MONEY, ITS FUNCTIONS AND CHARACTERISTICS

Origin of the Word “MONEY”

MONEY was derived from the Latin word Moneta, surname of the Roman goddess Juno-
the guardian of the finances of the Roman Empire. Moneta refers to a mint or a place
for coining money. Another term for money is “bucks” which came from the word
“buckskins” meaning deer hides, a medium of exchange used by settler during the early
times.

Money defined

Money is defined in many different ways.

 MONEY is anything authorized by law which is used as a medium of exchange and

which is widely acceptable for the payment of goods, services and debt without
reference to the general standing of the person who offers it.

 Money is anything that is generally acceptable in exchange for goods and

services.

 Money is any liquid financial asset representing a claim from a financial

institution that is used primarily for payment of goods and services.

 Money also refers broadly to wealth that can be exchanged for cash.

FUNCTIONS OF MONEY

1. As a Medium of Exchange. Money is used as a means of payments for

transactions, for the sale and purchase of goods and services. The use of
money as a medium of exchange promotes economic efficiency by reducing
the amount of time spent in the exchange of goods and services.

2. As a unit of value/ account. Money is also used to measure the value of

goods and services. The main reason is to standardize the value of goods and
services.
3. As a store of value. Money also serves as a repository of purchasing power
over time. It is used to save the purchasing power from the time income is
received until income is spent.
 4. As a means of deferred payment. Money is used to settle contracted debts.

Characteristics of GOOD MONEY

1. General acceptability. Money must be generally acceptable (Legal tender).

2. Portability. Money must be easy to carry by persons from one place to
another.
3. Cognizability. Money must be easily recognized by the populace.
4. Durability. Refers to the ability of money to be use for a longer period of time.
5. Divisibility. Refers to the convertibility/interconvertibility of currency.
6. Malleability. Money must be capable of being re-shaped or re-coined.
7. Uniformity/Homogeneity. This connotes similarity of money to avoid
confusion.
8. Stability of value. Refers to the ability of money to store its value.

KINDS and FORMS OF MONEY and their Characteristics

1. Commodity Money-- are made up of precious metals and valuable commodities.

Commodity money is poor media of exchange because their supply is subject to
abrupt changes and they are poor stores of value.

2. Credit Money—are money that is backed by a promise to pay. Examples are the
notes that are convertible into coins or into a quantity of precious metals.

3. Fiat Money—are paper and coin currency decreed by a government as legal

tender but not convertible into coins or precious metals. It is backed by a
government promise that is it legally acceptable as a medium of exchange.

4. Electronic Money/E-money –money stored electronically. These are card-based

products of banks such as credit cards, debit cards, store cards and the ATM
( Cash) cards.

THE MONETARY SYSTEM AND MONETARY STANDARD

Monetary system is a set of mechanisms by which a government provides money in
a country's economy. In other words, it is a formal structure adapted by a government
that issues a currency which is accepted as the medium of exchange by its citizens and
by other governments. Most monetary systems are managed by a central bank which is
given the authority to print money and control its supply in the economy.

Monetary standard or Standard of Value

Monetary standard is the value behind the money in a monetary system. The underlying
philosophy behind the adoption of a particular monetary standard stems from the
desire to provide uniform basis for measuring the value of money.

Types of Monetary Standard

1. Monometallic Standard-- the use of one metal as monetary standard either gold
or silver metals.
a. Gold standard—gold coin, gold bullion and gold exchange standard.
b. Silver standard—silver coin, silver bullion and silver exchange standard.

2. Bimetallic Standard—the use of two metals, the gold and silver as monetary
standard. It is a monetary system where both gold and silver are freely coined
with the same denomination. Both metals are legal tender. One advantage of
bimetallic standard is it provides for a broader metallic base. In the event of
inadequacy of gold stock as reserve, such could be complemented with the
addition of silver. However, in this standard Gresham’s Law is apparent; this
states that the overvalued (cheaper) money will drive out of circulation the
undervalued money.

3. Fiat Standard—a monetary system in which the face value is very much higher
than the material used as money. Usually, it is made of paper or any other
material. This money does not represent a promise to pay some other forms of
money, in other words, it is irredeemable money, for a reason that it is issued
against no reserves.
Fiat standard may consist of three distinct types, such as: utopian, the
involuntary and the manage currency standards. In actual practice, only the last
two are observed existing at the present time.

a. Utopian Paper Standard. For purposes of academic interest, this type is

included for discussion. The underlying philosophy behind the proposed
adoption of this standard is that money today is desired primarily for what it
will bring the individual in the form of goods and services it will buy, and not
for represents, whether in a specific weight and fineness of gold or silver. As
envisioned by its advocates, the seal of the government and the attribute of
legal tender are all that are necessary to make money issued under this
standard acceptable. Thus, following this line of thinking, it is contended that
there is no necessity of building up stocks of gold as is required in the case of
the gold standard.
b. The Involuntary Paper Standard. When a nation, whether on a gold or silver
standard, finds itself in a serious predicament of not being able to redeem its
money, such a situation brings on its path the consequent result of an
involuntary paper standard.

This situation is oftentimes observed as the result of a war. Thus, in spite of

the desire of the government to redeem its paper money, circumstances
prevent it from doing so. Nevertheless, the government and the people still
cling fervently to the hope that it could one day return he gold or silver
standard as the case may be.

c. Manage Currency Standard. Money whose value is established and

maintained by deliberate governmental action working through national
and international financial institutions. This kind of currency system is perhaps
as common today. Starting with the year 1949, the Philippines is on a
managed currency system.