Standard of deferred payment
A standard of deferred payment is the accepted way, in a given market, to settle a debt – a unit in which debts 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.
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 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:
- "Money is a matter of functions four, a medium, a measure, a standard, a store."
Being a standard of deferred payment is one of the functions of money; it is distinct from:
- the medium of exchange 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 value function, which relates to the saving, storing, and retrieval of value; and
- from the unit of account function which requires fungibility so accounts in any amount can be readily settled.
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. For example, a debtor might try to cheat by selecting a denominator 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.
Relation to debt
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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.
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.
- T.H. Greco. Money: Understanding and Creating Alternatives to Legal Tender, White River Junction, Vt: Chelsea Green Publishing (2001). ISBN 1-890132-37-3
- An introduction to money and banking, by Colin Dearborn Campbell, 1978, p. 23
- Money and the economy, by John J. Klein, p. 5
- Applied economics in banking and finance, by H. Carter, Ian Partington, p. 26
- Money, Banking, and Monetary Policy, by Colin Dearborn Campbell, Rosemary G. Campbell, Edwin G. Dolan, 1987, p. 38–40
- Mankiw, N. Gregory (2007). Macroeconomics (6th ed.). New York: Worth Publishers. ISBN 0-7167-6213-7.
- Krugman, Paul & Wells, Robin, Economics, Worth Publishers, New York (2006)
- Abel, Andrew; Bernanke, Ben (2005). "7". Macroeconomics (5th ed.). Pearson. pp. 266–269.
- The value of money, by Benjamin McAlester Anderson, 1917, p. 436
- Economics, by Jerome F Burns, Robert Burton Ekelund, Robert D. Tollison, p. 656
- Contains examination questions asked by the Board of Regents of the State of New York, 1929-1937.
- The cause of business depressions, by Hugo Bilgram, Louis Edward Levy, 1914, p. 93