Financial Market

06.18.2019
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 History of Philippine Currency and
Philippine Monetary standards
Nature of the Monetary Standard
A country is said to establish a monetary
standard or system when it sets down rules to
govern the creation of money and control the
quantity in circulation.
It starts by deciding its monetary unit
(Philippines = peso)
Standard Money – the monetary unit recognized
by the government as the ultimate basic
standard value.
Philippines:
Monetary system – the managed currency
system
Monetary unit (standard money) – the Peso
Monetary Standard – refers to the currency
system adopted by a country to provide a stable
medium of exchange for domestic transactions
and a means of international payment for
foreign obligations. (A1)
2 Broad Types of Monetary Standards
(A2)
1. Commodity Standard or Metallic Standard
2. Non-Commodity Standard or Fiat Standard

A. Commodity Standard – a monetary system in

which the purchasing power or value of the
monetary unit is equal to the value of a
designated quantity a particular commodity or
set of commodities.
A. Commodity Standard
- Sometimes called the full-bodied money
because it is 100% backed-up by gold or silver
reserves.
- May either be monometallic or bimetallic
Monometallic standard – a one-metal standard
whereby a country uses either gold or silver as a
standard unit of value.
Gold standard – further divided into gold coin
standard, gold bullion standard and gold
exchange standard.
A. Commodity Standard
Silver standard- also divided into silver coin
standard, silver bullion standard and silver
exchange standard.

Gold Coin Standard – when the government

allows the conversion of gold bullions into coins
which are freely obtained by the citizens of a
country in exchange for other forms of money.
The characteristics of gold coin standard: (A3)
1. The monetary unit of the country is stated in
a definite weight and fineness of gold,
2. People are free to convert their bullion into
coins,
3. The government allows gold to be used in
any manner,
4. Gold can be freely imported or exported. This
allows the automatic stabilization of the
domestic value of gold with its foreign value.
5. All other kinds of money and bills circulating
in the country should be exchangeable to gold
coins,
6. Money supply is determined by the amount
of gold reserves the ountry has,
7. There is free coinage of gold whereby any
citizen can convert gold bullion into coins. This is
important because it equalizes the value of gold
as coin with its value as metal,
8. There is free market of gold whereby people
are free to import and export gold.
A. Commodity Standard
Gold Bullion Standard – a system wherein the
monetary unit or standard money of the country
is expressed in a definite weight and fineness of
gold in bar or bullion form.
Assign: What are the characteristics of gold
bullion standard?
What are the advantages and disadvantages of
the gold bullion standard?
Some characteristics of gold bullion standard:(A4)
1. The monetary unit of the country is also
expressed in a definite weight and fineness of
gold, but gold was kept in the form of bars.
2. People were forbidden to coin their gold and all
the gold coins were melted into bars,
3. Redemption of representative money in gold
coins was forbidden except for foreign
transactions subject to the approval of the
monetary authorities.
4. The government fixed the price of gold,
5. The government was required by law tobuy
and sell all gold metals that meets the
requirement of the law as to fineness’
6. Gold may be freely imported and exported,
7. All other currencies circulating in the country
are freely convertible into gold, if the holder can
afford to buy 400 ounces, which is the weight of
one gold bar.
A. Commodity Standard
Gold Exchange Standard – one in which the
monetary unit of the country is expressed in terms
of gold.(A5)
The domestic currency of the country
adopting this monetary standard is interchangeable
for foreign gold drafts at a fixed rate, which in turn
is convertible into foreign currency that is ultimately
redeemable in gold coins or gold bullions.
Reasons why adopt this system – many
countries have difficulty in establishing the gold
coin standard and a change from silver to gold
standard is expensive since the necessary reserved
for gold must be obtained first.
A. Commodity Standard
Classifications of the Gold Exchange Standard:
1.Automatic Gold Exchange Standard- is adopted
by a country that depends on the gold reserves of
other countries. Ex. India is entirely dependent on
the gold reserves of England
2.Managed Gold Exchange Standard –adopted by a
country which can maintain a partial reserve at
home and would still count as part of the reserves,
short-term investments and gold deposits that it
can build up in other countries. Ex. Philippines
related its currency to that of the US.
A. Commodity Standard
Important characteristics of the Gold Exchange
Standard: (A6)
1. Gold does not have to be coined or used as
bullions but the monetary unit of the country
must be defined in terms of a specific quantity
of gold. (In the Philippines, the Peso was
equivalent to 12.9 grains of gold, .9 fine,
whereas the US Dollar was equivalent to 25.8
grains of gold, .9 fine)
2. The Central Bank or Treasury should build up
a credit balance with banks in foreign countries
that adopt coin or gold bullion standard. This
balance can be established by borrowing from
abroad, exporting goods, and investing abroad.
It could also be reduced by importing, paying
foreign obligations, lending money abroad, and
spending abroad.
3. The Treasury or Central Bank buys and sells any
amount of gold draft drawn upon banks located in
the foreign country to which it has related its
currency or to foreign banks located in countries
operating under the gold coin or gold bullion
standard.
4. The government allows the people to export and
import their gold and even to hoard it and use it for
any purpose.
5. All other kinds of currency circulating in the
country can ultimately be redeemed at par in gold
drafts which will eventually be equivalent to gold.
A. Commodity Standard
Bimetallic standard – when each of the two metals
provides the basis for the money in circulation and
the issuer standards ready to buy or sell either of
the two metals at stated prices.(A7)

Bimetallism – may also be defined as a monetary

system in which coins of two different metals at a
fixed legal ratio of weights and fineness are used as
the monetary unit or standard unit of value.
A. Commodity Standard
Legal ratio, coinage ratio or mint ratio –refers to
the ratio between the weights of gold coins and
silver coins in the mint.
Market ratio – refers to the ratio of the value of
gold and silver as being bought and sold in the
market.
A mint ratio of 16 to 1 means that a gold dollar
equivalent to 16 times the value of a silver
dollar.
A. Commodity Standard
Gresham’s Law – states that the bad or
overvalued money drives out the good or
undervalued money from circulation. (A9)
- operates whenever the market ratio of
silver to gold shifts away from the mint or legal
ratio. When:
Value of gold = value of silver then mint ratio =
market ratio, but
Silver becomes over abundant thus reducing its
value and becomes cheaper, silver would tend to
drive the gold coins out of the circulation.
Elaboration: (A8)
If mint ratio were 16 to 1, both gold and silver
circulates but if silver production should expand
and make silver cheaper than gold, making the
ratio 17 to 1, it would be profitable to convert
the gold coins into bullions and exchange it in
the market for 17 to 1. Out of the 17 parts of the
silver, 16 parts are made into silver coins and
replace the gold coins melted, and one part of
silver would be left as a profit. So long as the
market ratio remains sufficiently different from
the mint ratio, the displacement of the dearer
metal by the cheaper metal will continue.
If an increase in the output of gold lowered the
value of gold relative to silver so that the metal
ratio becomes 15 to 1, the reverse will happen.
B. Non-commodity or Fiat standard
- this standard refers to a monetary system
in which the face value of the monetary unit is
much higher than that of the value of the
material used as money.
Essential Characteristics of the Fiat Standard
1. A fiat money is adopted as the standard unit
of value or monetary unit.
2. The fiat money is legal tender.
3. All other money issued by the government is
redeemable in the standard fiat money.
Types of Fiat Standard
1.Utopian Paper Standard or Pure Fiat Standard
- this standard proposes the adoption of
standard money that is desired primarily
because of what it can buy for the individual in
goods and services and for what it is made of,
whether gold or silver.
- more of a theory because it has not yet
been put into use. This theory was the
forerunner of the Involuntary Paper Standard
and the Managed Currency System.
2. Involuntary Paper Standard
- adopted by a country that finds itself in a
dilemma of not being able to redeem its
currency in either gold or silver and so is forced
by circumstance to adopt the involuntary paper
standard.
- often comes during wartime
- Philippines adopted this standard during
the Japanese time from the year 1941-1945
3. Managed Currency Standard (A10)
- this standard espouses the use of an
inconvertible and irredeemable paper money that is
issued against no gold or silver reserves which is
managed by the Central Bank in such a way as to
keep the price levels fairly stable by increasing the
amount of paper money at one time and decreasing
it at another, using the trade and industrial
conditions as barometer.
- people accept this paper money because the
government has given it a legal tender power.
Legal tender power – refers to that power given
to money to settle all obligations whether public
or private.
- this power is given by law
- Philippines adopted this monetary
standard in 1949 and still operates under the
same standard up to the present time.
General Characteristics of the Manage Currency
Standard
1. The paper money is inconvertible and
irredeemable.
2. No reserves are maintained to back up the
domestic money supply.
3. The Central Bank is authorized to exercise
control over the credit system so as to
control money supply.
Objectives of the Managed Currency Standard
In the Philippines, the objective of the Managed
Currency Standard is the same objective of the Central
Bank of the Philippines.
Objectives:
1. To facilitate production
2. To make prices stable
3. To make each and every Filipino maximize his income
4. To promote full employment
5. To have an equitable distribution of wealth in the
country.
6. To preserve the international value of the peso
7. To make the country economically rich, and politically
and militarily strong and powerful.
Advantages of the Manage Currency System
1. Money supply is not dependent on the gold
reserves, but is controlled by the monetary
authorities.
2. There will be greater price stability since prices
depend on the volume of money in circulation.

Disadvantages of the Manage Currency system

1. Since money is not tied up to any reserve, there
is always the danger of over issuance of money
which will lead to inflation.
2. Since foreign exchange rates are not fixed by
the metallic content of currencies, this may
result to an erratic fluctuation of prices.
3. Competitive monetary depreciation might
easily be used by each nation in a fight for world
trade.
4. From a political point of view, it is easier to
issue paper money or what we term “Printing
Press” money than increase taxes.
History of Philippine Currency
Pre-Spanish Regime
Spanish Regime
First Philippine Republic
American Regime
Mexican Silver Dollar or Peso Containing Eight
Reals
Philippine Bank Notes
Dollar Exchange Standard
Japanese Regime
Post War Period
Hawala