INTRODUCTION TO MONEY

ROLE OF MONEY IN THE ECONOMY

• Money is any item or commodity that is generally accepted as a means of payment for goods and services.
• It is use for repayment of debt.
• It serves as an asset to its holder.

On the simplest level, money is composed of the bills and coins which have been printed or minted by the National Government (these are called
currency). But money also includes the funds stored as electronic entries in one's checking account and savings account.
Money is the oil that keeps the machinery of our world turning. It facilitates the billions of transactions that take place every day. Without it, the
industry and trade that form the basis of modern economies would grind to a halt and the flow of wealth around the world would cease.
Today it is the nation's government and central bank that control a country' economy. The Federal Reserve (known as "The Fed") is the central bank in
the US. In the Philippines, the central bank that controls the country's economy is the "Bangko Sentral ng Pilipinas".
CHARACTERISTICS AND KEY FUNCTIONS OF MONEY
Money must have value, be durable, portable, uniform, divisible, in limited supply, and be usable as a means of exchange.

• Store of value - Money acts as a means by which people can store their wealth for future use. It must not, therefore, be perishable, and it helps if
it is of a practical size that can be stored and transported easily.
• Item of worth - Most money originally has an intrinsic value, such as that of the precious metal that was used to make the coin. This in itself acted
as some guarantee the coin would be accepted.
• Means of exchange - It must be possible to exchange money freely and widely for goods, and its value should be as stable as possible. It helps if
that value is easily divisible and if there are sufficient denominations so change can be given.
• Unit of account - Money can be used to record wealth possessed, traded or spent-personally and nationally. It helps if only one recognized
authority issues money. If anybody could issue it, then trust in its value would disappear.
• Standard of Deferred Payment - Money is also useful because of its ability to serve as a standard of deferred payment. Money can facilitate
exchange at a given point by providing a medium of exchange and unit of account.

THE EVOLUTION OF MONEY

1. Barter (10,000 — 3000BCE) - In early forms of trading, specific items were exchanged for others agreed by the negotiating parties to be of similar
value. Barter — the direct exchange of goods — formed the basis of trade for thousands of years. Adam Smith, 18th-century author of The Wealth
of Nations, was one of the first to identify it as a precursor to money.
Advantages of Barter
• Trading relationship - Fosters strong links between partners.
• Physical goods are exchanged - Barter does not rely on trust that money will retain its value.
Disadvantages
• Market needed - Both parties must want what the other offers.
• Hard to establish a set value on items - Two goats may have a certain value to one party one day, but less a week later.
• Goods may not be easily divisible - For example, a living animal cannot be divided.
• Large-scale transactions can be difficult. - Transporting one goat is easy, moving 1,000 is not.
2. Evidence of trade records (7000 BCE) - Pictures of items were used to record trade exchanges, becoming more complex as values were established
and documented.
3. Coinage (600 BCE -1100 BCE) - Defined weights of precious metals used by some merchants were later formalized as coins that were usually issued
by states.
4. Bank notes (1100-2000) - States began to use bank notes, issuing paper IOUs that were traded as currency, and could be exchanged for coins at
any time.
5. Digital money (2000 onward) - Money can now exist "virtually," on computers, and large transactions can take place without any physical cash
changing hands.

ARTIFACTS OF MONEY
1. Barter (5000BCE) – Early trade involved directly exchanged items— often perishable ones such as a cow.
2. Sumerian cuneiform tablets (4000BCE) – Scribes recorded transactions on clay tablets, which could also act as receipts.
3. Cowrie shells (1000BCE) – Used As currency across India and the South Pacific, they appeared in many color and sizes.
4. Lydian gold coins (600BCE) – a mixture of gold and silver was formed into disks, or coins, stamped with inscriptions.
5. Athenian drachma (600BCE) – The Athenians used silver from Laurion to mint a currency used across the Greek world.
6. Han dynasty coin (200BCE) – Often made of bronze or copper, early Chinese coins had holes pinched in their center.
7. Roman coin (27BCE) – Bearing the head of the emperor, these coins circulated throughout the Roman Empire.
8. Byzantine coin (700CE) - Early Byzantine coins were pure gold; later ones also contained metals such as copper.
9. Anglo-Saxon coin (900CE) – This 10th century silver penny has an inscription stating that Offa is King (“rex”) of Mercia.
10. Arabic dirham (900CE) – Many silver coins from the Islamic empire were carried to Scandinavia by Vikings.

THE ECONOMICS OF MONEY

1. Potosi inflation (1540-1640) - The Spanish discovered silver in Potosi, Bolivia, and caused a century of inflation by shipping 350 tons of the metal
back to Europe annually.
2. The great debasement (1542-1551) - England's Henry VIII debased the silver penny, making it three-quarters copper. Inflation increased as trust
dropped.
3. Early joint-stock companies (1553) - Merchants in England began to form companies in which investors bought shares (stock) and shared its
rewards.
4. Bank of England (1694) - The Bank of England was created as a body that could raise funds at a low interest rate and manage national debt.
5. The Royal Mint (1696) - Isaac Newton became Warden and argued that debasing undermined confidence. All coins were recalled and new silver
ones were minted.
6. US dollar (1775) - The Continental Congress authorized the issue of United States dollars in 1775, but the first national currency was not minted
by the US Treasury until 1794.
7. Gold Standard (From 1844) - The British pound was tied to a defined equivalent amount of gold. Other countries adopted a similar Gold Standard.
8. Credit Cards (1970s) - The creation of credit cards enabled consumers to access short-term credit to make smaller purchases. This resulted in the
growth of personal debt.
9. Digital Money (1990s) - The easy transfer of funds and convenience of electronic payments became increasingly popular as internet use increased.
10. Euro (1999) - Twelve EU countries joined together and replaced their national currencies with the Euro. Bank notes and coins were issued three
years later.
11. Bitcoin (2008) - Bitcoin — a form of electronic money that exists solely as encrypted data on servers — is announced. The first transaction took
place in January 2009.

HISTORY OF MONEY IN THE PHILIPPINES

1. Pre-Spanish Regime - Prior to the coming of the Spanish in 1521, the Philippine was already trading with neighboring countries such as China, Java
and Macau. Through the prevailing medium of exchange was barter, some coins were circulating in the Philippines as early as the 8th century.
2. Spanish Regime - The Spanish introduced coins in the Philippines when they colonized the country in 1521.
3. American Regime - The country's first local currency, the Philippine Peso, was introduced replacing the Spanish-Filipino Peso. The Philippine
National Bank was authorized to issue Philippine Bank Notes.
4. Japanese Regime - The Japanese issued the Japanese War Notes. There bills had no reserves nor backed up by any government asset and were
called "mickey mouse" money.
5. Post-War Period
• In 1944, the Philippine Commonwealth was established under President Sergio Osmenia. All Japanese currencies circulating in the Philippines
were declared illegal, all banks were closed and all Philippine National Bank notes were withdrawn from circulation.
• The new treasury certificate (called Victory Money) were printed in P500, P200, P100, P50, P20, P10, P5, P2 and P1 denominations with the
establishment of the Central Bank.
• In 1949, a new currency called "Central Bank Notes" was issued.
• In 2010 the Central Bank launched the "New Generation Currency"
• In 2018, the New Generation Currency Coin series were put in circulation.

THE SUPPLY AND DEMAND FOR MONEY

Money facilitates the flow of resources in the circular model of macroeconomy. Not enough money will slow down the economy, and too much money
can cause inflation because of higher price levels. Either way, monitoring the supply and demand for money is vital for the e conomy's central bank's
monetary policy, which aims to stabilize price levels and to support economic growth.

The Key Measures for the Money Supply are:

• M1. The narrowest measure of the money supply. It includes currency in circulation held by the nonbank public, demand deposits, other checkable
deposits, and traveler's checks. M1 refers primarily to money used as a medium of exchange.
• M2. In addition to M1, this measure includes money held in savings deposits, money market deposit accounts, noninstitutional money market
mutual funds and other short-term money market assets (e.g., "overnight" Eurodollars). M2 refers primarily to money used as a store of value.
• M3. In addition to M2, this measure includes the financial institutions, (e.g., large-denomination time deposits and term Eurodollars). M3 refers
primarily to money used as a unit of account.
• L. In addition to M3, this measure includes liquid and near-liquid (e.g., short-term Treasury notes, high-grade commercial paper an acceptance
notes).

The Demand for Money

The Sources of the Demand for Money are:

• Transaction demand. Money demanded for day-to-day payments through balances held by households and firms (instead of stocks, bonds or
other assets). This kind of demand varies with GDP; it does not depend on the rate of interest.
• Precautionary demand. Money demanded as a result of unanticipated payments. This kind of demand varies with GDP.
• Speculative demand. Money demanded because of expectations about interest rates in the future. This means that people will decide to expand
their money balances and hold off on bond purchases if they expect interest rates to rise. This kind of demand has a negative relationship with
the interest rate.

THE IMPACT OF MONEY

Higher interest rates will decrease investment because it becomes more expensive to borrow money, and will also decrease consumption because
consumers will tend to, save more as interest rate returns increase. In addition, as higher Philippine interest rates increase the demand for pesos on
the foreign exchange markets (because of the higher returns on Philippines deposits), the higher pesos will decrease exports by making them
increasingly expensive. This means that real GDP growth and the inflation rate slow when the BSP raises the interest rate. The reverse occurs when the
interest rate is lowered.

THE QUANTITY THEORY OF MONEY

The quantity theory of money holds that changes in the money supply MS directly influences the economy's price level, but nothing else. This theory
follows from the equation of exchange:
MxV=PxY
where M= quantity of money
V = velocity of money (i.e., the average number of times a unit of money is used during a year to purchase GDP's goods and services)
P = price level
Y= real GDP

THE TIME VALUE OF MONEY

Interest is defined as the cost of using money over time. This definition is in close agreement with the definition used by economists, who prefer to say
that interest represents the time value of money.
Present Value
The concept of present value (or present discounted value) is based on the commonsense notion that a peso of cash flow paid to you one year from
now is less valuable to you than a peso paid to you today.