LG 1: Money

Tuesday, May 18, 2021 12:22 PM

Money
• Assets in the economy
• Includes only certain types of wealth that are regularly accepted by sellers to buy products and
services

Functions of Money
Medium of Exchange
• Barter economy
○ Alternative to monetary economy
○ Double coincidence of wants
• Money eliminates the problem of barter by acting as a generally accepted asset in all kinds of
stores
• Serves as a lubricant for trade
Store of Value
• Item that people can use to transfer purchasing power from the present to the future
• Wealth
○ Sum of a person's stores of value
○ Including both monetary and non-monetary assets
• Advantages
○ Convenient denominations
○ Lightweight
○ Portable
○ Liquidity property of money
▪ Liquidity: ability of an asset to be easily converted into the economy's medium of
exchange
• Disadvantage
○ Value of money decreases when there is inflation
Unit of Account
• Yardstick people use to post prices and record debts
• Easy and consistent way of comparing relative value with one another
Standard of Deferred Payment
• Deferred payment: payments to be made in the future
• Standard way of paying loans and debts
• Direct consequence of being the unit of account and a store of value

History and Evolution of Money

Barter System
• Exchange between two parties using goods and services for payment
• Problem
○ May take time
○ Lack of double coincidence of wants
Commodity Money
• Only specific items are considered as money
○ Cattle, livestock, crops, wine, shells, precious metals, gems, and salt
• Problem
○ Not easily divisible
○ Perishable
○ Messy to handle
• Solution

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 • Solution
○ Chinese introduced coins
▪ Made of bronze
○ Lydia of Anatolia
▪ Officially minted the first known coins
□ Made of silver and gold
□ However, there were shortages of resources to make coins
Paper Money
• Chinese moved from coins to paper money
• Most European countries were still using coins
• Banking became widely practiced
○ Banks began to accept banknotes in place of coins
Government-Issued Money
• Fiat money
• European countries
• Paper money played an important role in facilitating trade between two continents
○ To remedy shortage of supply of cash since ships that transported goods and currency
took too much time to travel
Modern Money
• Convenient way to carry it anywhere and anytime
• Cashless transactions

Demand for Money

Transactions Motive
• Pay for their day-to-day transactions
• Employee's salaries, rent, materials, and other costs
• When overall macroeconomic conditions improve → people will have higher spending →
increase in demand for money
• Function: medium of exchange
Precautionary Motive
• When actors cannot fully predict the amount of money they need to spend in the future
• Unnecessary spending that may occur
• Contingency
• Function: store of value
Speculative or Portfolio Motive
• Taking advantage of market conditions and the opportunities present in it
○ Purchasing stocks
○ Investing in bonds
○ Foreign exchange trading
• To earn additional income from returns of investment
• Function: store of value
• Cases
○ Expected deflation: money stored will have greater value
○ Continuously growing economy: higher returns in investment
○ Changes in currency exchange rates: higher value of currency
• Demands increase
○ When risks decline
○ Or return of investments increase

Money Supply
• Measure of the aggregate amount of money in the economy over a particular period
Money Definition M1 (Narrow Money)
• Currency in circulation (outside ODCs)
○ ODCs: Other Depositary Corporations
▪ Rural banks

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 ▪ Rural banks
▪ Thrift banks
▪ Loan and non-stock saving associations
▪ Commercial and universal banks
▪ Non-banks having quasi-banking functions
• Peso deposits subject to check of the monetary system
• Components
○ Currency
○ All checkable deposits
Money Definition M2
• M1 and other deposits included in broad money like savings and deposits
○ Savings deposits
○ Time deposits
Money Definition M3 (Money Liquidity)
• M2 and securities other than shares included in broad money
○ Money market borrowings by banks
▪ Promissory notes
▪ Repurchase agreements
▪ Commercial papers
▪ Securities and certificates of assignment
▪ Participation with recourse
Money Definition M4
• M3 and foreign currency that are transferrable and are in other deposits

Money Creation
• Open Market Operations by the BSP
○ Increase money by buying bonds from private institutions
○ Remove money by selling bonds

Money Multiplier
• Same as monetary multiplier
• Calculates the outcome of a change in a bank's reserve requirement to the overall supply of
money in an economy
• To stimulate money in the economy
○ Lowering the reserve requirement will enable banks to have more money which they
can lend to others
• Reciprocal of the reserve requirement ratio R

The Bangko Sentral ng Pilipinas

Importance of Banking
• Helps mobilize our savings into investments
• Helps accelerate economic progress
History of Banking in the Philippines
• Obras Pias
○ Est. Spanish colonization
○ First financial institution
○ Primarily built for charity and religious activities of the Catholic Church
• Banco Espanol-Filipino de Isabela II

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 • Banco Espanol-Filipino de Isabela II
○ Est. 1851 by Gov. Antonio de Urbiztondo
○ First government bank
• Monte de Piedad y Caja de Ahorros de Manila
○ Est. 1882 by Fr. Feliz Huertas
○ First savings bank
• British and American Banks
○ Est. 1900's
History of Central Banking
• Bank of England
○ Est. 1964 in Europe
○ First real central bank
• Central Banking in the Philippines
○ Created by law in 1948 by Pres. Elpidio Quirino
▪ Miguel Cuaderno
□ First Central Bank Governor
▪ Focus is to promote…
□ Rising level of production
□ Employment
□ Real income
○ During the term of Ferdinand Marcos
▪ Focus is to achieve monetary stability
• Bangko Sentral ng Pilipinas
○ Central Bank Charter of 1948 → New Central Bank Act of 1993
○ Primary mandate
▪ Promote price stability conducive to a balanced and sustainable growth of the
economy
○ Other functions
▪ Supervisor and regulator of banks, quasi-banks, and other financial institutions
▪ Issuer of the Philippine banknotes and coins
▪ Manager of the country's foreign exchange reserves, external debt, and
international stability
▪ Overseer of the convertibility of the Philippine peso
▪ Lender of last resort
▪ The government's banker, financial advisor, and official depository
○ Three pillars
▪ Price stability
▪ Financial stability
▪ Efficient payments and settlements system
○ Monetary Board
▪ Policy-making body
▪ 7 members for six years

The Philippine Financial System

• Help allocate and deploy financial instruments to transfer resources from lenders (savers) to
borrowers (investors)
Banks
Private Banks
• Universal and commercial banks
• Thrift banks
• Rural and cooperative banks
Public Banks (Government)
• Landbank of the Philippines
• Development Bank of the Philippines
Non-bank Financial Systems
• Pawnshops

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 • Pawnshops
• Credit unions
• Trust companies
• Financing companies
Examples
• Government Service Insurance Systems (GSIS)
• Social Security System (SSS)

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