Module 1

ROLE OF MONEY IN OUR ECONOMIC SYSTEM

Money is considered as the most important commodity in any person’s life. Money, in
itself is nothing. It is a shell, a metal coin or a piece of paper with historic image on it but the value
that people place on it has nothing to do with its physical value.
Money has always been recognized as an essential tool in a specialized economic society.
Its value derives from being a medium of exchange that is widely acceptable for the payment of
goods and services, used as a unit of measurement and a storehouse for wealth.
Money allows people to trade goods and services and understand the prices of goods.
Overtime, it became a commodity that controls most aspects of the human existence, both for good
and evil.

Development of Monetary System

A person couldn’t provide everything that he needs by himself, thus direct exchange of
goods and services emerged in primitive societies to aid their necessities before the use of money
facilitated the trade of these courses.
Barter System was the first stage of monetary development. It is a system of exchange in
which goods are swapped for goods, services for services, goods for services and services for
goods. The reciprocal exchange is usually bilateral but may be multilateral which results to the
complication and complexity of this system. This causes the society to look for another system of
acquiring goods and services.
Reasons for the Abandonment of Barter System:
1. It was difficult to look for that person who has the things you need and who also wants
the things you are offering for exchange.
For a barter to occur between two parties, there must be a mutual coincidence and
both parties need to have what the other wants. But this scenario is problematic. For
example is a fisherman wants to exchange his fish for a rice, but found a farmer who
wants to exchange his rice for meat. So the fisherman looks for someone who wants
his fish and who has meat, so that he can make a preliminary trade with that person
before he can finally get his rice.
2. There is no common denominator to measure the value of goods and services sought
for exchange.
The lack of measure of value of all goods made it difficult to determine how much
should be exchanged. An example of this is even though food, rice, in particular, is a
primary need for Filipinos, five kabans of this (which costs 5,000 pesos if there is a
measure of value) doesn’t justify a trade for one smartphone (which costs 20,000 pesos
to manufacture).
3. Most of the goods traded have unequal values.
Some goods are indivisible and a barter of unequal goods are difficult. For instance,
if the price of a book is equal to the price of three shirts, then a person having one shirt
cannot swap it for a few chapters of the book.
4. It is time consuming, cumbersome and very in convenient for individuals to use the
barter system.
 It is laborious to transfer goods and services to one another.
5. It lacks generalized purchasing power.
Since barter is only possible to the extent of how much you are willing to give up
and the value of what you’ll get in return couldn’t be determined, the purchasing of the
goods and services you have cannot be established.

Evolution of Money
People search for ways to make transactions easier and they found that certain items made
it easier to manage business. Certain goods like spices, leather, rice or the community’s main
product are considered as commodity money.
After the commodity money, people use precious metals such as gold, silver and copper.
This evolution posed one problem, it is that metals were very heavy to carry and hard to conceal
so the goldsmiths helped develop the use of money by accepting gold bullions for safe-keeping
and converted these gold into coins or he would just issue receipts representing the gold deposits.
These receipts became a negotiable instrument because it was a bearer instrument and later,
the goldsmiths found out that not all depositors withdraw their gold at the same time so some
receipts were sold to people who needed funds. These receipts were interest bearing. Originally, a
goldsmith was being paid a storage fee for the gold but when people came to realize that the
goldsmiths was making a money out of gold deposited, they required him to share with them a part
of the interest he earned. And this is how banking started.
Today, the sole power of issuing notes and coins lay on the government of a country. In
the Philippines, the security mint is manage by the Bangko Sentral ng Pilipinas.

Significance of Money
Money is nothing more than a medium of exchange. People exchange goods and services
for money in return. It’s the goods and services which the people really want and not money. But
it is impossible to attain and satisfy these wants without money so it’s this instance that gives
money a great importance.
The existence of money helps the consumer to maximise his satisfaction by easily spending
his given money income on various goods in such way that these marginal utilities goods are
proportional to their prices. Parallel to this, the producer of goods could easily decide levels of
output which maximises his profits by equating marginal cost with marginal revenue.
Another significance of money is that it contributes to the increase in savings of the
economy. This increase leads to the increase in investment which determines economic growth of
the country.
Money has become a very important moving factor in our modern society. Without money,
the modern economic life based on the complex division of labour or specialization which has
added so greatly to productivity of the economy will not be possible.
There are also negative effects of money. The excessive desire for wealth or money can
cloud moral judgment. In the case of some businessmen and manufacturers, this extreme aspiration
for money income sometimes induces them to sacrifice the quality of the products.
The pursuit of money can also become a compulsive behaviour and may cause a sense of
moral entitlement. Money prices and money incomes become a measure for judging people and
things that causes the tendency of the society to become too materialistic and results to the
depletion of our natural resources.
Functions of Money
1. As a medium of exchange
The most important function of money is a medium of exchange to facilitate
transactions. It is used to intermediate the exchange of goods and services and it avoids the
inefficiencies of the barter system such as the dependence on the occurrence of a
coincidence of wants.
2. As a standard to measure the value of goods and services (A unit of account)
Money provides a common measure of the value of goods and services being
exchanged. The monetary unit of the country is used as a standard of value.
3. As a store of value
Money can be kept for future use though it may not be the best store of value because
it depreciates with inflation. However, it is more liquid than most other stores of value
because it is readily accepted as a medium of exchange.
4. As a means of deferred payment
Money enables people to buy goods on credit. Goods and services can be obtained at
the present time in exchange for a promise to pay at a future date.

Attributes of Good Money

1. General Acceptability
Good money should be acceptable to everybody in a specific territory. It refers to the
willingness of people to accept the money in exchange of goods and services. It is the very
essence of the money and the most important attribute of money, readily acceptable in all
types of transactions. In our society the widely accepted money are:
You should be able to buy something with it, and you should be able to accept it if you
sell something. That is why money is considered as most liquid of all assets.
2. Stability of Value
Before a particular kind of money becomes acceptable, it must first have a stable value.
The purchasing power of money should not change abruptly. If ever there will be changes,
such change should be gradual.
Money must have a stable value because it serve as a standard for measuring the value
of other things.
3. Portability
This refers to the quality of money being easily carried from place to place. It is
important that the material used as money should conform with this characteristics.
The commodity fit to be used as money must be such it can be easily and economically
transported from one place to another.
4. Cognizability
The money circulating within a country can be easily distinguished from other kinds of
money. A fake bill can be recognized from a genuine bill.
As a medium of exchange, money has to be continually handed about and it will cause
great inconvenience if every person receiving it has to scrutinize, weigh, and test it, that’s
why it should have a certain distinct marks which nobody can mistake.
A method of determining the fake bill from a genuine one is through security design in
the network which is only known to experts who are authorized by the Central Bank.
 5. Divisibility
The material used as money must be capable of being divided into smaller
denominations without impairing or destroying the value of the whole. The aggregate value
of the money after division should be exactly the same as before.
The small units of money are needed for making small payments.
 A hundred peso bill can buy exactly the same as five(5) twenty peso bill
 A thousand peso bill can be divided as two(2) five hundred peso bill, ten(10)
hundred peso bill or twenty (20) fifty peso bill.
6. Homogeneity
The material used as money should not only be capable of being divided into equal
parts or smaller units, but that such equal parts should have equal weight and fineness, and
must be made of the same material and possess equal value.
The material used as money must be of the same quality; otherwise it will lack general
acceptability. The size, weight, texture of the currency notes are kept same so that everyone
accepts it in confidence
7. Elasticity
This characteristic refers to the volume of money being capable of manipulation by
monetary authorities. Money supply can easily be increased or decreased depending upon
the needs of our economy.
The supply of money should always be elastic, meaning it should respond to changes
in general needs of economy.
8. Durability
This characteristics enables money to withstand wear and tear. The paper money used
by almost all countries of the world is made of a special kind of paper, which has extra
strength to withstand usage. It does not easily decompose, deteriorate, degrade or otherwise
change form.
Three main forms of money:
 Paper money and coins – last a longtime, even if they are damaged new versions
can be easily printed.
 Bank Deposits – money is an electronic medium, hence cannot suffer physical
damage.
The Philippine paper currency is made up of 80% cotton and 20% abaca.

Kinds of Money
1. Commodity Money
This is the type of money that has a commodity value or a value of its own. In order
for it to circulate, the commodity value should equal its money value.
Simplest kind of money which is used in barter system where the valuable resources
fulfill the functions of money. Whether any commodity is used or the exchange purposes,
the commodity becomes equivalent to money and is called commodity money.
Disadvantage:
 They tend to have distinct borders. If you have a large amount of grain that you
want to trade for a new a cow, for example you would have to find someone who
wanted to take that grain. If every single other person you knew had no use for a grain,
then you wouldn’t be able to make a trade.
2. Credit Money
This is the credit instrument that is widely acceptable in payment for goods and services
and in the settlement of existing debts and obligations.
The three types of credit money are:
 Representative Paper Money
It is backed up by 100% gold or silver reserves. The money circulates in a
country adopting the full gold or silver standard.
It represents a claim on commodity and it can redeem for that commodity at a
bank. It is a token or paper money that can be exchanged for a fixed quantity of
commodity.
 Fiduciary Paper Money
It is backed up by partial gold or silver reserve. The kind of money circulated
in the Philippines when the country adopted the gold exchange standard.
It originated as a paper certificate that was a promise to pay a certain amount of
gold or silver to the bearer. From the Latin word “fiducia” which means confidence
or trust.
 Bank Notes
This refers to the promise of a bank to pay the bearer or holder of the note a
sum certain in standard money upon demand or upon the presentation of the note.
3. Fiat Money
This is the kind of paper money issued by a government edict or decree. It is most often
issued during a war whereby the occupying country circulates a kind of paper money whose
money value has no relationship at all with its intrinsic value.
Fiat money means “command in sovereign”, it does not have any intrinsic value and
cannot be converted into valuable resources. A government order determines its value. It
means that only government can make it a legal instrument for any transaction.

4. Legal Tender Money

This is the kind of money that circulates because of its legal tender power. By legal
tender we mean that the debtor is authorized by law to offer it in payment of his debt or
meet his financial obligation. The national currency is legal tender in practically every
country.

Coinage
It is the process of making uniform coins from metals and stamping them with a specific
design as a guarantee of its weight and fineness and the integrity of the country it represents.
 The coin is the product of coinage. It is defined as a mass of metal cast in some convenient
shape with a definite weight and fineness, which is guaranteed by the government and has a
particular design and denomination intended as money.
Fineness is defined as the ratio of pure gold and silver to the total weight of the coin. The
value of the Philippine peso in 1934 was 12.9 grains of gold 9/10 of which is pure gold and 1/10
of which is alloy. But now, mint is a place or a factory where coins are manufactured or minted. It
is usually operated by the government.
The actual manufacture of coins is done at the mint. The metals are cast into bars or
sometimes called ingots. The ingots are made into strips with thickness of the desired coins. Blank
coins are punched out of the strips of metal.
After being punched out, the coins are rolled to produce their raised edge, which is called
upset rim. This is done under heavy pressure. Finally, the design is stamped in the blank coins.
The silver coins have grooves or reeding on their edges so it will be evident if any part of the coin
has been shaved off.
Coins are made of metal alloys rather than pure metal so as to give them durability. The
silver peso issued by the treasury in 1934 contained 80% silver and 20% alloy. Denominations
from 10 centavos to 50 centavos contain 75% silver and 25% alloy.
The intrinsic value of the metal in the coin is less than the face value of the coin or the
value assigned to the coin.

Kinds of Coinage
1. Gratuitous Coinage or Free Coinage
It is a system whereby money metals or metals may be brought to the government mint
and converted into standard money without any charge or any expense for minting except
for the delay involved in the process.
2. Brassage
A kind of coinage where the fee charged by the government to mint metals into coins
is just sufficient to cover the cost.
3. Seignorage
A kind of coinage where the fee charged by the government is more than the cost of
minting so here, the government earns a profit.
4. Limited Coinage
It is a system adopted by a country whereby the government converts metals into coins
only at its option hence creating a limited coinage. Limited coinage is done only by
governments account. Under this method public is not allowed to offer bullion for being
converted into coins.
Such coins normally bear a heavy seignorage charge, which means that their face value
is considerably greater than the value of the metal they contain.

Detecting Counterfeited Bills

 Paper currencies are quite difficult to counterfeit as security features have been
incorporated in to design. The best way of determining if a bill is counterfeited or not is by
comparing it to a bill known to be genuine.

These are some of the security features present in Philippine peso bills:
1. Embossed Prints: The embossed or raised print nature of the ink deposition combined with
the quality of cotton-based paper gives the traditional banknote a unique tactile effect that
makes it the first and most important line of defence against counterfeiting.
2. Asymmetrical Serial Number: Alphanumeric characters at the lower left and upper right
corners of the note bearing one or two prefix letters and six to seven digits, with font
increasing in size and thickness.
3. Security Fibers: Visible red and blue fibers embedded on the paper and randomly scattered
on the face and back of the note.
4. Watermark: Shadow image of the portrait with the highlighted denominational value that
is particularly seen against the light from either side of the blank space of the note.
5. See-through Mark: The pre-Hispanic script (Baybayin) at the lower right corner of the face
of the note slightly above the value panel. This is seen in complete form only when the
note is viewed against the light. This script means “PILIPINO”.
6. Concealed Value: The denominational value superimposed at the smaller version portrait
at the upper left portion of the note. This becomes clearly visible when the note is rotated
45 degrees and slightly tilted.
7. Security Thread (Embedded or Windowed): Embedded thread that runs vertically across
the width of 20- and 50- piso notes when viewed against the light. Also, stitch-like metallic
thread on the 100-, 200-, 500-, and 1000- piso notes which changes color from red to green
and bears cleartext of “BSP” and the denominational value on the obverse and “BSP” on
the reverse, both in repeated series.
8. Optically Variable Device (OVD) Patch: Found only in 500- and 1000- piso notes, this
patch is a reflective foil, bearing the image of the Blue-naped parrot for 500-piso/ clam
with the South Sea pearl for 1000-piso, changes color from red to green when note is
rotated 90 degrees.
9. Optically Variable Ink: Found only in the 1000-piso note, this embossed denominational
value at the lower right corner of the note changes color from green to blue when viewed
at different angles.

Coins

Genuine coins show an even flow of metallic grains. The details of the profile, the
seal of the Republic of the Philippines, letterings and numerals are of high relief, that they
can be readily felt distinctly by running the fingers on these features. The beadings
composed of tiny stars on the ABL series and dots on the Pilipino series are regular and
the reedings are deep and even.

Most counterfeit coins feel greasy and appear slimy. The letterings and numerals
are low and worn out due to lack of sharpness and show signs of filling. The beadings look
as irregular and elongated depressions and are not as sharp and prominent as in the genuine.
Reference:

Financial System, Market and Management, Laman et al 2013