Standard of deferred payment
Encyclopedia
A standard of deferred payment is the accepted way, in a given market
, to settle a debt
– a unit in which debt
s are denominated. It is one of the defining functions of money
; for example, while the gold standard
reigned, gold
or any currency
convertible to gold at a fixed rate constituted such a standard. As of 2010, the US dollar and the euro
are the most generally accepted standards for international settlements.
The term "standard of deferred payment" is not as widely used as other terms for functions of money, namely medium of exchange
, store of value
, and unit of account
, though it is distinguished in some works.
, a unit of account
, a store of value
, and, sometimes, a standard of deferred payment, summarized in a mnemonic rhyme of older economics texts:
However, many newer texts do not distinguish the function of a standard of deferred payment, subsuming it in other functions.
Being a standard of deferred payment is one of the functions of money; it is distinct from:
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 cheating by selecting a denominator of debt that one believes to be dropping in value.
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.
, 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 diamond
s 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.
Historically, there have been many times when creditor
s have had to hide from debtor
s to avoid being paid off in near worthless currency, typically following hyper-inflation.
Time-based currency
such as Ithaca Hours
establishes fixed amounts of human labour as the only standard of deferred payment.
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
, to settle a debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
– a unit in which debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
s are denominated. It is one of the defining functions of money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given 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, occasionally in the past,...
; for example, while the gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
reigned, gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
or any currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
convertible to gold at a fixed rate constituted such a standard. As of 2010, the US dollar and the euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
are the most generally accepted standards for international settlements.
The term "standard of deferred payment" is not as widely used as other terms for functions of money, namely medium of exchange
Medium of exchange
A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and...
, store of value
Store of value
A recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....
, and unit of account
Unit of account
A unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets....
, though it is distinguished in some works.
Functions of money
Money is held to serve multiple distinguished but related functions, of which a "standard of deferred payment" is one. The most commonly distinguished functions of money are as a medium of exchangeMedium of exchange
A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and...
, a unit of account
Unit of account
A unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets....
, a store of value
Store of value
A recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....
, and, sometimes, a standard of deferred payment, summarized in a mnemonic rhyme of older economics texts:
- "Money is a matter of functions four, a medium, a measure, a standard, a store."
However, many newer texts do not distinguish the function of a standard of deferred payment, subsuming it in other functions.
Being a standard of deferred payment is one of the functions of money; it is distinct from:
- the medium of exchangeMedium of exchangeA medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and...
function which is used for immediate payments, not deferred payments and requires durability when used in trade, and a minimum of opportunity to cheat others — as the diamond or gold example below illustrate; - the store of valueStore of valueA recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....
function, which relates to the saving, storing, and retrieval of value; and - from the unit of accountUnit of accountA unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets....
function which requires fungibility so accounts in any amount can be readily settled.
When currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
is stable, money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given 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, occasionally in the past,...
can serve all four functions. When it is not, or when complex and volatile forms of financial capital
Financial capital
Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc....
are involved, some may wish to identify a single standard of deferred payment to avoid cheating by selecting a denominator of debt that one believes to be dropping in value.
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 inflationInflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
and deflation, the value of deferred payments (the real level of debt) likewise fluctuates.
A device is termed "legal tender
Legal tender
Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Paper currency is a common form of legal tender in many countries....
" 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 lawRule of law
The rule of law, sometimes called supremacy of law, is a legal maxim that says that governmental decisions should be made by applying known principles or laws with minimal discretion in their application...
, 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
Illegal drug trade
The illegal drug trade is a global black market, dedicated to cultivation, manufacture, distribution and sale of those substances which are subject to drug prohibition laws. Most jurisdictions prohibit trade, except under license, of many types of drugs by drug prohibition laws.A UN report said the...
or weapons), gold or diamond
Diamond
In mineralogy, diamond is an allotrope of carbon, where the carbon atoms are arranged in a variation of the face-centered cubic crystal structure called a diamond lattice. Diamond is less stable than graphite, but the conversion rate from diamond to graphite is negligible at ambient conditions...
s may be preferred as the medium of exchange
Medium of exchange
A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and...
— there being no recourse in case of counterfeit
Counterfeit
To counterfeit means to illegally imitate something. Counterfeit products are often produced with the intent to take advantage of the superior value of the imitated product...
currency being used — and there is rarely any deferral of payment: if there is, it will most likely be stated in dollars.
Historically, there have been many times when creditor
Creditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
s have had to hide from debtor
Debtor
A debtor is an entity that owes a debt to someone else. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor...
s to avoid being paid off in near worthless currency, typically following hyper-inflation.
Time-based currency
Time-based currency
In economics, a time-based currency is an alternative currency where the unit of exchange is the man-hour.Some time-based currencies value everyone’s contributions equally. One hour equals one service credit...
such as Ithaca Hours
Ithaca Hours
The Ithaca HOUR is a local currency used in Ithaca, New York and is the oldest and largest local currency system in the United States that is still operating. It has inspired other similar systems in Madison, Wisconsin; Corvallis, Oregon; and a proposed system in the Lehigh Valley, Pennsylvania...
establishes fixed amounts of human labour as the only standard of deferred payment.