Question

Discuss the operation of the payments system and different types of money (inside money, outside money, fiat money, commodity money)

Answer 1

A payment system is any system used to settle financial transactions through the transfer of monetary value, and includes the institutions, instruments, people, rules, procedures, standards, and technologies that make such an exchange possible.A common type of payment system is the operational network that links bank accounts and provides for monetary exchange using bank deposits.

What makes a payment system a system is the use of cash-substitutes; traditional payment systems are negotiable instruments such as drafts (e.g., checks) and documentary credits such as letters of credit. With the advent of computers and electronic communications a large number of alternative electronic payment systems have emerged. These include debit cards, credit cards, electronic funds transfers, direct credits, direct debits, internet banking, and e-commerce payment systems. Some payment systems include credit mechanisms, but that is essentially a different aspect of payment. Payment systems are used in lieu of tendering cash in domestic and international transactions and consist of a major service provided by banks and other financial institutions.

Payment systems may be physical or electronic and each has its own procedures and protocols. Standardization has allowed some of these systems and networks to grow to a global scale, but there are still many country- and product-specific systems. Examples of payment systems that have become globally available are credit card and automated teller machine networks. Specific forms of payment systems are also used to settle financial transactions for products in the equity markets, bond markets, currency markets, futures markets, derivatives markets, options markets, and to transfer fundsbetween financial institutions both domestically using clearing and real-time gross settlement (RTGS) systems and internationally using the SWIFT network.

The term electronic payment refers to a payment made from one bank account to another using electronic methods and forgoing the direct intervention of bank employees.^[4] Narrowly defined electronic payment refers to e-commerce—a payment for buying and selling goods or services offered through the Internet, or broadly to any type of electronic funds transfer.

Types of Money:

Inside Money : In monetary economics, inside money is money issued by private intermediaries (i.e. commercial banks) in the form of debt (credit). In the presence of interest rate differentials, debt issuers can make arbitrage profits by lending short and borrowing long.

Outside Money : Outside money is money that is not a liability for anyone "inside" the economy. It is held in an economy in net positive amounts. Examples are gold or assets denominated in foreign currency or otherwise backed up by foreign debt, like foreign cash, stocks or bonds.

Fiat Money : Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of.

Commodity Money : A form of currency in which the value of the currency comes from the material of which it is made. gold, silver, grains, livestock, salt, and other materials have served as commodity money at different points in history. Most modern currencies, such as the Euro or the United States dollar, are fiat money, or money whose value is based on government guarantees but has no inherent value.