GUAGUA NATIONAL COLLEGES

College of Business Administration

CHAPTER 1: INTRODUCTION TO MONEY (Part 1)

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 parts of financial system
✓ describe functions of money
✓ identify the characteristics of good money
✓ appreciate the importance of money
✓ enumerate the laws related to our Philippine Monetary System

IV. Recalling Prerequisites

V. Information and Examples

THE SIX PARTS OF THE FINANCIAL SYSTEM

Financial system describes collectively the financial markets, the financial system participants
and the financial requirements and securities that are traded in the financial markets. The financial
system plays the key role in the economy by stimulating economic growth, influencing economic
performance of the actors, affecting economic welfare. This is achieved by financial infrastructure,
in which entities with funds allocate those funds to those who have potentially more productive
ways to invest those funds.

The financial system has six parts, each of which plays a fundamental role in our economy.
Those parts are money, financial instruments, financial markets, financial institutions, government
regulatory agencies, and central banks.

We use the first part of the system, money, to pay for our purchases and to store our wealth. We
use the second part, financial instruments, to transfer resources from savers to investors and
to transfer risk to those who are best equipped to bear it. Stocks, mortgages, and insurance
policies are examples of financial instruments. The third part of our financial system, financial

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NOEL M. SALAZAR JR., MBA, LPT
 GUAGUA NATIONAL COLLEGES
College of Business Administration
markets, allows us to buy and sell financial instruments quickly and cheaply. The Philippine Stock
Exchange is an example of a financial market. Financial institutions, the fourth part of the
financial system, provide a variety of services, including access to the financial markets and
collection of information about prospective borrowers to ensure they are creditworthy. Banks,
securities firms, and insurance companies are examples of financial institutions. Government
regulatory agencies form the fifth part of the financial system. They are responsible for making
sure that the elements of the financial system—including its instruments, markets, and
institutions— operate in a safe and reliable manner. Finally, central banks, the sixth part of the
system, monitor and stabilize the economy. The Bangko Sentral ng Pilipinas (BSP) is the
central bank of the Philippines.

FUNCTIONS OF MONEY

Our monetary system developed to meet the changing needs of the economy. Primitive
economies consisted largely of self-sufficient units or groups that lived by means fishing, and
simple agriculture. There was little need or occasion to exchange goods or services

As economies became more developed, and some men specialized-to some degree, at least-the
process, of exchange became more important. To help facilitate this exchange of goods for goods,
or barter, tables of relative values were developed from experience. For example, the table might
show the measure of grains, amount of cloth, and the like as equal to one cow or sack of sugar.
This arrangement helped facilitate exchanges, but the process had many serious drawbacks. For
example, if a man had a cow which he wanted to trade for some nuts, he would need to find
someone who had an excess of nuts to trade. The need for a simple means of exchange led to
the development of money. Thus, money became a major tool for facilitating transactions.

Money is commonplace yet mysterious. Even common usage of the word often indicates
confusion between money and income and money and wealth (Hadjimichalakis, 1995, p.3). For
example, when we say a woman makes a lot of money, we may mean that she earns a high
income from her job as a lawyer. On the other hand, when we say a man has a lot of money, we
may mean that he has accumulated a lot of savings or wealth as money is one form of wealth.

Money is defined as anything authorized by law to be generally accepted as a medium of

exchange and a standard of value and has no reference to the general standing of the person
who offers it as payment for goods and services.

Money has several functions:

1. Medium of Exchange. Money facilitates buying and selling. It is used to pay for or settle
obligations. Because it is acceptable as payment for goods and services, it serves as a
physical means for conducting business transactions. The use of money makes purchases
and sales possible. In addition, money reduces the time spent on a transaction.

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

As a transaction medium, money is means of repaying debts or the exchange of assets,

such as shares of common stock. Throughout history, the medium of exchange has taken
many forms-commodities, precious metals, paper, and even mere entries in ledgers
(accounts). Societies began to designate as media of exchange commodities that were
nonperishable, divisible, and in great demand. In pre-historic times, such commodities
included feathers, livestock, grain, stones, and metals. Soon, these items were replaced by
precious metals, such as silver and gold, which were in use until the twentieth century.

By definition, a Medium of Exchange is anything that is used to determine value during the
exchange of goods and services. Money allows us to use systems of trade beyond the
Barter System. Bartering is directly trading one good or service for another. Your money
acts as a common ground for determining value.

2. Unit of Account or Standard of Value. Money serves as a yardstick for measuring prices
and values when comparing items. In principle, any commodity can serve as a unit of
account. Goods and services are expressed in relative values of money. Their prices are
related to the value of money, which serves as the measuring stick. When measuring
weight, kilo is the unit of account, when measuring distance, kilometer. Similarly, when we
measure the value of a haircut or a steak, we employ a unit of account, that is, the amount
of money needed to acquire the product or service. We measure the values of items we
want to acquire in terms of one commodity-money.

3. Store of Value. Money is a reservoir of future purchasing power. It is both a temporary and
a permanent store of purchasing power. A person who saves a portion of his income is
storing the purchasing power of his money temporarily. A person who puts in more money
to carry out a transaction in stocks, bonds, or real estate is also storing the purchasing
power of money. The ability of money to serve as a store of value depends on its capacity
to retain its purchasing power. When the purchasing power of money drops, as when the
prices of goods and services rise rapidly, the public does not want to hold money as a
permanent store of value and even shortens the amount of time it holds money as a medium
of exchange.

Money value can be stored in two forms: savings and investment. Income derived from
savings is interest and that from investment is profit. If money is kept for future use in the
form of savings or investment, it earns income. In an economy with developed financial
institutions, there exists a multitude of financial assets which serves as a means of storing
wealth, including various types of short-term securities, bank deposits, and stocks.

4. Standard of Deferred Payment. Money is used as a medium for fulfilling obligations of

debtors to creditors on maturity. It serves to measure the extent of obligations by debtors

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NOEL M. SALAZAR JR., MBA, LPT
 GUAGUA NATIONAL COLLEGES
College of Business Administration
and claims by creditors. Money as the standard of deferred payment means that promises
to pay at are expressed in money value.

CHARACTERISTICS OF GOOD MONEY

1. General Acceptability. This is the ready acceptance of money by people of a country.

Money must be acceptable as a tool for settlement of obligations between creditors and
debtors or between buyers and sellers.

Section 52 of the New Central Bank Act, Legal Tender Power, states: "All notes and coins
issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic
of the Philippines and shall be legal tender in the Philippines for all debts, both public and
private. Provided, however, that, unless otherwise fixed by the Monetary Board, coins shall
be legal tender in amounts not exceeding Fifty pesos (Php50.00) for denominations of
Twenty-five centavos and above and in amounts not exceeding Twenty-pesos (Php20.00)
for denominations of Ten centavos or less."

2. Durability. Money must be able to bear normal wear and tear when used in any
transaction. It must be made of materials which can last for a reasonably long period of
time without losing its usefulness as a medium of exchange. Designs and inscriptions
therein must be visible and recognizable.

Section 57 of the New Central Bank Act, Retirement of Old Notes and Coins, states: "The
Bangko Central may call in for replacement notes of any series or denomination which are
more than five (5) years old and coins which are more than ten (10) years old. This
property enables coins and paper bills to serve the store of value function effectively."
Central Bank may demonetize notes and coins in circulation as the Monetary Board
deems necessary.

3. Portability. Money must be easy to carry for faster settlement of transactions. Materials
used, like metal alloys, must not be heavy. For higher denominations, paper-based
materials are preferable for easy transport.

4. Divisibility: Money, as a unit of account, must lend itself to being divided into smaller
denominations to settle obligations or collections arising from various transactions.
Section of the New Central Bank Act states: "The monetary unit in the Philippines is the
"peso," which is represented by the sign P. The peso is divided into one hundred (100)
equal parts called "centavos," which is represented by the sign c. By its availability in
several denominations, coins and paper bills conveniently allow money to finance
transactions of various magnitudes."

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NOEL M. SALAZAR JR., MBA, LPT
 GUAGUA NATIONAL COLLEGES
College of Business Administration
5. Stability of Money Value. The purchasing power of money must be maintained for a
period of time to maximize economic development and increase employment, production
and income levels.

Section 64 of the New Central Bank Act, International Monetary Stabilization, states: "The
Bangko Sentral shall exercise its powers under this Act to preserve the international value of
the peso and to maintain its convertibility into other freely convertible currencies primarily for,
although not necessarily limited to, current payments for foreign trade and invisibles."

Section 65 of the same Act, International Reserves, states: "In order to maintain the
international stability and convertibility of the Philippine peso, the Bangko Sentral maintains
international reserves adequate to meet any foreseeable net demands on the Bangko Sentral
for foreign currencies."

In judging the adequacy of the international reserves, the Monetary Board shall be guided by
the prospective receipts and payments of foreign exchange by the Philippines. The Board
shall give special attention to the volume and maturity of the Bangko Sentral's own liabilities
in foreign currencies, the volume and maturity of the foreign exchange assets and liabilities of
other banks operating in the Philippines, and, insofar as they are known or can be estimated,
the volume and maturity of the foreign exchange assets and liabilities of all other persons and
entities in the Philippines.

6. Cognizability. Good money must be easy to recognize. Each denomination must be

distinct to avoid confusion with other denominations during exchange transactions.
Weight, fineness, designs, and other characteristics of coins and notes, as prescribed by
the Monetary Board, must be unique for a denomination.

7. Homogeneity or Uniformity. Money of the same denomination must have the same
characteristics in terms of weight, fineness, and designs. Coins of the same denomination
must have uniform weight of metal alloy, fineness, shape, size, and inscriptions. Paper
bills of the same denomination must possess uniform design, size, color, and other
physical characteristics.

8. Malleability. Materials for the minting of money must lend themselves to being stamped
with proper designs and must be durable to maintain its form. The form and design of
coins are a compromise of objectives. The least wear and tear can be attained by a
spherical form and a minimum of design, but such would be awkward to handle, difficult
to recognize, and easy to counterfeit. The design of a coin is a compromise between the
artistry of high relief and the exposure to abrasion. Pure gold and silver are very soft, so it
is necessary to harden them by adding copper, nickel, tin, or zinc. While still malleable,
the harder the material, the less wear-and-tear and the possibility of counterfeiting.

FM 4: Monetary Policy and Central Banking Page 5

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

Without money, individuals would have to devote more time to buying what they want and selling
what they do not want. Money simplifies matters. Workers are paid in money, which they can
then use to pay bills and make purchases. Money becomes the medium of exchange. Goods
and services are then expressed in terms of money, a common denominator.

One of the most important things about the medium of exchange is that everyone must be
confident that it can be passed on, that it is generally acceptable in trade. People will accept the
medium of exchange only when they are certain that it can be passed on to others. Also, they will
be more willing to accept the medium of exchange if they are certain of its worth in terms of
acquiring things that they want. The uncertainty of barter transactions makes people wary of
exchange. Money meets the low-uncertainty-high-exchangeability requirement. It frees
people from spending much time bartering goods and services and allows them to pursue other
endeavors. People use money as a medium of exchange, not because it has intrinsic value, but
because it can be exchanged for things to eat, drink, wear, and play with. The value of a unit of
money is determined, therefore, by the price of each and every good or service or, more
accurately, the average level of all prices. If prices go up, a unit of money is worth less because
it will buy less; if prices go down, money is worth more because it will buy more. Thus, the value
of money varies inversely with the price level.

Money also contributes to economic development and growth. It does this by stimulating
both savings and investment and facilitating transfers of funds from savers to borrowers, who
want to invest but do not have enough money to do so. Financial markets give savers a variety of
options to lend to borrowers, thereby increasing the volume of both savings and investment and
encouraging economic growth.

In a monetary economy, a person accumulates savings in cash because money is a store of

value. Through financial markets, this surplus cash can be lent to a business firm to invest in new
equipment. Both the saver and the business firm are better off. The only way an economy can
grow is by allocating part of its resources to the creation of new and more productive facilities.

Laws related to our Philippine Monetary System are the following:

1. Philippine Coinage Act of 1903. This provided that gold coins contain 12.9 grains of gold
and .9 fineness. silver coins contain 416 grains of silver and .9 fineness.

2. US Coinage Act of 1903. Philippine money was redeemable in drafts or checks payable
in full gold standard currency. In order to maintain the value of peso against gold, a
currency reserve fund known as "Gold Standard Fund" was set up.

FM 4: Monetary Policy and Central Banking Page 6

NOEL M. SALAZAR JR., MBA, LPT
 GUAGUA NATIONAL COLLEGES
College of Business Administration
3. Gold Reserve Act of 1934. Under this monetary standard, the Philippine currency was
not redeemable in gold but in dollars. Dollars devaluated by forty-one percent, and the US
government was given title to all gold coins, bullion, and certificates held by Federal
Reserve Banks.

4. Dollar Exchange Standard. Philippine currency was redeemable in dollar instead of gold.
Currency issued was backed up by silver coins and dollars on demand.

5. Mickey Mouse Notes. The Japanese military government issued paper bills called Mickey
Mouse notes. These were not legal tender, but Filipinos used them lest authorities
penalize them for non-cooperation. From 1946 to 1949, money supply increased
tremendously.

6. Managed Currency System. With the creation of the Central Bank, the country's
monetary system and banking system were reorganized. The Central Bank Act, or
Republic Act No. 265, was enacted. This placed banks in a better position to meet the
credit needs of existing business enterprises and new development projects. When the
Central Bank started operations, it assumed the liabilities of the Exchange Standard Fund
for all treasury certificates and coins in circulation. Chapter 2 of the Central Bank Act
defines the monetary unit as "peso," represented by P, and divided into one hundred equal
parts called "centavo," represented by 'c.'

V. Practice and Feedback

Identification
_____________________ 1. Function of money which means it facilitates buying and selling
transactions.

_____________________ 2. Function of money which means it serves as a yardstick for

measuring prices and values for company items.

_____________________ 3. Function of money which means it is a reservoir of future purchasing

power.

_____________________ 4. Function of money where it serves as a medium for fulfilling

obligations of debtors to creditors on maturity and promises to pay are expressed in money value.

_____________________ 5. Characteristic of money which means it must be capable of being

subdivided into smaller denominations to settle obligations.

_____________________ 6. Retirement age for notes.

FM 4: Monetary Policy and Central Banking Page 7

NOEL M. SALAZAR JR., MBA, LPT
 GUAGUA NATIONAL COLLEGES
College of Business Administration
_____________________ 7. Retirement age for coins.

_____________________ 8. Characteristic of good money which means that all notes and coins
issued by the Bangko Sentral shall be legal tender.

_____________________ 9. Characteristic of good money which requires that each

denomination must be distinct to avoid confusion.

_____________________ 10. Characteristic of good money which requires that same

denomination must have same physical characteristics.

VII. Summary

The financial system has six parts, each of which plays a fundamental role in our economy.
Those parts are money, financial instruments, financial markets, financial institutions, government
regulatory agencies, and central banks.

Money has several functions: medium of exchange, unit of account or standard of value, store
of value, and standard of deferred payment.

Characteristics of good money includes general acceptability, durability, portability, divisibility,

stability of money value, cognizability, homogeneity or uniformity, and malleability.

Importance of money are money simplifies matters, money becomes the medium of exchange,
money meets the low-uncertainty-high-exchangeability requirement, money also contributes to
economic development and growth, money is a store of value.

Laws related to our Philippine Monetary System are the following:

• Philippine Coinage Act of 1903.
• US Coinage Act of 1903.
• Gold Reserve Act of 1934.
• Dollar Exchange Standard.
• Mickey Mouse Notes.
• Managed Currency System.

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.

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NOEL M. SALAZAR JR., MBA, LPT