CHAPTER 1: INTRODUCING MONEY

I. DEFINITION OF MONEY
Money can be defined as any generally accepted medium of exchange for goods and
services within an economy.
It is a tool that facilitates trade by eliminating the need for barter, where individuals
would exchange goods directly for other goods.
Money can take various forms, including physical currency (coins and banknotes), digital
money (electronic transfers and online payments), and even non-traditional forms such as
cryptocurrency.
II. CHARACTERISTICS OF MONEY
1. Acceptability: Money must be universally accepted as a medium of exchange within a
given economy. This means that individuals and businesses must be willing to exchange
goods, services, or assets for money.
2. Divisibility: Money should be easily divisible into smaller units to accommodate
transactions of varying sizes. This allows for flexibility in pricing and enables individuals
to make purchases of different values.
3. Durability: Money should be durable and able to withstand repeated handling and
circulation without deteriorating in quality. This ensures that money remains usable over
time and retains its value.
4. Portability: Money should be easily portable and transportable, allowing individuals to
carry and exchange it conveniently. This facilitates transactions across different locations
and enables mobility in trade and commerce.
5. Uniformity: Money should possess uniform characteristics, such as size, weight, and
appearance, to ensure its authenticity and prevent counterfeiting. Standardized features
make it easier to identify genuine money and maintain trust in the currency.
6. Limited Supply: Money should have a limited or controlled supply to maintain its value
and prevent inflationary pressures. Central banks and monetary authorities typically
regulate the money supply through monetary policy to ensure stability in the value of
money.
7. Fungibility: Money should be fungible, meaning that each unit is interchangeable with
any other unit of the same denomination. This allows for seamless transactions and
simplifies accounting and record-keeping.
8. Store of Value: Money should serve as a reliable store of value, allowing individuals to
save and preserve wealth over time. This requires that money maintains its purchasing
power and retains value over extended periods.
9. Recognizability: Money should be easily recognizable and distinguishable from
counterfeit or fraudulent forms of currency. Clear markings, security features, and official
endorsements help to verify the authenticity of money.
III. FUNCTIONS OF MONEY
1. Medium of Exchange
Money serves as a universally accepted medium of exchange, enabling individuals to
trade goods and services efficiently.
Without money, economies would rely on cumbersome barter systems, where
individuals would need to find direct matches for their desired trades.
Money eliminates the need for a double coincidence of wants, making transactions
smoother and more convenient.
 Example: A farmer can sell crops for money and then use that money to purchase clothing,
rather than having to find a tailor who needs crops in exchange for clothing.
2. Unit of Account
Money provides a standardized unit of measurement for expressing the value of
goods, services, and assets.
By denominating prices in a common currency, individuals can easily compare the
value of different goods and make informed economic decisions.
Prices serve as signals in the market, conveying information about relative scarcity,
demand, and production costs.
Example: A consumer can compare the prices of various brands of smartphones to determine
which offers the best value for their budget.
3. Store of Value
Money serves as a store of value, allowing individuals to save purchasing power for
future use.
Unlike perishable goods or assets subject to depreciation, money retains its value over
time, preserving wealth.
However, inflation and fluctuations in the value of money can erode its purchasing
power, necessitating prudent financial planning and investment strategies.
Example: Saving money in a bank account or investing in assets such as stocks or bonds can
help individuals preserve and grow their wealth over time.
4. Standard of Deferred Payment
Money facilitates transactions where payment is delayed or scheduled for a future
date.
Contracts, loans, and financial agreements often specify payment terms in monetary
terms, providing certainty and enforceability.
Money's stability and acceptance make it a reliable medium for honoring financial
obligations over extended periods.
Example: A mortgage agreement specifies the repayment of the loan in monthly installments
denominated in the local currency.
IV. EVOLUTION OF MONEY
Pre-colonial Period: Before the arrival of Spanish colonizers in the 16th century, various
indigenous communities in the Philippines used a barter system for trade. They exchanged goods
such as gold, pearls, agricultural products, and other commodities.
Spanish Colonial Era (16th to 19th Century): With the arrival of the Spanish, the Philippines
came under the influence of the Spanish colonial government and the Spanish currency system.
The Spanish introduced silver coins known as "pesos" and gold coins known as "escudos," which
became the primary medium of exchange in the islands.
American Period (late 19th to mid-20th Century): After the Spanish-American War in 1898,
the United States gained control of the Philippines. During this period, the American colonial
government introduced the Philippine peso as the official currency in 1903, pegged to the US
dollar. The Philippines also issued its own coins and banknotes.
Japanese Occupation (1942-1945): During World War II, Japan occupied the Philippines and
introduced its own currency, the Japanese-issued Philippine peso. This period was marked by
economic turmoil and instability.
Post-Independence Era (1946 to Present): The Philippines gained independence from the
United States in 1946. The Central Bank of the Philippines was established in 1949, and the
Philippine peso continued to be the official currency. Over the years, the country has seen
various economic policies, currency devaluations, and reforms aimed at stabilizing the economy
and managing inflation.
Modern Era: Today, the Philippine peso (PHP) remains the official currency of the country,
with banknotes and coins issued by the Bangko Sentral ng Pilipinas (Central Bank of the
Philippines). The peso is subdivided into 100 centavos. Alongside traditional currency, electronic
banking, digital transactions, and mobile payments have become increasingly popular, reflecting
global trends in financial technology.
The Philippines' rich history and cultural diversity have influenced the evolution of its monetary
system, with each era leaving its mark on the country's currency and financial infrastructure.
V. DEMAND AND SUPPLY FOR MONEY
Money facilitates the flow of resources in the circular model of macroeconomy. Not
enough money will slow down the economy, and too much money can cause inflation because of
higher price levels. Either way, monitoring the supply and demand for money is vital for the
economy`s central bank`s monetary policy, which aims to stabilize price levels and to support
economic growth.
The demand and supply of money operate within the broader framework of the country's
monetary system and economic conditions.
KEY MEASURES FOR MONEY SUPPLY
1. M1 – The narrowest measure of the money supply. It includes currency in circulation
held by the nonbank public, demand deposits, other checkable deposits, and traveler`s
checks. M1 primarily to money used as a medium of exchange.
2. M2 – In addition to M1, this measure includes money held in savings deposits, money
market deposit accounts, non institutional money market mutual funds and other short
term money market assets. M2 refers primarily to money used as a store of value.
3. M3 – In addition to M2, this measure includes the financial institutions. M3 refers
primarily to money used as a unit of account.
4. L. In addition to M@, this measure includes liquid and near liquid assets.
Supply of Money
1. Currency in Circulation: The Bangko Sentral ng Pilipinas (BSP), the central bank of
the Philippines, is responsible for issuing currency in the country. The supply of physical
currency in circulation is influenced by factors such as economic growth, inflation, and
the demand for cash by households and businesses.
2. Reserves Held by Banks: Commercial banks in the Philippines are required to hold
reserves with the BSP, which are used to maintain liquidity in the banking system and
ensure the stability of the financial system. The level of reserves held by banks depends
on regulatory requirements set by the BSP and the demand for credit in the economy.
3. Deposits and Money Supply Measures: The broad money supply in the Philippines
includes not only physical currency but also various types of deposits held by individuals
and businesses in banks. The BSP monitors and regulates the money supply through
various monetary policy tools such as reserve requirements, open market operations, and
policy interest rates.
Demand for Money
1. Transaction Demand: Like in any economy, individuals and businesses in the
Philippines hold money to facilitate day-to-day transactions. The demand for money for
transactions depends on the level of economic activity, the frequency of transactions, and
the availability of alternative payment methods such as electronic banking and mobile
payments.
2. Precautionary Demand: Given the economic uncertainties that can arise in the
Philippines due to factors such as natural disasters, political instability, and external
economic shocks, there is typically a significant precautionary demand for money.
Individuals and businesses hold cash or liquid assets to meet unexpected expenses or
emergencies.
3. Speculative Demand: The speculative demand for money in the Philippines is
influenced by factors such as interest rates, inflation expectations, and the performance of
alternative investment options such as stocks, bonds, and real estate. Investors may hold
cash or money market instruments as a temporary store of value while awaiting favorable
investment opportunities.
Overall, the demand for money in the Philippines reflects the diverse needs and preferences
of individuals, businesses, and investors, while the supply of money is influenced by central
bank policies, banking regulations, and economic conditions. The interaction between the
demand for money and its supply plays a crucial role in shaping interest rates, inflation, and
overall macroeconomic stability in the Philippines.