MONETARY POLICY AND CENTRAL BANKING

Role of Money in Nation’s Economy

1. Define Money and know its evolution in the Philippines.

2. What are the functions, kinds/characteristics and features of money?

PREPARATION

1. According to Crowther, “Money is anything that is generally acceptable as a

means of exchange (i.e., as a means of settling debts) and that at the same time,
acts as a measure and as a store of value”. Many different things have been
used as money over the year- among them, cowry shells, barley, peppercorns,
gold, and silver.
The evolution of Philippine money was started in pre-Hispanic era where the
early Filipinos and with traders from the neighboring islands was conducted
through barter. The inconvenience of barter later led to the use of some objects
as medium of exchange gold. Piloncitos, small bead-like gold bits considered by
the local numismatists as the earliest coin of the ancient Filipinos, and gold barter
rings. At the end of Spanish regime, Philippine money was a multiplicity of
currencies that included Mexican pesos, Alfonsino pesos and copper coins of
other currencies. The Philippine Republic of 1898 under General Emilio
Aguinaldo issued its own coins and paper currency backed by the country’s
natural resources. One peso and five peso notes printed as Republika Filipina
Papel Moneda De Un Peso and Cinco Pesos were freely circulated. 2 centimos
de peso coppers were also issued in 1899. The Americans instituted a monetary
system for the Philippine based on gold and pegged the Philippine peso to the
American dollar. The US Congress approved the coinage act for the Philippines
in 1903. The outbreak of World War II caused serious disturbances in the
Philippines monetary system. Two kinds of notes circulated in the country during
this period. The Japanese occupation forces issued war notes in big
denominations, provinces and municipalities, on the other hand, issued their own
guerilla notes or resistance currencies, most of which were sanctioned by the
Philippine government in exile and partially redeemed after the war. Under the
Philippine Republic, where having gained independence from the United States,
the country used as currency old treasury certificates overprinted with the word
“victory”. With the establishment of the central bank of the Philippines in 1949,
the first currencies issued were the English series notes printed by the Thomas
De la Rue and Co., Ltd. in England and the coins minted at the US Bureau of
 Mint. The Filipinazation of the Republic coins and paper money began in the late
60’s and is carried through to the present. In the 70’s, the “Ang Bagong Lipunan
(ABL)” series notes were circulated. A new wave of change swept through the
Philippine coinage system with the flora and fauna coins initially issued in 1983.
These series featured national heroes and species of flora and fauna. The new
design series of banknotes issued in 1985 replaced the ABL series. Ten years
later, a new set of coins and notes were issued carrying the logo of the Bangko
Sentral ng Pilipinas.

2. Money performs four main functions in today’s society. Money serves as a

medium of exchange that allows goods and services to be traded without the
need for a barter system. Money as a Store of Value, refer to any asset whose
“value” can be used now or used in the future i.e. its value can be retrieved at a
later date. Money serves a unit of account, which refers to anything that allows
the value of something to be expressed in an understandable way, and in a way
that allows the value of items to be compared. And money as a standard of
deferred payment, this refers to the expressing of the value of a debt i.e. if
people borrow today, then they can pay back their loan in the future in a way that
is acceptable to the person who made the loan.
There are four different types of money; commodity money, fiat money,
fiduciary money, and commercial bank money. Commodity money is the oldest
type of money that closely related to a barter system, where goods and services
are directly exchanged for other goods and services. Fiat money gets its value
from a government order that means, it requires all people and firms within the
country to accept it as a means of payment. Fiduciary money depends for its
value on the confidence that it will be generally accepted as a medium of
exchange. It is not declared legal tender by the government, which means people
are not required to accept it as a means of payment. And commercial bank
money can be described as claims against financial institutions that can be used
to purchase goods or services.
The characteristics of money and its features are durability, portability,
divisibility, uniformity, limited supply, and acceptability. Durability of money is
such that it can be used over and over again. Portability is that money must be
able to go wherever such that it is easy to transport as people travel. Divisibility
deals with the fact that money must be easily divided to enable a person to buy
different products. Uniformity of money calls for a standardization of money so
that it looks the same. Limited supply states that money is only valuable if it is
produce in limited quantities. And acceptability deals with the fact that the form
of currency must be generally acceptable.