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 Primitive
of hunting, fishing, and simple agriculture. There was little need or occasion to exchange
goods or services.

As economies became more developed, and some men specialized - to some

degree, at least - the process, of exchange became more important. To help facilitate this
exchange of goods for goods, or barter, tables of relative values were developed from
experience. For example, the table might show the measure of grains, amount of cloth, and
the like as equal to one cow or sack of sugar. This arrangement helped facilitate exchanges,
but the process had many serious drawbacks. For example, if a man had a cow which he
wanted to trade for some nuts, he would need to find someone who had an excess of nuts to
trade. The need for a simple means of exchange led to the development of money. Thus,
money became a major tool for facilitating transactions.

Money is commonplace yet mysterious. Even common usage of the word often
indicates confusion between money and income and money and wealth (Hadjimichalakis,
1995, p.3).

For example, when we say a woman makes a lot of money, we may mean that she
earns a high income from her job as a lawyer. On the other hand, when we say a man has a
lot of money, we may mean that he has accumulated a lot of savings or wealth as money is
one form of wealth. Money is defined as anything authorized by law to be generally accepted
as a medium of exchange and a standard of value and has no reference to the general
standing of the person who offers it as payment for goods and services.

FUNCTIONS OF MONEY

Money has several functions:

Medium of Exchange. Money facilitates buying and selling. It is used to pay for or settle
obligations. Because it is acceptable as payment for goods and services, it serves as a
physical means for conducting business transactions. The use of money makes purchases
and sales possible. In addition, money reduces the time spent on a transaction. As a
transaction medium, money is means of repaying debts or the exchange of assets, such as
shares of common stock. Throughout history, the medium of exchange has taken many
forms - commodities, precious metals, paper, and even mere entries in ledgers accounts.
Societies began to designate as media of exchange commodities that were nonperishable,
divisible, and in great demand. In pre-historic times, such commodities included feathers,
livestock, grain, stones, and metals. Soon, these items were replaced by precious metals,
such as silver and gold, which were in use until the twentieth century.

The prolonged use of money as a commodity suggests that a medium of exchange must be
scarce for it to be valuable, divisible for it to be used for small and large purchases, portable
for it to be carried around by traders, and non-perishable (storable) for it to last over time.
Precious metals, especially gold, were commodities of choice, but the limited supply required
monetary authorities to devise new forms of money, like paper money, the supply of which
can be increased easily and inexpensively.

Unit of Account or Standard of Value. Money serves as a yardstick for measuring prices and
values when comparing items. In principle, any commodity can serve as a unit of account.
Goods and services are expressed in relative values of money. Their prices are related to
the value of money, which serves as the measuring stick. When measuring weight, kilo is the
unit of account, when measuring distance, kilometer. Similarly, when we measure the value
of a haircut or a steak, we employ a unit of account, that is, the amount of money needed to
acquire the product or service. We measure the values of items we want to acquire in terms
of one commodity-money.

Store of Value. Money is a reservoir of future purchasing power. It is both a temporary and a
permanent store of purchasing power. A person who saves a portion of his income is storing
the purchasing power of his money temporarily. A person who puts in more money to carry
out a transaction in stocks, bonds, or real estate is also storing the purchasing power of
money. The ability of money to serve as a store of value depends on its capacity to retain its
purchasing power. When the purchasing power of money drops, as when the prices of goods
and services rise rapidly, the public does not want to hold money as a permanent store of
value and even shortens the amount of time it holds money as a medium of exchange.

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. In an economy with developed financial
institutions, there exists a multitude of financial assets which serves as a means of storing
wealth, including various types of short-term securities, bank deposits, and stocks.

Standard of Deferred Payment. Money is used as a medium 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 the standard of deferred payment means that promises to
pay at are expressed in money value.

CHARACTERISTICS OF GOOD MONEY

Good money has two characteristics:

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 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 and in amounts not exceeding Twenty-pesos (Php20.00) for
denominations of Ten centavos or less."

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 there be visible and
recognizable.

Section 57 of the New Central Bank Act, Retirement of Old Notes and Coins, states: "The
Bangko Central may call in for replacement 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.
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.

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."

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."

In judging the adequacy of the international reserves, the Monetary Board shall be guided by
the prospective receipts and payments of foreign exchange by the Philippines. The Board
shall give special attention to the volume and maturity of the Bangko Sentral's own liabilities
in foreign currencies, the volume and maturity of the foreign exchange assets and liabilities
of other banks operating in the Philippines, and, insofar as they are known or can be
estimated, the volume and maturity of the foreign exchange assets and liabilities of all other
persons entities in the Philippines.

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.

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 inscriptions. Paper bills
of the same denomination must possess uniform design, size, color, and other physical
characteristics.

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 to 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 the possibility of counterfeiting.
IMPORTANCE OF MONEY

Without money, individuals would have to devote more time to buying what they want
and selling what they do not want. Money simplifies matters. Workers are paid in money,
which they can then use to pay bills and make purchases. Money becomes the medium of
exchange. Goods and services are then expressed in terms of money, a common
denominator.

One of the most important things about the medium of exchange is that 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 they are certain that it can be passed on to others. Also,
they will be more willing to accept the medium of exchange if they are certain of its worth in
terms of acquiring things that they want. The uncertainty of barter transactions makes people
wary of exchange. Money meets the low-uncertainty-high-exchangeability requirement. It
frees people from spending much time bartering goods and services and allows them to
pursue other endeavors. People use money as a medium of exchange, not because it has
intrinsic value, but because it can be exchanged for things to eat, drink, wear, and play with.
The value of a unit of money is determined, therefore, by the price of each and every good
or service or, more accurately, the average level of all prices. If prices go up, a unit of money
is worth less because it will buy less; it prices go down, money is worth more because it will
buy more. Thus, the value of money varies inversely with the price level.

Money also contributes to economic development and growth. It does this by

stimulating both savings and investment and facilitating transfers of funds from savers to
borrowers, who want to invest but do not have enough money to do so. Financial markets
give savers a variety of options to lend to borrowers, thereby increasing the volume of both
savings and investment and encouraging economic growth.

In a monetary economy, a person accumulates savings in cash because money is a

store of value. Through financial markets, this surplus cash can be lent to a business firm to
invest in new equipment. Both the saver and the business firm are better off. The only way
an economy can grow is by allocating part of its resources to the creation of new and more
productive facilities.

Channeling of funds from savers to borrowers through financial markets reaches

highly complex dimensions. A wide variety of financial instruments, such as stocks, bonds,
and mortgages, are utilized as devices through which borrowers can gain access to the
surplus funds of savers. Various markets specialize in trading one or the other of these
financial instruments. Financial institutions, such as commercial banks, savings banks,
savings and loan associations, credit unions, insurance companies, mutual funds, and
pension funds, act as intermediaries in transferring funds from ultimate lenders to ultimate
borrowers. Such financial intermediaries themselves borrow from saver-lenders and then
lend the funds to borrower-spenders. None of these would be possible without money.

Laws related to our Philippine Monetary System are the following:

1. Philippine Coinage Act of 1903. This provided that

• gold coins contain 12.9 grains of gold and .9 fineness.
• silver coins contain 416 grains of silver and .9 fineness.

2. US Coinage Act of 1903. Philippine money was redeemable in drafts or checks payable in
full gold standard currency. In order to maintain the value of peso against gold, a
currency reserve fund known as "Gold Standard Fund" was set up.
3 Gold Reserve Act of 1934. Under this monetary standard, the Philippine currency was not
redeemable in gold but in dollars. Dollars devaluated by forty-one percent, and the
US government was given title to all gold coins, bullion, and certificates held by
Federal Reserve Banks.

4. Dollar Exchange Standard. Philippine currency was redeemable in dollar instead of gold.
Currency issued was backed up by silver coins and dollars on demand.

5. Mickey Mouse Notes. The Japanese military government issued paper bills called Mickey
Mouse notes. These were not legal tender, but Filipinos used them lest authorities
penalize them for non-cooperation. From 1946 to 1949, money supply increased
tremendously.

6. Managed Currency System. With the creation of the Central Bank, the country’s monetary
system and banking system were reorganized. The Central Bank Act, Republic Act
No. 265, was enacted. This placed banks in a better position to meet the credit needs
of existing business enterprises and new development projects. When the Central
Bank started operations, it assumed the liabilities of the Exchange Standard Fund for
all treasury certificates and coins in circulation. Chapter 2 of the Central Bank Act
defines the monetary unit as "peso," represented by P, and divided into one hundred
equal parts called "centavo," represented by 'c’.

COINAGE

The manufacture of money is done in a mint, and the process is called minting or
coining or coinage. It 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.

As the government has the exclusive right of coinage, any private coinage is
counterfeit, and, if the government is coining freely and gratuitously, it may be assumed that
counterfeit coins have fall under the standard weight and fineness. Counterfeit coins may
have the full legal weight of standard metal and still be profitable because the cost of private
manufacture is less than the seigniorage charged by the government. A high seigniorage
creates a temptation to counterfeit. One of the objectives in the manufacture of money is to
give it a shape, adesign, 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, the copper, and the seigniorage is high, preventing abrasion,
chipping and other damage is not important. The harder the material, the less the wear-and-
tear. Pure gold and silver are very soft, so it is necessary to harden them by adding copper,
nickel, tin, or zinc. The cheaper metals are so small in quantity and so inexpensive that they
do not affect the value of gold and silver coins. The ratio of the weight of pure metal to total
weight of a coin is called fineness and is expressed as a decimal, tenths, or carats.

Given free coinage, a seigniorage charge increases the value of the coined metal by
the amount of this fee. For instance, if the government allowed the holder of standard gold
bullion a gold coin weighing 25.8 grains and having a fineness of 0.9, for every 30 grains of
standard gold offered at the mint, 25.8 grains would have the same debt-paying power and
the same purchasing power as would 30 grains of uncoined metal. If the gold coin were to
be melted and the bullio sold, 4.2 grains on the value will be lost (30-25.8) from the standard
gold as it would then require 30.0, not 25.8, grains to get the money value back. The
followingare the principles of a subsidiary coinage articulated by Dr. Neil Carothers, following
hisintensive 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 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 multiples of
five.
• The coins should be convenient in size, attractive in appearance, durable in use and
individual in design.

KINDS OF COINAGE

Coinage has three kinds:

Free coinage. The government defines sizes, shapes, weight and designs of coins but
allows individuals to bring their precious metals to the mint to convert such into standard
coins. Owners of these metals are charged with brassage or seigniorage fee.

Gratuitous coinage. Total responsibility for minting is borne by the government.

Limited coinage. Government purchases precious metal in an open market and mints them
as a medium of exchange at face values higher than its material content to facilitate trade.