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Standard of deferred payment and legal tender - YouTube
Channel: Khan Academy
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hey everyone so in the last couple
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videos i was talking about various
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functions of money and people usually
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list at least three different functions
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that it serves the first is a medium of
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exchange it's what we use to trade for
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goods the second is that it's a store of
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value if you keep your money around
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it'll retain its value and the third is
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that it's a unit of value we usually
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think of things in you know dollar terms
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or euro or peso or yen terms and some
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texts will actually add a fourth
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function of money onto this which is
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that money is the standard of deferred
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payment
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standard
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of
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deferred payment
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now what does this mean what does
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deferred payment mean basically it's any
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time that you receive something but only
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pay for it later and the most common
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form of this is debt so let's say that
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you you're over here and you want to
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borrow a thousand dollars so you borrow
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one thousand dollars maybe it's from
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some kind of institution like a bank
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and maybe it's a let's say it's a
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thousand dollar credit card loan uh so
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you receive it and then some kind of
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time passes maybe it's like the month
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before your credit card bill comes some
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time passes and then after that you
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repay that debt
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and you'll repay it with money um and
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this is probably the most common where
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you're receiving you know money to use
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for something and then you pay it back
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but there are other forms of deferred
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payment like if you go to a restaurant
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for example where you receive your food
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before you pay your bill at the end that
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would actually be a form of a deferred
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payment because you know you receive
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your food at the start of the evening
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and then you eat it and it's only at the
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end that you pay it hopefully your bill
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isn't a thousand dollars but it is
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something where you're paying it at the
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end and insofar as money is what we use
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to repay this
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this is its fourth function
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and now you might be able to see why
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some people think that this shouldn't
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count as an extra one because you could
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argue that this falls under the category
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of a medium of exchange you know just in
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the same way that you use money to buy a
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chair or to buy legal services or to buy
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food
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you're using money to pay your debt it's
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just another one of those things that
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you're exchanging for so why should this
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be separated well one case that you
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could make for why this idea of a
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standard of deferred payment really does
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serve a different function than the
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others is that at least in modern
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economies there's somewhat of a legal
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backing to the idea of money serving
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this standard and by that i mean if you
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take on a debt in a country and there's
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some kind of legal obligation attached
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to that debt associated with the legal
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system of the country tied into the law
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is the idea that you can pay back that
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debt with money and if you've ever heard
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the term legal tender
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legal tender
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this is what it's referring to so legal
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tender you might have heard of like
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dollar bills or coins and things like
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that being called legal tender and what
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this means so legal indicates that
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there's some association with the system
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of law within a given country and tender
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tender is kind of an old word for offer
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and what this basically means is that if
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you take on a debt like you know you
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borrow a thousand dollars from the bank
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or you you know eat food in a restaurant
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before you pay for it as soon as you
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offer money as soon as you offer
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something which is legal tender so like
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dollar bills that debt will no longer
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exist the act of offering it alone will
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eliminate that debt and just as an
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example of why this has some bearing
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consider the fact that it used to be the
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case people would often take out loans
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in gold like in the late 1800s for
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example when a lot of railroads were
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being built and there was debt being
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raised to support the building of those
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it would often be the case that one of
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the men building these railroads might
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borrow a large sum of money but he would
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borrow it in the form of a lot of gold
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some kind of gold and then it was
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expected that he could pay this back you
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know in that same form he could pay back
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the gold itself
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you know maybe plus interest this is why
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people would give him gold in the first
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place and it might be you know maybe
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it's just a lot of um
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people looking to invest the gold that
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they're holding and hoping that it
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returns some kind of interest
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now let's think about what would happen
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if you tried to do this today where if
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instead of you know back in the back in
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the era you were doing this
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today
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so let's say you borrowed like one ounce
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of gold so it might be one
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ounce of gold and say that corresponded
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today to one thousand dollars if it was
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one thousand dollars for every ounce of
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gold then let's say while you're holding
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on to it you know some time passes
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you're investing it maybe instead of
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building railroads you're doing
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something more modern with it but let's
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say after enough time has passed the
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gold has actually gone up in value you
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know maybe there's been inflation or
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maybe for whatever reason the gold is
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now a higher price and instead instead
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let's say after the time it's now two
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thousand dollars
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two thousand dollars for a single ounce
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of gold
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now if you were to pay back exactly what
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you received you would pay back one
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ounce of gold maybe plus some interest
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and nobody would have any reason to
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complain however legally you're allowed
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to pay back your debt in the form of the
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legal tender of the country so for
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example in the united states since your
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original loan was in the form of a
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thousand dollars you could pay back
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instead of in gold one thousand dollars
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just us dollars and just by offering
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that to the people who originally gave
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you the loan the debt would be gone but
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in effect what this would mean is that
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you're paying back half an ounce of gold
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because after this time has passed you
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know the dollar has devalued relative to
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gold and instead a thousand dollars
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would only buy half an ounce of gold and
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you might imagine people would be kind
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of unhappy about that
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so the whole point here is that the
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standard of deferred payment actually
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has some legal clout to it so what could
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what you could argue separates it from
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the other functions of money is this
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fact that the currency in most modern
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economies is actually tied up with the
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legal system of the associated country
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so with that i will see you next video
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