MONEY,

CREDIT AND BANKING

ESSENTIALS OF

MIRANDA

MONEY IN THE NATIONS ECONOMY

CHAPTER 1
Barter as a form of exchange is not only utterly inadequate but, moreover, crude
and cumbersome to meet the needs of our modern economic life. For this reason,
man on his road to development and progress introduced the use of a very
important commodity purposely designed to eliminate the shortcomings that
characterize every barter transaction, like the need for a double coincidence of
demand and equality in value of the things entering the exchange transaction.

MONEY IN THE NATIONS ECONOMY

Money and its Evolution.

The evolution of money in the life of man represents one of the most
interesting and yet intriguing chapters in his cultural development. So important is
money in his economic life that in the words of a well-known professor in finance,
it deserves to be ranked among the most outstanding inventions in the entire
history of mankind.

MONEY IN THE NATIONS ECONOMY

The Use of metals.

The use of metals as money stems form a number of advantages.
First, Metal, particularly gold, are virtually indestructible.
Second, such metals can be melted and cast into certifiable weights.
Third, metals are valuable in their of portability.
Fourth, such metals are valuable in their own right. Copper, silver and gold coins
can be melted down and used for industrial purposes. Compared to paper
currencies which have no intrinsic value and, as such, become subject to value
manipulation by governments, metallic money of known purity possess a
purchasing power that cannot fall below the value of the metal itself.

MONEY IN THE NATIONS ECONOMY

The Use of metals.

Fifth , metals cannot be created at will.
Finally, Metals are not only scare but, at the same time, require massive
exertion of labor to extract them from the bowels of the earth and refine and
therefore have a floor value.

MONEY IN THE NATIONS ECONOMY

Functions of Money
Money, which was derived form moneta, another name for the Roman
goddess Juno, has been defined in a number of ways. However, in all such
definitions, certain desired characteristics are present and these are : as a medium
of exchange and as a measure of value.
Accordingly, money is generally described as anything which is used as a
medium of exchange and which is widely acceptable for the payment of goods and
services without reference to the general standing of the person who offers it

MONEY IN THE NATIONS ECONOMY

Functions of Money
From the above definition, it appears quite clear that the basic function of
money is to facilitate exchange transaction of goods and service. However, in the
performance of such basic function, money has been observed to discharge the
following incidental functions:
a.
b.
c.
d.

As
As
As
As

a
a
a
a

medium of exchange.
unit of account (measure or standard of value)
store of value
means of deferred payment.

MONEY IN THE NATIONS ECONOMY

Functions of Money
Money as a Medium of Exchange. If the troublesome problem of the
double coincidence of demand is to be avoided, it is necessary that some readily
acceptable thing must be available as a medium of exchange that will bring about a
smooth and effective transfer of goods from one hand to another. Thus, the need
for something that will serve as an intermediary in the process of exchange.

MONEY IN THE NATIONS ECONOMY

Functions of Money
It might be interesting as well as important to note that money
comprises those things that an individual accepts in payment of a debt, whether
it involves goods or services not because he intends to consume them but
because he can exchange them for other goods and services that he may desire
at some future time. Thus, a good medium of exchange must posses stability of
value to make it a good store of value. Moreover, it must command general
accept ability. This explains why, during the early period of monetary
development, precious metals, principally gold and silver, were used as
mediums of exchange because they possess intrinsic value. Today, when the
greater part of the circulating media of exchange appears in the form of paper
notes, their general acceptability is premised lien of the government which
issued them apart from the fact that they are made as legal tender and enjoy
the full guarantee of the said government.

MONEY IN THE NATIONS ECONOMY

CHARACTERISTICS OF GOOD MONEY

For money to be able to perform the four major functions previously
discussed, it is necessary that the materials used to represent such money must
possess a number of essential attributes.
At the outset, money must possess general acceptability. Obviously,
materials having economic values, like utility, among others, will command
general acceptability among the people aside from their real and intrinsic value.
The general acceptability of a commodity used as money is likewise influence, if
not actually determined, by its stability of value, that is, its purchasing power is
not widely susceptible to wide and violent fluctuations. Otherwise, such kind of
money will fall in the discharge of its role as a standard means of deferred
payment.

MONEY IN THE NATIONS ECONOMY

KINDS OF MONEY
Basically, there are two types of modern money, each of considerable
importance, namely: metallic money and paper money. Their titles express what
they actually mean. Thus, metallic money is a special type of commodity money
in which some metal, as for instance, gold or silver is used. On the other hand,
paper money is used in the form of bills and notes. They may or may not be
backed up by a particular commodity.
While there is no single acceptance classification of different kinds of
money, nevertheless, three important kinds may be noted: commodity money,
credit money and fiat money.

MONEY IN THE NATIONS ECONOMY

KINDS OF MONEY
Commodity Money
Under a modern monetary system, commodity money appears in
metallic form, the face value of which approximate that of the value of the
metal itself. As such, commodity money, unlike other forms of money, possesses
intrinsic value. This means that I could be used either as a commodity (bullion)
or as a medium of exchange (money) without any loss in value.

MONEY IN THE NATIONS ECONOMY

KINDS OF MONEY
Credit Money
Credit money may be described briefly as in the nature of promissory
note. A government note is the governments promise to the bearer standard
money on demand. A bank note is a similar promise of a bank.
Thus, the use of credit money presupposes the existence of another
form of money in which it may be exchanged or redeemed. That money is
usually referred to as the money of final redemption or standard money.

MONEY IN THE NATIONS ECONOMY

KINDS OF MONEY
Paper Money
Doubtless, paper money does away with many of the shortcomings of
commodity money. However, like commodity money, its use also presents
certain problems. One such problem is how to control the amount of paper
money in circulation. We have noted that the volume of commodity money as
exemplified by gold and silver coins were limited by the amount of metal
available. In the particular case of inconvertible paper money other other hand,
no limits exist other that those imposed by monetary authorities. Clearly,
therein lies the danger. A desperate government such as that of the Japanese
government might print too much money resulting in a galloping inflation as it
did during its occupation of the Philippines.

MONEY IN THE NATIONS ECONOMY

KINDS OF MONEY
Fiat Money
As its name implies, fiat money is money issued by command that is,
from the Latin fiat, which means let it be done. Such kind of money may
consist of coins or paper bills whose value is fixed by government edict or
decree and at a level that bears no relation to the value of the material used to
represent such kind of money. Thus, if the government should, for instance,
take a piece of paper whose value is very much lower that fiver pesos and print
on it the words : This is P5.00 Philippine Currency without any promise of
redemption in other kinds of money and then issue it in circulation, such a fivepeso bill is considered a good example of fiat money.

MONEY IN THE NATIONS ECONOMY

CHAPTER 2
A countrys monetary standard is adopted by authority of state as a
measure of value. As such, the monetary standard may be held synonymous
with standard money or money of standard value.