CHAPTER 1: OVERVIEW OF MONEY AND ITS EVOLUTION

CONTENT
- Origin of Money
- Functions of Money
- Features of Good Money
- Kinds of Money

WHAT IS MONEY?

A medium of exchange that is centralized, generally accepted, recognized, and facilitates transactions of
goods and services, is known as money.

 Money is a medium of exchange for various goods and services in an economy.

 The money system varies with the governments and countries.
 Different countries have different currencies.

*WHY DIFFERENT COUNTRIES HAVE DIFFERENT CURRENCIES? Well, the majority of countries have their
own currency for a reason, and it's a simple one: most countries have unique economic situations and
want to make monetary decisions based on their specific interests and needs.

ORIGIN OF MONEY

1. BARTER SYSTEM
Before the advent of money, societies used barter as a means of attaining goods and services. Barter is an
economic system in which the members trade goods and services for other goods and services without
using a medium of exchange. An example of a barter exchange would be a farmer who specializes in
growing fruits trading with another farmer who specializes in growing grains. The two farmers would
come to an agreement on how much fruit to trade for grains to meet their individual needs. It was hard
for trade to happen, as it would require both sides to want exactly what the other person had to offer.

DIFFICULTIES IN BARTERING:
1. Barter tends to slow down trade, it being cumbersome or burdensome.
2. Barter is difficult because of the lack of double coincidence of wants.
3. Barter is also difficult due to the lack of a proper way to equate the value of the things exchanged.
4. Barter is difficult because of the indivisibility of some goods.

2. COMMODITY MONEY
As bartering was difficult for trade, some common commodities slowly took the function of money.
Commodity money is an economic good that acts as money. Commodity money is an economic good that
has an intrinsic value. Intrinsic value means that the commodity has value even if it is not used as money.
Examples of commodity money throughout history included cocoa beans, tea, tobacco, salt, and seashells,
to name a few.

3. METALLIC MONEY
As societies and economies evolved, they found better ways to facilitate their trade and
transaction. Metals such as gold, silver, and copper were used instead of commodity money.
Metallic money was later standardized and certified in the form of coinage. The switch to metal
money in the form of coins allowed for there to be a value associated with each type of coin.
Coins were also portable, which made payments convenient.

Pre-Hispanic Period
 Long before the Spaniards came to the Philippines, trade among the early Filipinos and with
traders from the neighboring lands like China, Java, Borneo, and Thailand was conducted
through barter. The inconvenience of the barter system led to the adoption of a specific medium
of exchange – the cowry shells. Cowries produced in gold, jade, quartz and wood became the
most common and acceptable form of money through many centuries.

Since the Philippines is naturally rich in gold, it was used in ancient times for barter rings,
personal adornment, jewelry, and the first local form of coinage called Piloncitos. These had a
flat base that bore an embossed inscription of the letters “MA” or “M” similar to the Javanese
script of the 11th century. It is believed that this inscription was the name by which the
Philippines was known to Chinese traders during the pre-Spanish time.
Spanish Era (1521-1897)

The cobs or macuquinas of colonial mints were the earliest coins brought in by the galleons
from Mexico and other Spanish colonies. These silver coins usually bore a cross on one side and
the Spanish royal coat-of-arms on the other.

The Spanish Dos Mundos were circulated extensively not only in the Philippines but the world
over from 1732-1772. Treasured for its beauty of design, the coin features twin crowned globes
representing Spanish rule over the Old and the New World, hence the name “two worlds.” It is
also known as the Mexican Pillar Dollar or the Columnarias due to the two columns flanking the
globes.

Due to the shortage of fractional coins, the barrillas, were struck in the Philippines as ordered by
the Royalty of Spain. The barrilla, a crude bronze or copper coin worth about one centavo, was
the first coin struck in the country. The Filipino term “barya”, referring to small change, had its
origin in barrilla.

Coins from other Spanish colonies also reached the Philippines and were counterstamped to
legalize their circulation in the country. Gold coins with the portrait of Queen Isabela were
minted in Manila. Silver pesos with the profile of young Alfonso XIII were the last coins minted in
Spain. The Pesos Fuertes, issued by the country’s first bank, the El Banco Espanol Filipino de
Isabel II, were the first paper money circulated in the country .

DISADVANTAGES OF METALLIC MONEY:

1. Necessary to carry in bulk in case of large transactions

2. Intrinsic value of coins is greater than its face value
3. The metal would be sold out after melting instead of being used as medium of exchange
4. Scarcity in metals
5. Loss of weight and value of coins due to wear and tear

4. PAPER MONEY

Revolutionary Period (1898-1899)

Asserting its independence, the Philippine Republic of 1898 under General Emilio Aguinaldo
issued its own coins and paper currency backed by the country’s natural resources. At the
Malolos arsenal, two types of two-centavo copper coins were struck. One peso and five peso
revolutionary notes printed as Republika Filipina Papel Moneda de Un Peso and Cinco Pesos
were freely circulated. These were handsigned by Pedro Paterno, Mariano Limjap and Telesforo
Chuidian. With the surrender of General Aguinaldo to the Americans, the currencies were
withdrawn from circulation and declared illegal currency.

American Period (1900-1941)

With the coming of the Americans 1898, modern banking, currency and credit systems were
instituted making the Philippines one of the most prosperous countries in East Asia. The
Americans instituted a monetary system for the Philippine based on gold and pegged the
Philippine peso to the American dollar at the ratio of 2:1. The US Congress approved the
Coinage Act for the Philippines in 1903.

The coins issued under the system bore the designs of Filipino engraver and artist, Melecio
Figueroa. Coins in denomination of one-half centavo to one peso were minted. The renaming of
El Banco Espanol Filipino to Bank of the Philippine Islands in 1912 paved the way for the use of
English from Spanish in all notes and coins issued up to 1933. Beginning May 1918, treasury
certificates replaced the silver certificates series, and a one-peso note was added.
The Japanese Occupation

The outbreak of World War II caused serious disturbances in the Philippine monetary system.
Two kinds of notes circulated in the country during this period. The Japanese Occupation Forces
issued war notes in high denominations. These war notes had no back up reserves, thus,
Filipinos dubbed it “Mickey Mouse” money. During the worst inflation in Philippine history,
Filipinos would go to the market laden with bayongs of Mickey Mouse bills, since one duck egg
cost 75 pesos, and a box of matches more than 100 pesos.

On the other hand, Guerrilla Notes or Resistance Currencies which are in low denominations,
were issued by different provinces and, in some instances, municipalities through their local
currency boards to show resistance against the Japanese occupation.
Post-War Independence Period: The Philippine Republic

A nation in command of its destiny is the message reflected in the evolution of Philippine money
under the Philippine Republic. Having gained independence from the United States following
the end of World War II, the country used as currency old treasury certificates overprinted with
the word “Victory”.
 With the establishment of the Central Bank of the Philippines in 1949, the first currencies issued
were the English series notes printed by the Thomas de la Rue & Co., Ltd. in England and the
coins minted at the US Bureau of Mint. The “Filipinization” of the Republic coins and notes
began in the late 60’s and is carried through to the present. In the 70’s, the Ang Bagong Lipunan
(ABL) series notes were circulated, which were printed at the Security Printing Plant starting
1978. A new wave of change swept through the Philippine coinage system with the Flora and
Fauna Coin Series initially issued in 1983. The New Design Series of banknotes issued in 1985
replaced the ABL series. Ten years later, a new set of coins and notes were issued carrying the
logo of the Bangko Sentral ng Pilipinas.
5. ELECTRONIC MONEY

Electronic money is money that is stored electronically and can be accessed through devices to
complete transactions. Other services such as electronic transfers allow for money to be
transferred from one party to another without the use of paper money.

FUNCTIONS OF MONEY

1. Medium of Exchange
As a medium of exchange, money can be used to make payments to all the transactions related to
goods & services. It is the most important function of money. As money is universally accepted,
therefore all exchanges take place in terms of money.

This function of money eliminates the major problem of double coincidence of wants and the
problems related to the barter system.

This function of money facilitates the trade in an economy and allows purchase and sale to be
conducted independently of each other.

2. Standard of Value
As a measure of value money works as a common parameter, in which the value of every good &
service is expressed in monetary terms.

It helps in determining the relative prices of goods & services due to this, it is also known as a Unit of
Account.

By limiting the value of all goods & services to a single unit, it becomes very easy to find out the
exchange ratio between them and to compare their prices.

3. Store of Value
Money as a store value can be used to store wealth in the most economical and convenient way and
to transfer the purchasing power from the present to the future.

It was very difficult to store wealth in terms of goods because of their perishable nature and high
cost. Money provides a solution to this problem as one can store money for as long as possible.

Money is easily portable, and saving money is much easier and more secure than saving goods for
future use.

4. Standard of Deferred Payment

The Standard of deferred payments states that money act as a “standard of payment”, which is to
make in the present or in near future. On a daily basis, millions of transactions are made in which
payments are not made immediately. Money encourages such transactions and facilitates capital
formation & economic development of the nation. This function of money is important because:

It leads to the creation of financial institutions.

It simplifies the borrowing and lending operations.

5. Reserve or Guarantee for Solvency

If an individual has enough money (more than his liabilities), then he cannot be declared insolvent or
bankrupt. Due to this reason, individuals and firms keep large amount of money to meet unexpected
needs.
FEATURES OF A GOOD MONEY

An Ideal and good money should possess the following qualities:

The ideal money commodity

should, as such, possess utility,
portability, durability,
homogeneity,
divisibility, malleability,
Cognoscibility and stability of
value
The ideal money commodity
should, as such, possess utility,
portability, durability,
homogeneity,
divisibility, malleability,
Cognoscibility and stability of
value
The ideal money commodity
should, as such, possess utility,
portability, durability,
homogeneity,
divisibility, malleability,
Cognoscibility and stability of
value
a. Acceptability: In terms of a form of currency being accepted within society, money must be accepted
by everyone in the economy. This acceptance is for the purpose of the exchange of money for goods and
different types of services.

b. Divisibility: This relates to money being easily divided into smaller denominations for transactional
purposes. People will only need as much money as is necessary for their purchases, therefore it is
necessary for money to be easily broken down for different types of transactions.
c. Durability: This simply refers to the physical wear and use of money over a period of time. If some
money is easily destroyed or damaged it is likely that it is fraudulent and therefore cannot be trusted.
Yet, money is made from a paper source, so some wear and tear must be expected.

d. Limited supply: In order for money to retain its worth, there must be a type of limited supply. The
more money that is in circulation the less it is valued by the economy.

e. Portability: Quite simply it is necessary for money to be easily transported so that people can carry it
around with them on a daily basis. This also allows for the ease of transaction so that money can be
transferred from one place to another.

f. Uniformity: Depending on the different types of currency that are available, money within that specific
currency must look the same. This also allows for money to be counted and measured accurately.

KINDS OF MONEY

According to the Economists, Money can be categorized into four types-

1. Fiat Money- It consists of the type of currency that is legally issued by the government. In
simpler terms, it does not involve physical commodities like gold and silver. Examples of fiat
Money include- the US dollar, the euro, and the pound.

2. Commercial Money- It is the type of currency that is generated by commercial Banks.

Commercial Banks are responsible for making Money by providing loans. It can be in any form
like personal loans, mortgages, etc. In simpler terms, the amount of Money that is produced by
the commercial Banks is called commercial Money.

3. Fiduciary Money- Are you aware of what a cheque is? Well, it is one of the primary examples to
understand fiduciary Money. A cheque is defined as a means of payment between the payer and
the payee which is based on the trust between these people rather than any official involvement
of the government. To put it simply, Fiduciary Money is the type of currency that involves
Money based on the trust between the payer and the payee.

4. Commodity Money- As the term describes, is defined as the type of Money that is based on the
value of a commodity. These commodities hold an inner value of their own. It varies from
commodity to commodity. Instances of Commodity Money include- Gold, silver, copper.