MONETARY STANDARD AND MONETARY SYSTEM

(Reaction Paper for Group 2)

Money, as stated in Group 1's last report, is a type of force with immense

strength since it promotes the process of trade. As a result, its formation must be

regulated by rules or guidelines known as monetary standards or systems. Its purpose

is to create a stable means of exchange both within the country and in international

transactions.

The monetary unit to be used must first be determined. The government

recognizes standard money as the ultimate fundamental standard of worth upon which

all other types of money are convertible. It serves as the foundation for all types of

money in circulation. The controlled currency system is the monetary system that the

Philippines has employed till now, and the peso is the monetary unit that also refers to

standard money. There are two types of monetary standard commodity standard or

metallic standard and non-commodity standard or fiat standard. Commodity Standard or

Metallic Standard is also called the full bodied money because it is one-hundred percent

backed up by gold or silver reserves. Its purchasing power or value is equal to the value

of a designated quantity of a commodity or set of commodities which can either be

monometallic or bimetallic. Monometallic Standard is a one-metal standard. So, a

country must choose whether to use gold or silver as a standard unit of value. Non-

commodity or Fiat standard refers to a monetary system in which the face value of the

monetary unit is much higher than that of the value of the material used as money.

Essential Characteristics of the Fiat Standard are the following: A fiat money is adopted

as the standard unit of value or monetary unit; the fiat money is legal tender; and all

other money issued by the government is redeemable in the standard fiat money.

A monetary standard is a system of institutions and laws that manage an

economy's money supply. The creation of money is constrained by these norms and

institutions. The standard indirectly affects prices by constraining money creation. A

monetary standard may have an impact on actual economic production growth, but this

is dependent on expectations. Other economic institutions may be influenced by

monetary institutions, which in turn drive economic growth.