money in the nation's economy[1]

7/27/2019 Money in the Nation's Economy[1]

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CHAPTER 1 –

MONEY IN THE NATION’ S ECONOMY



MONEY AND IT’S EVOLUTION

The objects that was used in the creation of money weretobacco in continental Virginia, cattle in ancient Persia, ironin China as well as in ancient Greece, lead for Burma, cowryshells for India, metal in the Philippines and copper byancient Hebrews.

The commodity chosen by different countries as theirmedium of exchange was influenced by climatic conditions,locations of the community, degree of cultural development.

With the development of trade, silver was thecommodity used by China and India, Greece and Rome andthe rest of European countries.



the use of metals

1. Metals, particularly gold, are virtually indestructible.2. Such metals can be melted and cast into certifiable weights.3. Metals possess the attribute of portability.

4. Such metals are valuable in their own right. Copper, silverand gold are melted down and used for industrial purposes.5. Metals can not be created at will.6. Metals are not only scarce but, at the same time, require

massive exertion of labor to extract them from the bowels ofthe earth and refine, and therefore have a floor value



significance of coinage

The first step toward the system of coinage took placewhen the practice of cutting the metal into pieces of a fixedweight developed. When made in the form of a coin, moneybecomes not only a convenient commodity for comparing andstoring values but moreover, it becomes the symbol of theState.

A coin is merely “an ingot of metal, of which the weightand fineness are certified by the integrity of the designs uponits surface. ” The purpose of a government monopoly in theminting of coins is to ensure the uniformity in weight as wellas fineness of coins, thereby ensuring the presence of stabilityin the country’s monetary system.



functions of money

Accordingly, money is generally described as “anything whichis used as a medium of exchange and is widely acceptable for thepayment of goods and services without reference to the generalstanding of the person who offers it. ” From the above definition, it

appears quite clear that the basic function of money is to facilitateexchange transaction of goods and services. However, in theperformance of such basic function, money has been observed todischarge the following incidental functions:

1. As a medium of exchange.2. As a unit of account (measure or standard of value).3. As a store of value.4. As a means of deferred payment.



(1) money as a medium of exchange

As a medium of exchange, money does not only eliminatecertain difficulties that attend to every barter transaction but,at the same time, enables consumers to manifest theirpreferences for certain goods which they purchase in the

market. As such, it exerts a powerful influence on the characterof goods that are produced. Thus, as a medium of exchange,money serves as a specialized tool by which economic activitiesare fostered and promoted, smoothly and expeditiously.



(2) as a measure of standard of value

The importance of the role of money as a commondenominator of value may be best appreciated by recalling tomind the numerous difficulties that attend every bartertransaction. As observed under a barter (money-less) system,

every commodity must necessarily be measured in terms ofevery other commodity which enters into the exchangetransaction. Without the ability to evaluate goods or servicesin terms of a single unit of account, it would be inconceivable

for trade to progress as it is now.



(3) as a store of value

The use of money as a medium of exchange for presentand future transactions give rise to its use as a store of value.Knowing that it represents general command over a variety ofgoods, people may decide to hold money, that is save and

thereby store “value” thus enabling them to obtain the goodsthey may want and need any time in the future. As may benoted, money is not only useful at the actual moment ofexchange. Rather, it is just as useful even when lying “idle” in

somebody’s cash balance for it is held and kept waiting forpossible exchange in the future – immediate or remote.



(4) as a means of deferred payment

Money serves as a standard of deferred payments in alldebts, which are contracts expressed in terms of money. Alldebts which specify the repayment of a definite sum in thefuture are using money as a standard deferred of payment. So

long as the value of money is constant, it serves as an equitablestandard of deferred payments. But when the value of moneychanges, some persons gain at the expense of others.



characteristics of good money

(1) Cognizability. The standard money must be capable of easyrecognition. This will help minimize counterfeiting andeliminate confusion. This is the purpose behind the minting ofcoins into desired sizes and weights with marks of sovereignty

of the imposing country duly stamped on them.(2) Durability. If it is to serve as a medium of exchange andstore of value, money should possess this quality coveringfairly long periods of time. Originally, in the history ofcoinage, coins were made of pure metals , like that of gold andsilver. However, because these metals are soft in their pureform, in order to give the coins such of quality of hardness,government have added alloys to them in their milting.



(3) Divisibility. Since exchange transactions vary in value froma few centavos to tens, if not hundreds or thousands of pesos,

the circulation of money in various denominations becomesimperative.(4) Malleability. The material should lend to the mintingprocess. It should be capable of being stamped with a proper

design and, moreover, sufficiently durable to maintain its formand quality for an indefinite period of time. Last but not theleast, it must be elastic.(5) Convertibility. Not to be glossed over is another important

characteristic of good money. Such attribute enables money tobe convertible, that is, exchangeable in terms of its equivalentIn other money.



kinds of money

Basically there are 2 types of modern money namely: (1)metallic money and (2) paper money. Their titles express whatthey actually mean. Thus, metallic money is a special type ofcommodity money in which some metal, as for instance, gold

or silver is used. On the other hand, paper money used in theform of bills and notes. They may or may not be backed up by aparticular commodity. While there is no single acceptableclassification of money, nevertheless, 3 important kinds may be

noted: (1) commodity money, (2) credit money and (3) fiatmoney.



(1) commodity money

Under a modern monetary system, commodity moneyappears in metallic form, the face value of which approximatesthat of the value of the metal itself. As such, commoditymoney, unlike other forms of money, possesses intrinsic value.

This means that it could be used either as a commodity(bullion) or as a medium of exchange (money) without any lossin value.



(2) credit money

Credit money may be described briefly as in the nature ofa promissory note. Thus, the use of credit money presupposesthe existence of another form of money in which it may beexchanged or redeemed. That money is usually referred to as

the standard money or money of final redemption. In acountry where commodity money is in circulation, such kindof money represents standard money into which coins, notesand deposits are freely convertible.



Clearly then, standard money establishes the value of allkinds of money and, therefore, represents a common

denominator into which the values of all other money may besafely expressed or reduced.The value of credit money is therefore essentially equal to

the value of standard money, provided of course, that no

expense, delay or other difficulties are encountered in itsredemption. However, from the moment certain obstacles areplaced or encountered in the process of redemption, the valueof credit money will depreciate in terms of standard money.



(3) fiat money

As its name implies, fiat money is issued by command,that is from the Latin “fiat”, which means, “let it be done” . Suchkind of money may consist of coins or paper bills whose valueis fixed by the government edicts or decrees and at a level that

bears no relation to the value of the material used to representsuch kind of money. Unlike credit money in the form ofrepresentative paper money, fiat money is not convertible inother forms of money.



(4) electronic money

Money evolves as the requirement for its use becomemore sophisticated. Advances in technology made possiblethe introduction of newer forms of money. The first to bedeveloped is electronic money which simply means money

stored electronically and is also known as E-money. Forms ofelectronic money include debit cards, stored value cards,electronic cash, and electronic checks.

money in the nation's economy[1]

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