Money and Hierarchy: Four Ways to Discharge a Payment Obligation

Posted: 16 Feb 2022 Last revised: 23 May 2024

Date Written: February 11, 2022

Abstract

We ordinarily describe payments as “transfers” of funds, something implying a flat structure where payer and payee are both capable of holding the asset being used to discharge the obligation. But the payment landscape in modern economies is not at all like that; rather, hierarchy is pervasive. We intuitively know that hierarchical arrangements multiply the ways a payment can be made, depending on where in that hierarchy payer and payee are located. For example, a payment by a household to a non-financial firm is likely to be effected differently – meaning, the balance sheet entries differ – from a payment by a household to a bank (e.g., mortgage repayment). Yet, the terms we use are too coarse and fail to discriminate between them. The aim of this paper is to introduce four new words in the vocabulary of economists that describe how payments are settled.

Keywords: payment, clearing and settlement systems; hierarchy of money; legal definition of money; transfer; assignment; novation; issuance; set-off

JEL Classification: E42; E5

Suggested Citation

Clavero, Borja, Money and Hierarchy: Four Ways to Discharge a Payment Obligation (February 11, 2022). Available at SSRN: https://ssrn.com/abstract=4032398 or http://dx.doi.org/10.2139/ssrn.4032398

Borja Clavero (Contact Author)

University of Winchester ( email )

United Kingdom

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