GUAGUA NATIONAL COLLEGES

College of Business Administration

CHAPTER 1: INTRODUCTION TO MONEY (Part 2)

I. Introduction
This chapter provides an overview of money. It introduces the functions, characteristics and
importance of money. It also discusses the different laws related to our Philippine Monetary
System. In the second part, students will examine the coinage, the kinds of money and its
classifications.

II. Motivation

III. Objectives
After completing the module, the students are expected to:
✓ discuss the coinage.
✓ identify the types of money.
✓ enumerate the classifications of money.

IV. Recalling Prerequisites

Why do you think that BSP should not print lots of money and give it to everyone? Watch this
video clip on YouTube: https://www.youtube.com/watch?v=Queuzb1R4vg.

V. Information and Examples

COINAGE
The manufacture of money is done in a mint, and the process is called minting or coining or
coinage. If gold or silver coins are to circulate freely at face value rather than weight, the public
must be assured that coins are of standard weight and fineness. Coin circulation is promoted by
molding precious metal into shapes and sizes that are convenient and inscribing in them an
attractive and readily recognizable design.

As the government has the exclusive right of coinage, any private coinage is counterfeit, and, if
the government is coining freely and gratuitously, it may be assumed that counterfeit coins have
fall under the standard weight and fineness. Counterfeit coins may have the full legal weight of
standard metal and still be profitable because the cost of private manufacture is less than the
seigniorage charged by the government. A high seigniorage creates a temptation to counterfeit.
One of the objectives in the manufacture of money is to give it a shape, a design, and other
characteristics that will render counterfeiting difficult, expensive, and readily detectable.

The form and design of coins are a compromise of objectives. If the material used is very low-
cost, for instance, the copper, and the seigniorage is high, preventing abrasion, chipping, and
other damage is not important. The harder the material, the less the wear-and-tear. Pure gold and

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NOEL M. SALAZAR JR., MBA, LPT
 GUAGUA NATIONAL COLLEGES
College of Business Administration
silver are very soft, so it is necessary to harden them by adding copper, nickel, tin, or zinc. The
cheaper metals are so small in quantity and so inexpensive that they do not affect the value of
gold and silver coins. The ratio of the weight of pure metal to total weight of a coin is called
'fineness' and is expressed as a decimal, tenths, or carats.

Given free coinage, a seigniorage charge increases the value of the coined metal by the amount
of this fee. For instance, if the government allowed the holder of standard gold bullion a gold coin
weighing 25.8 grains and having a fineness of 0.9, for every 30 grains of standard gold offered at
the mint, 25.8 grains would have the same debt-paying power and the same purchasing power
as would 30 grains of uncoined metal. If the gold coin were to be melted and the bullion sold, 4.2
grains on the value will be lost (30-25.8) from the standard gold as it would then require 30.0, not
25.8, grains to get the money value back. The following are the principles of a subsidiary coinage
articulated by Dr. Neil Carothers, following his intensive study of "Fractional Coinage" (Helfferich,
page 304):

Coinage should be solely on government account.

• The coins should be issued only through sales to the public at their face values in
exchange for standard money.
• Total coinage, total issue, and total circulation should be unrestricted.
• The market value of the metal in the coins should be well below the face values.
• The coins should be redeemable without charge, delay, and limit at the issue price and in
standard money, regardless of the extent of wear.
• The coins should be legal tender in private and public payments.
• The legal tender power should be limited to sums representing a proper maximum use of
the coins.
• The denominational system should be decimal with intermediate coins in multiples of five.
• The coins should be convenient in size, attractive in appearance, durable in use, and
individual in design.

KINDS OF COINAGE
Coinage has three kinds:
1. Free coinage. The government defines sizes, shapes, weight and designs of coins but
allows individuals to bring their precious metals to the mint to convert such into standard
coins. Owners of these metals are charged with brassage or seigniorage fee.

2. Gratuitous coinage. Total responsibility for minting is borne by the government.

3. Limited coinage. Government purchases precious metal in an open market and mints
them as a medium of exchange at face values higher than its material content to facilitate
trade.

FM 4: Monetary Policy and Central Banking Page 2

NOEL M. SALAZAR JR., MBA, LPT
 GUAGUA NATIONAL COLLEGES
College of Business Administration
TYPES OF MONEY
1. COMMODITY MONEY
The inconvenience of the barter system forced the creation of a common medium or
commodity to facilitate exchange. Money evolved from simple forms or things with intrinsic
value, such as rice, corn, wheat, salt, tobacco, sugar, copper, wire, gold, and silver. Early men
used these commodities as money. Since there was no uniformity in the use of commodities
as money, the following factors were considered:
a) General acceptability at the place and time.
b) Utility other than as medium of exchange.
c) High demand.
d) Limited supply.
When commodities were used as a medium of exchange, goods could be valued in terms of
the item used as money and could be exchanged for it. This process was still cumbersome
and time-consuming as some items were bulky and difficult to carry around.

2. METALLIC MONEY
Due to economic development and an improved standard of living, people wanted a better
medium of exchange. Metals proved to be more efficient. Copper, iron, tin, and lead were the
earliest metals used as money and were in the form of useful implements such as knives,
forks, pots, spears, bows and arrows. When supply of gold and silver became abundant (3,000
B.C.), they were used as a form of money. The transition from the use of commodities as
money to the use of precious metals eventually led to the general usage of the latter. Gold
and silver were in great demand for ornamentation because of their durability, malleability,
and beauty. The supply of these metals was limited, and they had great value, which made
them a valuable medium of exchange. In time, coins with a certain weight of metal in them
were developed and coining money and determining its value became a governmental
function.
In the evolution of money, the following properties favored the use of metallic coins and
eliminated other commodities as material for money:
a) Scarcity and stability of metal supply.
b) Durability.
c) Divisibility.
d) Availability in convenient units.

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NOEL M. SALAZAR JR., MBA, LPT
 GUAGUA NATIONAL COLLEGES
College of Business Administration
3. PAPER MONEY
Gold and silver coins are cumbersome to carry around when large transactions are to be
made. The main purpose of paper money is to minimize this inconvenience. The government
issued paper money to represent certain quantities of gold or silver those were kept by the
government. The paper was accepted as a medium of exchange because persons accepting
it knew that they could get the precious metal when and if they wanted it. Such paper money
backed up by gold or silver, or representative paper money, circulated freely.

The general acceptance of paper money as a medium of exchange without the intention of
redeeming the precious metal it represented made possible the issuance of paper money with
no such backing. In early times, Philippine peso bills used to bear the promise of the Philippine
Treasury to redeem such notes in gold or silver to bearer on demand. To date, money
circulating is liabilities of the Bangko Sentral ng Pilipinas and are guaranteed by the
government of the Philippines.

4. COINS
In 1949, the Central Bank was established, and it replaced gold and silver coins with coins
made of metal alloys that were less than one centavo in value. Today, coins circulating in the
world are of lower metal value to prevent the waste or loss of precious metals and to facilitate
the settlement of small obligations.
Standard coins are made of metal like gold. They are also known as full-bodied money under
the gold standard. A full-bodied monetary system is one in which the value of the commodity
circulating as money or metal coins is the same for non-monetary and monetary purposes.
Subsidiary or token coins are coins, whose face value is greater than material used. It is also
similar to representative full-bodied money. These are evidence (usually paper money) of
ownership of a commodity such as gold and silver. Originally, these paper notes were issued
as simple IOU's or receipts acknowledging claim to an equivalent volume of gold or silver
coins collectible on demand by the bearer of the note. Since these notes could be exchanged
for a fixed quantity of metal coins on demand, they became acceptable as means of payment.
Money whose value as a commodity is less than its value in exchange for goods or services
is known as fiat, credit or fiduciary money. This originated 400 years ago with English
goldsmiths, who maintained safekeeping warehouses for precious metals. They became
conscious of the fact that they did not need to maintain full 100 percent backing of their notes.
Credit money excludes representative full-bodied money. It includes any form of money which
exhibits a value in exchange greater than the intrinsic value of the material from which it was
made. Fiduciary money or credit money includes token coins, the centavos, pennies, and
dimes initially issued at a face value substantially in excess of the market value of the metals
in the coins. It also includes the paper money issued by the government, paper currencies
issued by the Bangko Sentral, notes issued by commercial banks as evidence of claims, and
current accounts at financial institutions. These are claims of depositors against the financial

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NOEL M. SALAZAR JR., MBA, LPT
 GUAGUA NATIONAL COLLEGES
College of Business Administration
institutions, payable on demand and transferrable from one party to another with the use of
checks.
Coinage is the process of manufacturing coins for use as money. In our case, Bangko Sentral
provides coinage requirements in terms of denominations, design, fineness, weight,
retirement, and replacement. The coin is the metal itself. It is a shaped metal with specific
weight and purity guaranteed by the Philippine government for use as a medium of exchange.
Purity of the precious metal in a coin is known as fineness, while weight is the heaviness or
bulkiness of precious metal.
In the early years, our coins were made abroad, but today the Central Bank maintains a mint
that minimizes expenses and provides employment. In coinage, brassage and seigniorage
fees are charges by the government for coins whose face value is not more than the expenses
for coins marked at a value higher than actual cost of minting and metallic content. This is
done to realize profit for the government and to eliminate the practice of melting coins to get
precious metals for purposes other than as a medium of exchange.
The present-day processes of exchanging goods and services developed in response to the
changing needs of the economy as we progressed from a simple culture to our modern way
of life. Payments for most transactions are made by means of checks drawn on bank deposits,
but cash is still used for many day-to-day transactions. An individual builds up a claim for
funds against his employer as he performs services. He receives his paycheck which
represents a claim against the employer's bank for funds equal to the face amount of the
check. The pocket money and the fund on individual keeps in his checking account serve not
only as means of exchange, but also as a cushion between the receipt of funds and the making
of payments. On the other hand, an individual may find that he has more funds that he needs
for his ordinary transactions. He may then invest them in a business, extend loans to others,
or put them into one of the many financial institutions that invest funds. The process by which
money is accumulated in financial institutions, which lend them out or invests them, is known
as interference.

The various types of money are as follows:

a. Full-bodied money
b. Representative full-bodied money
c. Credit money
i. Token coins
ii. Representative token coins
iii. Government promissory note
iv. Commercial bank promissory notes
v. Central bank promissory notes
d. Demand deposits subject to transfer by checks

FM 4: Monetary Policy and Central Banking Page 5

NOEL M. SALAZAR JR., MBA, LPT
 GUAGUA NATIONAL COLLEGES
College of Business Administration
CLASSIFICATIONS OF MONEY

Money can be classified according to the following:

1. Money According to Material Used

• Commodity money. This can be metallic in nature. It is used for purposes other than
as a medium of exchange. Precious metals like gold and silver are used as commodity
money.

• Paper money. High quality paper materials are used to withstand wear-and-tear over
a long period of time and to minimize counterfeiting.

• Bank money. These are checks or other paper notes issued by financial
intermediaries.

2. Money According to the Character of the Issuer

• Treasury money. These were issued by the National Treasury before 1949. They are
notes and coins of various denominations.

• Central Bank money. These were issued by the Central Bank after 1949. They are
the Central Banknotes and coins circulating in the Philippines.

• Commercial bank money. These are issued by the Philippine National Bank and
other commercial banks as promises to pay, legal tender, payable on demand at a
future time to the bearer or order.

3. Money According to Popularity

• Paper money. has no commodity value.

• Fiat money. They are inconvertible paper money with no reserve. Face value is higher
than the value of paper used.

• Subsidiary coins. These are representative full-bodied money made of base metals
to settle small transactions. These are not advisable for use in big transactions and
have limited legal tender power.

4. Money According to Face Value

• Standard money. This is full-bodied money, authorized by law and having the
weight, fineness, denominations, and designs prescribed by the government as
standard basis for coinage.

FM 4: Monetary Policy and Central Banking Page 6

NOEL M. SALAZAR JR., MBA, LPT
 GUAGUA NATIONAL COLLEGES
College of Business Administration
LEGAL TENDER
Any kind of money which, according to law, must be generally accepted when offered as payment
for any obligation expressed in terms of the country's monetary unit. In the Philippines, "peso" is
legal tender.

CURRENCY
This is any kind of money which has limited acceptability expressed in a monetary unit. Money of
other countries is currencies because of their limited acceptability in the Philippines.

V. Practice and Feedback

Activity:
Watch the video: The History of Paper Money - Origins of Exchange - Extra History - #1 by Extra
Credits in YouTube (https://www.youtube.com/watch?v=-nZkP2b-4vo) and write a 300-word
essay of your key takeaways and insights learned from the video. (30 points)

VII. Summary

The manufacture of money is done in a mint, and the process is called minting or coining or
coinage.

Coinage should be solely on government account.

Coinage has three kinds: the free coinage, gratuitous coinage and limited coinage.

Types of money include commodity money, metallic money, paper money, and coins.
Money can be classified according to material used, character of the issuer, popularity, and face
value.

Legal tender is any kind of money which, according to law, must be generally accepted when
offered as payment for any obligation expressed in terms of the country's monetary unit. In the
Philippines, "peso" is legal tender.

Currency is any kind of money which has limited acceptability expressed in a monetary unit.
Money of other countries is currencies because of their limited acceptability in the Philippines.

References
• Alminar-Mutya, R. F. (2017). Introduction to Philippine Money, Credit, and Banking. Anvil
Publishing Inc.
• Cecchetti, S. G. & Schoenholtz K.L. (2015). Money, Banking, and Financial Markets 4e.
Boston: McGraw-Hill Irwin.

FM 4: Monetary Policy and Central Banking Page 7

NOEL M. SALAZAR JR., MBA, LPT