, which breaks down into various hormones including MSH (melanocyte-stimulating hormone) and opioids. When this hormone is injected into frogs, it darkens their skin. Sometimes, injections also darken human skin. "There is a close relationship between MSH and another pituitary hormone, ADRENOCORTICOTROPHIC HORMONE (ACTH).
"When there is too much ACTH, as in Addison's Disease, the skin gets darker. This hormone is involved in energy levels in the body and brain and is related to adrenalin. In the human embryo, the intermediate lobe of the pituitary produces hormones which cause pigmentation. Then, in humans the intermediate lobe disappears as the individual grows. In most animals, the intermediate lobe continues to produce alpha-melanocyte-stimulating hormone and beta-melanocyte stimulating hormone.
"Although the MSH peptides may have lost their pigmentary function during mammalian evolution, recent research has uncovered a variety of other properties such as effects on the immune, cardiovascular and central nervous systems (Eberle, 1988). In its action on brain functions, MSH injection heightens arousal and improves performance in tests of visual retention and reaction time. It seems that the primary central action of MSH (specifically alpha-MSH) is to enhance attention, with secondary effects on memory, learning and behavior (La Hoste et al., 1980). This mediation in the attentional processes of the cortex has adapted MSH to perform an extrapigmentary role within the sphere of behavior."
La Hoste, G.J., Olson, G.A., Kastin, A.J. & Olson, R.D. (1980). Behavioral effects of melanocyte stimulating hormone. NEUROSCIENCE AND BIOBEHAVIOURAL REVIEWS, 4, 9-16.
"What MSH is to the darkening of frog skin, so MELATONIN is to its lightening." Frogs and tadpoles experience rapid blanching of the skin after they are fed minced mammalian pineal tissue.
The pineal gland evolved from the third eye found on the heads of primitive lizards and amphibians. In mammals, the pineal has migrated to the center of the head. The pineal receives impulses from the eyes informing it of lightness and dark. The pineal regulates day and night cycles and also seasonal cycles. The pinal gland causes some animals to turn white in winter and hibernate. It is the master gland of the body and regulates energy levels, hibernation, coat color, and mating seasons. The pineal hormone, melatonin, lightens skin or coat color in some mammals. In a few cases it has lightened the skin of humans suffering from hyperpigmentation disorders.
"The seasonal tranformations of the weasel illustrate the complex inter-relationships between light, hair colour, hormones and reproduction." Estrogen and progesterone darken the skin of some mammals, especially around the nipples.
"Testosterone has enhanced pigmentation in women, in castrated and hypogonadal men, and in the scrotal skin of monkeys and rats, but there are species differences--guinea-pig skin, for example, darkens after castration and lightens after treatment with testosterone." Female hormones darken the sexual and nipple area skin.
"One of the early signs of pregnancy is darkening of the nipples and areolae and, to a lesser extent, of the face, anterior abdominal wall and genitalia." This is called chloasma. Oral contraceptives can also cause chloasma. The book shows a woman with dark discoloration on cheeks, nose, and forehead after prolonged use of birth control pills.
One study in Australia showed that after 5 years, 37 percent of women taking birth control pills experienced chloasma. "It seems therefore that the chloasma represents a specific sensitivity of facial melanocytes to the oestrogen and progesterone contained in oral contraceptives."
A survey of female doctors and nurses also showed that skin darkens right before and during menstruation. "Characteristically, darkening appeared around the eyes and mouth and in the areolar skin."
"Notes1. A third group of pigments, the trichromes, are related to the phaeomelanins and occur also in yellow or red hair and feathers."
Among Japanese, eumelanin (dark pigment) is predominant within epidermal melanocytes, but there was also some phaeomelanin (red pigment). This may explain the yellowish skin of Mongoloids.
Orange pigment has been called both carotene and phaeomelanin. I am 99% sure that they are the same thing. They are found in the hair of redheads, the skin of Mongoloids, and in the brain and other internal areas. The substantia nigra and locus coeruleus of the brain contain dark pigment in most people, but may be predominantly phaeomelanin in redheads. This causes their brains to have different metabolic pathways which causes them to be more excitable and have other behavioral differences. These have been explored in depth in some of the forums below:

Melanin Outside Skin and HairThis information if from BIOLOGICAL PERSPECTIVES ON HUMAN PIGMENTATION by Ashley H. Robins. Cambridge, Cambridge University Press, 1991.
Page 75: eyes "Ciliary body and choroid" "The colour of the fundus varies in accordance with skin pigmentation, being orange in fair-skinned Caucasoids and a chocolate brown in Negroids--in fact, some workers find it convenient to describe the fundus as being blond, average, brunet or negroid."
Page 76: Mucous membranes. Oral mucosa. "In African Negroids and Australian Aborigines it is almost universal." Pigmentation of the buccal mucosa only occurs in 5% of light-skinned Caucasoids.
Page 77: Ears. Melanin is present in the inner ear. Its absence accounts for the deafness of blue-eyed white cats.
Leptomininges. These are the membranes enveloping the brain and spinal cord, called the pia mater and the arachnoid mater. "In his study of Ugandan Negroids Lewis (1969) detected a definitie trend, in that light-skinned sujects had little or no pigment of the meninges while the very dark-skinned showed more widespread pigmentation."
In some cases, pigmented skin naevi have been associated with leptomeningeal melanosis, showing the close relationship between brain and skin.
Page 78: Robins speculates that the melanocytes in the leptomeninges may be involved in the regulation of cerebrospinal fluid, in a manner analogous to the function of melanocytes in the inner ear, where they are involved in the secretion and absorption of endolymph.
Pages 78-81 Neuromelanin (brain pigment)

It is distributed all along the brainstem, but is concentrated in the substantia nigra and locus caeruleus.
There is a metabolic pathway which begins with the amino acid tyrosine, which is converted to dopa. Dopa is then converted to either melanin, dopamine, or noradrenaline. The two neurotransmitters themselves break down into melanin. "The ability of the catecholamines to be oxidized to melanin is observed clinically when black deposits of melanin (the size of pinheads) develop in the conjunctiva of the eye after instillation of adrenaline eye drops (British Medical Journal, 1971)."
"There is a striking parallelism between the location of neuromelanin in the human brainstem and the distribution of catecholamine neurones as mapped out in the brains of numerous primate and sub-primate species and in foetal brain (Bogerts, 1981; Saper & Petito, 1982). This conspicuous overlap strongly suggests that neuromelanin is a 'waste product' of the catecholamines and that is presence is a valid marker for catecholamine neurones."
There is a great deal of dopamine in the basal ganglia and substantia nigra. This breaks down into melanin. In Parkinson's Disease, the substantia nigra turns white and there is a shortage of dopamine. Whites are more subject to Parkinson's than Blacks.
Page 86: "If the assumption is made that Parkinson's disease may result from the binding of an environmental toxin to neuromelanin then the apparently decreased prevalence of the disease in dark-skinned groups may be due to a greater binding of potential neurotoxins to skin melanin with a consequent lowering of their access into brain tissue (Lerner & Goldman, 1978)."
Lerner, M.R. & Goldman, R.S. (1987). Skin colour, MPTP, and Parkinson's disease. LANCET, 2, 212.
Lerner, A. B., Shizume, K. & Bunding, I. (1954). The mechanism of endocrine control of melanin pigmentation. JOURNAL OF ENDOCRINOLOGY AND METABOLISM, 14, 1463-90.
In one experiment, melanocyte-stimulating hormone was injected into Parkinsonians. The expectation was that it would increase melanin in the brain and improve the condition, but instead, it darkened the skin and made the Parkinson's worse. The brain and skin competed to use dopa to make melanin. When the skin used up more, there was less left for the brain.
Blacks may have less brain energy because they are using their dopa to make melanin in the skin. Redheads may have overexcited brains because their skin isn't using up much dopa and their is more for the brain. In addition, they have a different chemical pathway in the brain which leads to phaeomelanin instead of eumelanin.