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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 Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
, thereby allowing goods and services to be acquired now and paid for in the future. The 19th-century economist
William Stanley Jevons William Stanley Jevons (; 1 September 183513 August 1882) was an English economist and logician. Irving Fisher described Jevons's book ''A General Mathematical Theory of Political Economy'' (1862) as the start of the mathematical method in ec ...
, influential in the study of money, considered it to be one of four fundamental functions of money, the other three being
medium of exchange In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services. In modern economies, the most commonly used medium of exchange is currency. The origin of "mediums of exchange" in human societies is ass ...
, store of value, and
unit of account In economics, unit of account is one of the money functions. A unit of account is a standard numerical monetary unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of rela ...
. However, most modern textbooks now list only the other three functions, considering standard of deferred payment to be subsumed by the others. Most forms of money can act as standards of deferred payment including
commodity money Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects having value or use in themselves (intrinsic value) as well as their value in buying goods. This is in contrast to representa ...
, representative money and most commonly
fiat money Fiat money (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was sometim ...
. Representative and fiat money often exist in digital form as well as physical tokens such as coins and notes.


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 In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services. In modern economies, the most commonly used medium of exchange is currency. The origin of "mediums of exchange" in human societies is ass ...
, a
unit of account In economics, unit of account is one of the money functions. A unit of account is a standard numerical monetary unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of rela ...
, 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 and 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 standard of deferred payment can be distinguished from the medium of exchange function because of how its value might change over time. If payment is to be deferred, it should be denominated in a unit which is expected to maintain its value. Deferred payments require durability when used in trade, and a minimum of opportunity to cheat others — as the diamond or gold examples illustrate. * the store of value function, which relates to the saving, storing, and retrieval of value; and * the unit of account function which requires
fungibility In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of whose parts is indistinguishable from any other part. Fungible tokens can be exchanged or replaced; for exa ...
so accounts in any amount can be readily settled. When
currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general ...
is stable,
money 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 primary functions which distinguish money ar ...
can serve all four functions. When it is not, or when complex and volatile forms of
financial capital Financial capital (also simply known as capital or equity in finance, accounting and economics) 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 provi ...
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.


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 In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
and
deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflatio ...
, the value of deferred payments (the real level of debt) likewise fluctuates. A device is termed "
legal tender Legal tender is a form of money that courts of law are required to recognize as satisfactory payment for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered ("tendered") in ...
" 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 The rule of law is the political philosophy that all citizens and institutions within a country, state, or community are accountable to the same laws, including lawmakers and leaders. The rule of law is defined in the ''Encyclopedia Britannic ...
, 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 A drug is any chemical substance that causes a change in an organism's physiology or psychology when consumed. Drugs are typically distinguished from food and substances that provide nutritional support. Consumption of drugs can be via inhalati ...
or weapons), gold or
diamond Diamond is a solid form of the element carbon with its atoms arranged in a crystal structure called diamond cubic. Another solid form of carbon known as graphite is the chemically stable form of carbon at room temperature and pressure, b ...
s may be preferred as the
medium of exchange In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services. In modern economies, the most commonly used medium of exchange is currency. The origin of "mediums of exchange" in human societies is ass ...
— there being no recourse in case of
counterfeit To counterfeit means to imitate something authentic, with the intent to steal, destroy, or replace the original, for use in illegal transactions, or otherwise to deceive individuals into believing that the fake is of equal or greater value tha ...
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 A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on 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 ...
s have had to hide from
debtor A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this ...
s to avoid being paid off in near worthless currency, typically following
hyper-inflation In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as t ...
.
Time-based currency In economics, a time-based currency is an alternative currency or exchange system where the unit of account is the person-hour or some other time unit. Some time-based currencies value everyone's contributions equally: one hour equals one service ...
such as Ithaca Hours establishes fixed amounts of human labour as the only standard of deferred payment.


See also

*
Bretton Woods system The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretto ...
* Credit *
Legal tender Legal tender is a form of money that courts of law are required to recognize as satisfactory payment for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered ("tendered") in ...
* Value of life


References


Notes


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
{{Means of Exchange Debt