Nature and Value of Money

Learning Outcomes :
1. Explain the concept of money.
2. Enumerate the functions of money.
3. Discuss the characteristics of good money.
4. Expound the importance of money in man’s everyday living.
5. Discuss the Philippine Monetary System.
6. Explain the classification of money.
Introduction
Nature and Value of Money

•CONCEPT OF MONEY
Our monetary system developed
to meet the changing needs of the
economy. Primitive economies
consisted largely of self-sufficient
units or groups that lived by
means of hunting, fishing, and
simple agriculture. There was
little need or occasion to
exchange goods or services.
Bible Verse :

•Prov. 21:5-2 The thoughts of the diligent

tend only to plenteousness; but of every one
that is hasty only to want.
•
As economies developed, the
process of exchange became
more important. To help
facilitate the exchange, relative
values were developed. The need
for a simple means of exchange
led to the development of money
. Thus, making it as a major tool
for facilitating transactions.
 Every usage of the word money What
i
indicates confusion between Money s Money ?
money and income and money anythi is defined a
ng aut s
and wealth law to h orized
be g by
(Hadjimichalakis, 1995 ,p.3) accept eneral
ed as a ly
exchan mediu
ge and m of
Example, when we say a woman makes a lot standa as a
rd of v
alue.
of money, we may mean that she earns a high
income from her job as a lawyer, when we
say a man has a lot of money ,we mean that
It has no reference to the general standing
he has accumulated a lot of savings or wealth of the person who offers it as payment for
as money is one form of wealth . goods and services.
Many economists consider the amount of
money and growth in the amount of money
in an economy very significant in
determining interest rates, inflation and the
level of economic activity.
 Functions of Money
1. As a Medium of Exchange
Money facilitates buying and selling , It is used to
pay for or settle obligations . It also reduces the
time spent on transactions.
2. As a Unit of Account or Standard of Value
Money serves as a yardstick for measuring prices
and values when comparing items. Any
commodity can serve as a unit of account . We
measure the values of items we want to acquire in
terms of one commodity -money .
3. Store of Value
Money is a reservoir of future purchasing power .
It is both a temporary and a permanent store of
purchasing power. The ability of money to store
its value depends on its capacity to retain its
purchasing power.
Money value can be stored in two forms:
Savings and investment . Income derived
from savings is interest and that from
investment is profit.
If money is kept for future use in the form
of savings or investment, it earns income.
4. As a Standard of Deferred Payment
Money is used as a medium of exchange for fulfilling
obligations of debtors to creditors on maturity . It
serves to measure the extent of obligations by debtors
and claims by creditors . Money as a standard of
deferred payment means that promises to pay at are
expressed in money value.
CHARACTERISTICS OF GOOD MONEY
1. General Acceptability
This is the ready acceptance of money by people of a country . Money must be acceptable
as a tool for settlement of obligations between creditors and debtors or between buyers and
sellers.

Section 52 of the New Central Bank Act , Legal Tender Power, states “ All notes and coins issued by the Bangko
Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in
the in the Philippines for all debts, both public and private. Provided, however, that, unless otherwise fixed by the
Monetary Board , coins shall be legal tender in amounts not exceeding Fifty pesos ( Php50.00) for denominations
of Twenty-five centavos and above in amounts not exceeding Twenty pesos (Php 20.00 ) for denominations of Ten
centavos or less.
2 . Durability
Money must be able to bear normal wear and tear when used in any transaction. It must be made of materials
which can last for a reasonably long period of time without losing its usefulness as a medium of exchange .
Designs and inscriptions therein must be visible and recognizable.

Section 57 of the New Central Bank Act , Retirement of old notes and coins ,
states “ The Bangko Sentral may call in for replacement of notes of any series
or denomination which are more than five ( 5) years old and coins which are
more than ten ( 10) years old. This property enables coins and paper bills to
serve the store of value function effectively.” Central Bank may demonetize
notes and coins in circulation as the Monetary Board deems necessary.
3. Portability
Money must be easy to carry for faster settlement of transactions. Materials used, like metal alloys must not be
heavy. For higher denominations, paper-based materials are preferable for easy transport.

4. Divisibility
Money , as a unit of account, must lend itself to being divided into smaller denominations to settle obligations
or collections arising from various transactions.

Section 48 of the New Central Bank Act states : “ The monetary unit in the Philippines is the “peso”
which is represented by the sign P . The peso is divided into one hundred ( 100) equal parts called
“centavos” which is represented by the sign c. By its availability in several denominations, coins and
paper bills conveniently allow money to finance transactions of various magnitudes.
5. Stability of Money Value
The purchasing power of money must be maintained for a period of time to maximize economic development
and increase employment, production and income levels.

Section 64 of the New Central Bank Act, International Monetary Stabilization , states: “The Bangko Sentral
shall exercise its powers under this Act to preserve the international value of the peso and to maintain its
convertibility into other freely convertible currencies primarily, for, although not necessarily limited to ,
current payments for foreign trade and invisibles.”

Section 65 of the same Act, International Reserves , states : “In order to maintain the international stability
and convertibility of the Philippine peso, the Bangko Sentral maintains international reserves adequate to
meet any foreseeable net demands on the Bangko Sentral for foreign currencies.
6. Cognizability
Good money must be easy to recognize. Each denomination must be distinct to avoid confusion with other
denominations during exchange transactions . Weight, fineness, designs and other characteristics of coins and notes
, as prescribed by the Monetary Board , must be unique for a denomination.

7. Homogeneity or Uniformity
Money of the same denomination must have the same characteristics in terms of weight, fineness, and designs.
Coins of the same denomination must have uniform weight of metal alloy, fineness, shape, size and inscription.
Paper bills of the same denomination must possess uniform design, size, color and other physical characteristics.

8. Malleability
Materials for the minting of money must lend themselves to being stamped with proper designs and must be durable
to maintain its form. The form and design of coins are a compromise of objectives. The least wear and tear can be
attained by a spherical form and a minimum of design, but such would be awkward to handle, difficult to recognize,
and easy to counterfeit. The design of a coin is a compromise between the artistry of high relief and the exposure of
abrasion. Pure gold and silver are very soft, so it is necessary to harden them by adding copper, nickel , tin or zinc.
While still malleable, the harder the material, the less wear and tear and possibility of counterfeiting.
Class Activity 1:

Cite the importance of money in your everyday living . What are the
results if individuals do not have money?
Money simplifies matters. Workers are paid in money, which they can use to
pay bills and make purchases. Money becomes the medium of exchange.
Goods and services are expressed in terms of money, a common denominator. Activity 2 :
Everyone must be confident that it can be passed on , that it is generally
acceptable in trade. People will accept the medium of exchange only when Based on the
they are certain that it can be passed on to others. Also, they are more willing paragraphs on the
to accept the medium of exchange if they are certain of its worth in terms of
right, on your own
acquiring things they want.
Money also contributes to economic development and growth. It does by enumerate the
stimulating both savings and investment and facilitating transfer of funds from importance of
savers to borrowers , who want to invest but do not have enough money to do money .
so.
In a monetary economy, a person accumulates savings in cash because money
is a store of value. Through financial markets, this surplus can be lent to a
business firm to invest in new equipment. The only way an economy will grow
is by allocating part of its resources to the creation of new and more productive
facilities.
Assignment No. 3
Provide a short description of the following laws related to our
Philippine Monetary System . Submit in a short size bond paper ,
computerized , use Book Antiqua Font # 12 . Do not forget to write
your name on the upper right hand side of your paper , date of
submission and your subject . Cite source/s of information . Send to
my email account on ___________ . Late submission will not be
considered .
1.Philippine Coinage Act of 1903
2. US Coinage Act of 1903
3. Gold Reserve Act of 1934
4. Dollar Exchange Standard
5. Mickey Mouse Notes
6. Managed Currency System
COINAGE
The manufacture of money is done in a mint, and the process is called minting or
coining or coinage. If gold or silver coins are to circulate freely at face value rather
than weight , the public must be assured that coins are of standard weight and
fineness. Coin circulation is promoted by molding precious metal into shapes and
sizes that are convenient and inscribing in them an attractive and readily
recognizable design.
The government has the exclusive right of coinage and private coinage is counterfeit
and if government is coining freely and gratuitously, it may assumed that counterfeit
coins have fall under the standard weight and fineness. A high seigniorage creates a
temptation to counterfeit. One of the objective in the manufacture of money is to give
it a shape , a design, and other characteristics that will render counterfeiting difficult,
expensive and readily detectable.

The form and design of coins
are a compromise of
objectives. If the material
used is very low cost , for
instance, copper, and the
seigniorage is high,
preventing abrasion,
chipping, and other damage
is important. The harder the
material, the less wear and
tear.
Given free coinage, a
seigniorage charge increases
the value of the coined metal
by the amount of this fee.
Principles of Subsidiary Coinage articulated by Dr. Neil Carothers, following
his study of “Fractional Coinage “ ( Helfferich, page 304 ) :
Coinage should be solely on government account .
▪ The coins should be issued only through sales to the public at their face
values in exchange for standard money.
▪ Total coinage, total issue, and total circulation should be unrestricted.
▪ The market value of the metal in the coins should be well below the face
values.
▪ The coins should be redeemable without charge, delay, and limit at the issue
price and in the standard money, regardless of the extent of wear.
▪ The coins should be legal tender in private and public payments.
▪ The legal tender power should be limited to sums representing a proper
maximum use of the coins
▪ The denominational system should be decimal with intermediate coins in
multiple of five.
▪ The coins should be convenient in size, attractive in appearance , durable in
use and individual in design.
THREE KINDS OF COINAGE

Free Coinage.
The government defines
Limited Coinage
sizes, shapes, weight and
Government purchases
designs of coins but allows
Gratuitous Coinage precious metal in an open
individuals to bring their
Total responsibility for market and mints them as
precious metals to the mint
minting is borne by a medium of exchange at
to convert such into
the government. face values higher than
standard coins. Owners of
its material content to
these metals are charged
facilitate trade.
with brassage or
seigniorage fee.
TYPES OF MONEY

COMMODITY MONEY
The inconvenience of the barter system forced the creation of a common medium of
commodity to facilitate exchange . Money evolved from simple forms or things with
intrinsic value, such as rice, corn, salt, sugar , gold and silver. Early men used these
commodities as money. Since there was no uniformity in the use of commodities as
money, the following factors were considered :
a. General acceptability at the place and time.
b. Utility other than as medium of exchange.
c. High demand
d. Limited supply .
When commodities were as medium of exchange, goods could be valued in terms of the
item used as money and could be exchanged for it.
TYPES OF MONEY

METALLIC MONEY
Due to economic development and an improved standard of living, people wanted a
better medium of exchange. Metals proved to be more efficient. Copper, iron, tin and
lead were the earliest metals used as money and were in the form of useful implements
such as knives, forks, pots, spears , bows and arrows. When supply of gold and silver
became abundant ( 3,000 B.C.) they were used as a form of money. The transition from
the use of commodities as money to the use of precious metals eventually led to the
general usage of the latter. Gold and silver were in great demand for ornamentation
purposes because of their durability, malleability and beauty. The supply of these metals
was limited and they had great value, which made them a valuable medium of
exchange. In time, coins with a certain weight of metal in them were developed and
coining money became a governmental function.
 a. Scarcity and stability of metal supply.

In the evolution of b. Durability

money, the
following properties
favored the use of c. Divisibility
metallic coins and
eliminated other
d. Availability in convenient units .
commodities as
material for money.

PAPER MONEY
Gold and silver coins are cumbersome to carry
around when large transactions are to be made.
The main purpose of paper money is to minimize
this inconvenience. The govt. issued paper money
to represent certain quantities of gold or silver
those were kept by the government. The paper
was accepted as a medium of exchange because
persons accepting it knew that they could get the
precious metal when and if they wanted it. Such
paper money backed up by gold or silver , or
representative paper money, circulated freely.
Today, money circulating is liabilities of the BSP
and are guaranteed by the govt. of the Philippines.
COINS
In 1949, the Central Bank was established and it
replaced the gold and silver coins with coins made
of metal alloys that were less than one centavo in
value. Today, coins circulating in the world are of
lower metal value to prevent the waste and loss of
precious metals and to facilitate the settlement of
small obligations.
Standard coins are made of metal like gold. They
are also known as full-bodied money under the
gold standard. A full bodied monetary system is
one in which the value of the commodity
circulating as money or metal coins is the same
for non-monetary and monetary purposes.
Subsidiary or token coins are coins whose face
value is greater than the material used.
Bank Money Electronic Money
Bank money includes checks, bills With the development of computers and
of exchange and drafts. Bank its application, the business and business
money is playing a vital role in the transactions are changing very fast. Now
a days , most of the transactions take
economic development of the
place through electronic money. People
country. Because various prefer to use debit cards and credit cards
transactions are settled without the instead of paper money or bank money.
use of paper money. Bank money With the passage of time , electronic
is safer than any other forms of money may diminish the use of paper
money. money.
Coinage is the process of manufacturing coins
for use as money. In the Philippines, the BSP
provides coinage requirements in terms of
denominations, design, fineness, weight,
retirement and replacement.
The coin is the metal itself. It is a shaped
metal with specific weight and purity
guaranteed by the Phil. Government for use
as a medium of exchange.
Purity of the precious metal in a coin is
known as fineness, while weight is the
heaviness or bulkiness of precious metal.
CLASSIFICATION OF MONEY
Money can be classified according to the following :

Money According to Material Used

Commodity Money . This can be metallic in nature. It is used for purposes
other than as a medium of exchange. Precious metals like gold and silver are
used as commodity money.
Paper Money . High quality paper materials are used to withstand wear and
tear over a long period of time and to minimize counterfeiting.
Bank Money. These are checks or other paper notes issued by financial
intermediaries.
Money According to the Character of the Issuer
Treasury Money. These were issued by the National Treasury before
1949. They are notes and coins of various denominations.
Central Bank Money. There were issued by the Central Bank after 1949.
They are the Central Banknotes and coins circulating in the Philippines.
Commercial Bank Money. There are issued by commercial banks as
promises to pay, legal tender, payable on demand at a future time to the
bearer or order.
Money According to Popularity
Paper Money. Has no commodity value.
Fiat Money. They are inconvertible paper money with no reserve. Face
value is higher than the value of the paper itself.
Subsidiary Coins. These are representative full-bodied money made of
base metals to settle small transactions. There are not advisable for use
in big transactions and have limited legal tender power.
Money According to Face Value
Standard Money . This is full bodied money, authorized by law and having the
weight, fineness, denomination, and designs prescribed by the government as
standard basis for coinage.

LEGAL TENDER . Any kind of money which according to law, must be generally
accepted when offered as payment for any obligation expressed in terms of the country’s
monetary unit. In the Philippines, “peso” is legal tender.

CURRENCY . This is any kind of money which has limited acceptability expressed in
a monetary unit. Money of other countries is currencies because of their limited
acceptability in the Philippines.
MONETARY SYSTEM
In any country, the monetary system consists of the aggregate of moneu in use and the
values of the various types of money being organically related to one another in both formal
and substantive ways.
In a system , there is standard money and unit of account and every type of money is either
a multiple or sub-multiple of that unit, that is, there are various denominations. There is
also provision for converting one type of money into another or redeeming fiduciary money
by standard money on parity or other basis.
The monetary system of a country is a national affair . The central govt. usually acquires a
monopoly or near control of monetary affairs, minimizing state and local differences and
facilitating production and trade on a national basis. Each country enacts its own coinage,
banking and other monetary legislation. The monetary system is determined by law.
MONETARY SYSTEM
Laws are passed from time to time, adding new types of money or modifying existing types
to meet special emergencies of a financial or political character. Chief determinant in the
selection of the monetary standard is the relative stability of value attainable under each
standard.
Stability of money is more frequently used to signify the constancy of its purchasing power
over goods in general. This use of stability does not imply that the unit of money has equal
command at all times over any particular commodity, such as grain or service.
Stability of money, therefore, refers to the stability of purchasing power over a considerable
list of commodities or services . If the average price remains constant , the assumption is that
the purchasing power of money has stayed constant while the prices of the individual
commodities on the list may have varied considerably in amount and direction.
Another concept of stability of money value is its purchasing power constancy in foreign
markets, that is, the exchange rate between the Philippine peso and the currencies of foreign
countries.
Assignment No. 4
Cite the qualities of good money.
Discuss briefly each quality .