Standard of deferred payment

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In economics standard of deferred payment is a function of money. It is the function of being a widely accepted way to value a debt, thereby allowing goods and services to be acquired now and paid for in the future. [1]

Debt deferred payment, or series of payments, that is owed in the future

Debt is when something, usually money, is owed by one party, the borrower or debtor, to a second party, the lender or creditor. Debt is a deferred payment, or series of payments, that is owed in the future, which is what differentiates it from an immediate purchase. The debt may be owed by sovereign state or country, local government, company, or an individual. Commercial debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest. Loans, bonds, notes, and mortgages are all types of debt. The term can also be used metaphorically to cover moral obligations and other interactions not based on economic value. For example, in Western cultures, a person who has been helped by a second person is sometimes said to owe a "debt of gratitude" to the second person.

Contents

The 19th-century economist William Stanley Jevons, influential in the study of money, considered it to be one of four fundamental functions of money. The other three being medium of exchange, store of value, and unit of account. However, most modern textbooks now list only the other three functions; considering standard of deferred payment to be subsumed by the others. [2] [3] [4]

William Stanley Jevons English economist and logician

William Stanley Jevons FRS was an English economist and logician.

Medium of exchange is one of the three fundamental functions of money in mainstream economics. It is a widely accepted token which can be exchanged for goods and services. Because it can be exchanged for any good or service it acts as an intermediary instrument and avoids the limitations of barter; where what one wants has to be exactly matched with what the other has to offer.

A store of value is the function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved. More generally, a store of value is anything that retains purchasing power into the future.

Most forms of money can act as standards of deferred payment including commodity money, representative money and most commonly fiat money. Representative and fiat money often exist in digital form as well as physical tokens such as coins and notes.

Commodity money Money with value derived from composition from a commodity (such as silver or gold coins)

Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects that have value in themselves as well as value in their use as money.

Representative money any type of money that has face value greater than its value as material substance

Representative money is any medium of exchange that represents something of value, but has little or no value of its own. However, unlike some forms of fiat money, to be a genuine representative money, there must always be something valuable supporting the face value represented.

Fiat money currency established as money by government regulation or law.

Fiat money is a currency without intrinsic value that has been established as money, often by government regulation. Fiat money does not have use value, and has value only because a government maintains its value, or because parties engaging in exchange agree on its value. It was introduced as an alternative to commodity money and representative money. Commodity money is created from a good, often a precious metal such as gold or silver, which has uses other than as a medium of exchange. Representative money is similar to fiat money, but it represents a claim on a commodity.

Functions of money

Money is held to serve multiple distinguished but related functions, of which a "standard of deferred payment" is one. [5] [6] [7] [8] [9] The most commonly distinguished functions of money are as a medium of exchange, a unit of account, a store of value, and, sometimes, a standard of deferred payment, summarized in a mnemonic rhyme of older economics texts:

In economics, unit of account is one of the functions of money. The value of something is measured in a specific currency. This allows different things to compared against each other; for example, goods, services, assets, liabilities, labor, income, expenses. It lends meaning to profits, losses, liability, or assets.

"Money is a matter of four functions: a medium, a measure, a standard and a store."

However, many newer texts do not distinguish the function of a standard of deferred payment, subsuming it in other functions. [2] [3] [4]

Being a standard of deferred payment is one of the functions of money; it is distinct from:

In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of its parts is indistinguishable from another part.

When currency is stable, money can serve all four functions. When it is not, or when complex and volatile forms of financial capital are involved, some may wish to identify a single standard of deferred payment to avoid strategic behavior. Otherwise, for example, a debtor might try to select a standard of deferred payment of debt that is forecast to drop in value so the real value of his payment to the lender will be lower. The lender can avoid this by selecting a denomination of debt that is forecast to maintain its value.[ citation needed ]

Relation to debt

A debt is a deferred payment; a standard of deferred payment is what they are denominated in. Since the value of money – be it dollars, gold, or others – may fluctuate over time via inflation and deflation, the value of deferred payments (the real level of debt) likewise fluctuates. A device is termed "legal tender" if it may serve to discharge (pay off) debts; thus, while US dollars are not backed by gold or any other commodity, they draw value from being legal tender – being usable to pay off debts.

Examples

Deferred payment is based on enforceability of debts and rule of law, and is not used or rarely used when debts are unlikely to be collectable. For certain kinds of transactions (such as for illegal goods like drugs or weapons), gold or diamonds may be preferred as the medium of exchange — there being no recourse in case of counterfeit currency being used — and there is rarely any deferral of payment: if there is, it will most likely be stated in dollars.[ citation needed ]

Historically, there have been many times when creditors have had to hide from debtors to avoid being paid off in near worthless currency, typically following hyper-inflation.[ citation needed ]

Time-based currency such as Ithaca Hours establishes fixed amounts of human labour as the only standard of deferred payment.[ citation needed ]

See also

Related Research Articles

Barter Exchange of goods

In trade, barter is a system of exchange where participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money. Economists distinguish barter from gift economies in many ways; barter, for example, features immediate reciprocal exchange, not delayed in time. Barter usually takes place on a bilateral basis, but may be multilateral. In most developed countries, barter usually only exists parallel to monetary systems to a very limited extent. Market actors use barter as a replacement for money as the method of exchange in times of monetary crisis, such as when currency becomes unstable or simply unavailable for conducting commerce.

A currency, in the most specific sense is money in any form when in use or circulation as a medium of exchange, especially circulating banknotes and coins. A more general definition is that a currency is a system of money in common use, especially for people in a nation. Under this definition, US dollars (US$), pounds sterling (£), Australian dollars (A$), European euros (€), Russian rubles (₽) and Indian Rupees (₹) are examples of currency. These various currencies are recognized as stores of value and are traded between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in this sense are defined by governments, and each type has limited boundaries of acceptance.

Financial capital is any economic resource measured in terms of money used by entrepreneurs and businesses to buy what they need to make their products or to provide their services to the sector of the economy upon which their operation is based, i.e. retail, corporate, investment banking, etc.

This aims to be a complete article list of economics topics:

Currency substitution Use of a foreign currency in parallel to or instead of a domestic currency

Currency substitution or dollarization is the use of a foreign currency in parallel to or instead of the domestic currency.

Legal tender is a medium of payment recognized by a legal system to be valid for meeting a financial obligation. Paper currency and coins are common forms of legal tender in many countries. Legal tender is variously defined in different jurisdictions. Formally, it is anything which when offered in payment extinguishes the debt. Thus, personal cheques, credit cards, and similar non-cash methods of payment are not usually legal tender. The law does not relieve the debt obligation until payment is tendered. Coins and banknotes are usually defined as legal tender. Some jurisdictions may forbid or restrict payment made other than by legal tender. For example, such a law might outlaw the use of foreign coins and bank notes or require a license to perform financial transactions in a foreign currency.

Fractional-reserve banking banking system where bank holds reserves equal to fraction of deposit liabilities

Fractional-reserve banking is the common practice by commercial banks of accepting deposits, and making loans or investments, while holding reserves at least equal to a fraction of the bank's deposit liabilities. Reserves are held as currency in the bank, or as balances in the bank's accounts at the central bank. Fractional-reserve banking is the current form of banking practiced in most countries worldwide.

The silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver. The silver specie standard was widespread from the fall of the Byzantine Empire until the 19th century. Following the discovery in the 16th century of large deposits of silver at the Cerro Rico in Potosí, Bolivia, an international silver standard came into existence in conjunction with the Spanish pieces of eight. These silver dollar coins played the role of an international trading currency for nearly four hundred years.

The history of money concerns the development of social systems that provide at least one of the functions of money. Such systems can be understood as means of trading wealth indirectly; not directly as with barter. Money is a mechanism that facilitates this process.

Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox macroeconomic theory that describes currency as a public monopoly for a government and unemployment as the evidence that a currency monopolist is restricting the supply of the financial assets needed to pay taxes and satisfy savings desires. MMT is seen as an evolution of chartalism and is sometimes referred to as neo-chartalism.

"Mutual credit" is a term mostly used in the field of complementary currencies to describe a common, usually small scale, endogenous money system.

Money Object or record accepted as payment

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment. Any item or verifiable record that fulfils these functions can be considered as money.

Credit theory of money

Credit theories of money are monetary economic theories concerning the relationship between credit and money. Proponents of these theories, such as Alfred Mitchell-Innes, sometimes emphasize that money and credit/debt are the same thing, seen from different points of view. Proponents assert that the essential nature of money is credit (debt), at least in eras where money is not backed by a commodity such as gold. Two common strands of thought within these theories are the idea that money originated as a unit of account for debt, and the position that money creation involves the simultaneous creation of debt. Some proponents of credit theories of money argue that money is best understood as debt even in systems often understood as using commodity money. Others hold that money equates to credit only in a system based on fiat money, where they argue that all forms of money including cash can be considered as forms of credit money.

Central Bank of Kosovo

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In macroeconomics, chartalism is a theory of money which argues that money originated with states' attempts to direct economic activity rather than as a spontaneous solution to the problems with barter or as a means with which to tokenize debt, and that fiat currency has value in exchange because of sovereign power to levy taxes on economic activity payable in the currency they issue.

This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.

References

  1. http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=standard%20of%20deferred%20payment
  2. 1 2 Mankiw, N. Gregory (2007). "2". Macroeconomics (6th ed.). New York: Worth Publishers. pp. 22–32. ISBN   0-7167-6213-7.
  3. 1 2 Krugman, Paul & Wells, Robin, Economics, Worth Publishers, New York (2006)
  4. 1 2 Abel, Andrew; Bernanke, Ben (2005). "7". Macroeconomics (5th ed.). Pearson. pp. 266–269. ISBN   0-201-32789-9.
  5. T.H. Greco. Money: Understanding and Creating Alternatives to Legal Tender, White River Junction, Vt: Chelsea Green Publishing (2001). ISBN   1-890132-37-3
  6. An introduction to money and banking, by Colin Dearborn Campbell, 1978, p. 23
  7. Money and the economy, by John J. Klein, p. 5
  8. Applied economics in banking and finance, by H. Carter, Ian Partington, p. 26
  9. Money, Banking, and Monetary Policy, by Colin Dearborn Campbell, Rosemary G. Campbell, Edwin G. Dolan, 1987, p. 38–40

Notes