INTRODUCTION

Finance 101 (Basic Finance) is a basic subject. It is therefore necessary that as beginners, the
students must be provided with a simple presentation and adequate knowledge and understanding of the basic
concepts, theories and principles of finance, money, credit and banking.
For this reason, there is a need for an instructional manual in this subject area to be made available to
students, which will supplement the limited books in the library.

PART I THE MONETARY SYSTEM

OBJECTIVES: To be familiar with the basic of money its definitions, characteristics and functions; to
enumerate the earliest forms &kinds of money & the different monetary standards and trace the historical
background of the Philippine monetary system, and to understand the important theories in the value of money.

INITIAL SUMMARY: This topic deals with the basics of money-its definitions, characteristics& functions; the
earliest forms of money and the different kinds of money: the different monetary standards & the historical
development of the Philippine monetary system as well as the important theories in the value of money.

INTRODUCTION:

In the early days, the early man had no use for money. This was because he was regarded as self-
sufficient for he provided his own dwelling and he produced his own food and clothing. Then as his
family expanded that he could no longer meet or provide all the needs of his family, he then began to engage
in an industry where specialization took place. Soon, he began to produce more than what his family actually
needed, hence, surplus came about. With this surplus, he then thought of exchanging it with the surplus also of
other families. This was the ancient practice of exchanging goods and services with other goods and services
called BARTER SYSTEM.

But because of the difficulties of this system, man adopted something, which facilitated the exchange
transaction. Now man lives in a society known as the MONEY SOCIETY that makes use of money as the
medium of exchange. However, this society is fast developing into what is known as CASH-LESS SOCIETY
where the use of credit and banking has been entirely depended upon.

Barter Stage = this stage is characterized by the barter system, which refers to the direct exchange of goods
and services for other goods & services. BARTER came from the French word "BARATER" which means to
"cheat or to trick". This implies that in every barter transaction, there is always one party that is cheated.

Money Stage= this stage uses money as the regular medium of exchange. MONEY -is defined as
anything that is authorized by law to be generally accepted as a medium of exchange and as standard of value
within a given political territory at a given time. MONEY was derived from MONETA = another name for JUNO
(the wife of the highest Roman God Jupiter) in whose temple, the first money was coined.

Credit Stage = this stage does not use cash mainly for its transactions but uses any of its legal
substitutes such as: checks, drafts and acceptances. CREDIT - is the ability of a person to obtain goods,
money and services in exchange for a promise to pay in the future. It is originated from the word "CREDITUM"
= which means "TRUST". Therefore, it is evident that the first consideration in granting credit would be the
presence of trust and confidence.

Money came into existence as a result of the difficulties encountered in the barter system. In order to
supplement our money supply and to enhance production, credit came about as a substitute for the regular
medium of exchange.

A. MONEY DEFINED, ITSs CHARACTERISTICS & FUNCTIONS:

Money- is defined as anything that is authorized by law to be generally accepted as medium of exchange and
as standard of value within a given political territory at a given time. MONEY- was derived from MONETA -
another name for JUNO (the wife of the highest Roman God Jupiter) in whose temple, the first money was
coined.

CHARACTERISTICS OF GOOD MONEY:

1. General acceptability. This is the most important quality of good money because on it, depends its
function as medium of exchange. It refers to already acceptance or receipt of money in the settlement of his
claims.

➢ BSP notes and coins are generally accepted because of Republic Act. No. 265, amended by RA #
7653, Sec. 52 states "That all notes and coins issued by the Bangko Sentral ng Pilipinas shall be fully
guaranteed by the government of the Republic or the Philippines and shall be legal tender in the
Philippines for all debts, both public and private."

25 c - above = shall be legal tender in amounts not exceeding P 50.00

10 c -less = shall be legal tender in amounts not exceeding P 20.00

2. Durability of Money. It refers to its quality to withstand the normal wear and tear when used in
transaction, therefore, it is implied that BSP notes have an estimated life of five (5) years and coins for ten (10)
years. (Sec.57 of RA # 7653)

3. Portability of Money. This refers to its quality of being easily transferred from place to another for the
purpose of settling any kind of transaction. Materials used, like metal alloys must not be bulky, for higher
denominations, paper-based materials are preferable for easy transport.

4. Divisibility of Money. This means that money could be divided into as many different smaller
denominations to enable traders to settle any size of obligation or collect claims arising from their various
transactions. (Sec. 48 of RA # 7653)

5. Cognizability of Money. Money could be easily recognized, determined or distinguished from the
counterfeit or fake money.

Recognizing the Genuine Money:

➢ Paper. The genuine note is printed on a special kind of paper which is rough when you run your
fingers thru it. It does not glow under the ultraviolet light. During the paper manufacture, the watermark,
security threads and iridescent band are included.

➢ Watermarks. The watermark is the silhoutte of the portrait appearing on the face of the note. Sharp
details of the light and shadow effect can be seen when the note is viewed against the light. The
contours of the features of the silhoultte can be felt by running the fingers over the design on relatively
new notes.

➢ Security Fibers. Embedded red and blue visible fibers are scattered at random on both surfaces and
can be readily picked off by means any pointed instrument.

➢ Embedded Security Thread. This is a special thread implanted vertically off center of the note during
paper manufacture. It appears as a broken line for 5's, 10s and 20's and a continuous line for 50's,
100's, 200's, 500's and 1000s.

➢ Windowed Security Thread. The windowed security thread is a narrow security thread vertically
located like "stitches" at the face of the note with clear text of the numeral value in repeated sequence
and changes in color from magenta to green or green to magenta depending on the angle of view.
Appears on improved version of 100-, 500- and 1000- piso notes and the new 200- piso notes.

➢ Iridescent Band. A wide glistening gold vertical stripe with the numerical value printed in series.
Appears on improved version of 100-, 500- and 1000- pis0 notes and the new 200- piso notes.

➢ Printing. The registry of the different printed features is well defined, sharp and distinct. The fingers
can readily feel the main prints on the front and back of relatively new notes brought about by the
measurable thickness of the ink deposited on the paper which gives the print an embossed effect.

➢ Portrait. Appears life-like. The eyes "sparkle". Shadings are formed by the fine lines that give the
portrait a characteristics facial expression which is extremely difficult to replicate.
 ➢ Serial Number. Composed of 1 or 2 prefix letters and 6 or digits which are clearly printed. The letters
and numerals are uniform in size and thickness, evenly spaced and well-aligned; and glow under the
ultra-violet light. A banknote with six "0" digits serial number is a specimen note and not legal tender.

➢ Background/Lacework Design. The background designs are made up of multi- colored and well
defined lines. The lacework designs are composed of fine, web-like crisscrossing lines which are
continuous and traceable even at the intersection.

➢ Vignette. The lines and dashes composing the vignette are fine, distinct and sharp the varying color
tone gives a vivid look to the picture that makes it stand out" of the paper.

➢ Value Panel. These are the numerals found at the four corners or the front and back of the note
denoting the denomination.

➢ Color. Genuine notes have multi- colored background with one predominant color for each
denomination enumerated hereunder. The shifting of color in the background design is gradual.

Denomination Color
1000-piso BIue
500-piso Yellow
200-piso Green
100-piso Mauve (violet)
50-piso Red
20-piso Orange
10-piso Brown
5-piso Green
* The BSP has stopped printing these banknotes and are being replaced by coins; however, the
existing 10- and 5-piso notes remain legal tender.

➢ Fluorescent Printing. Fluorescent print is the invisible numerical value that appears off center of the
face of the note and glow when exposed to ultraviolet light. Imitated by using a commercially available
fluorescent ink. Fluorescent is less intense and the shape is irregular.

➢ Micro-printings. Micro-prints are the minute and finely printed words "Central Bank of the Philippines"
located at the face or back of the note that are present only on 50, 100, 200, 500, and 1000
denominations. They are not as clear and fine as the genuine and are often not readable.

➢ Concealed Value. Found only in 500-piso denomination. This concealed value is located at the lower
left corner of the face of the note and recognizable when the note is held at eye level. The figure "500'
is not recognizable as in the genuine when held at eye level.

6. Homogeneity/Uniformity of Money. This means that each piece of coin or paper bill of the same
issue and denomination must be the same in all respect in size, shape, color, design, weight and value.

7. Convertibility of Money. Money as a medium of exchange is freely exchangeable into other freely
convertible currencies e.g. US dollar, Hong Kong & Singapore dollar, Kuwaiti dinar, riyal, baht, yen, euro, etc.

8. Stability of the value of money. This is very important for the attainment of a stable economy. It refers
to money's purchasing power maintained to a fairly constant level at reasonably long period of time. In short,
the value of money (in terms of goods and services given in exchange for a unit of money) does not easily
fluctuate from time to time. (Sec. 64 & 65 of RA # 7653, International Monetary Stabilization)

9. Elasticity of money supply. This refers to money's quality to respond to the needs of the economy when
the monetary authority arbitrarily changes its supply. This means that the volume of money in circulation could
be easily controlled or expanded in relation to the needs of the economy.

FUNCTIONS OF MONEY:
1. as a medium of exchange. This is the most important function of money because money facilitates
exchange - for it is an instrument by which we can obtain the goods and services that will satisfy human
wants This means that money is an accepted means of payment for goods and services.

2. as a standard of value. Money facilitates the measure of the relative value of goods and services for it
is an instrument/yardstick by which we can measure the value of the goods and services that will satisfy
human wants.

3. as a store of value. Money represents the value of goods that are produced and or services reserved
by the owner. Such value is reserved up there for future use. This could be done by (a) saving and (b)
investment. It is a reservoir of future purchasing power. This means that money can be kept today and
be spent at a later period of time with the assurance that the same amount of goods & services that
money can buy today can still be bought at that future period of time.

4. as a standard of deferred payment. This function refers to money- serving to measure the extent of
obligations of borrowers and the extent of claims of creditors.