Lesson 1: An Introduction to Money and the Financial System

The financial Systems and their Financial Functions

Monetary System responsible for creating and transferring money.
Financial institutions Accumulate or gather savings.
Financial markets financial instruments and securities created and sold in
the primary securities market.
Classification of the Financial System
1. The Banking Sector
a. Expanded Commercial Bank or Universal Bank
b. Commercial Banks
c. Rural Banks
d. Thrift Banks
i. Savings Banks
ii. Private development Banks
iii. Cooperative Banks
iv. Islamic Banks
v. Microfinance Banks
e. Specialized Banks
f. Offshore Banking Units (OBUs)
2. Private Non-Bank Financial Intermediaries
a. Investment Houses
b. Investment Companies
c. Finance Companies
d. Securities Dealers
e. Securities Brokers
f. Private Insurance Companies
g. Pawnshops or pawnbrokers
h. Non-stock Savings and Loan Association
i. Mutual and Building Loan Associations
j. Credit Unions
k. Trust and Pension Fund Managers
l. Lending Investors
The Five Core Principles of Money and Banking
Core Principle 1: Time has values.
Core Principle 2: Risk Requires Compensation.
Core Principle 3: Information is the Basis for Decisions
Core Principle 4: Markets Determine Prices and Allocate Resources
Core Principle 5: Stability Improves Welfare
What is Money?
Money can be defined as anything that people regularly use to buy goods and
services from other people. It can be anything accepted as a means of paying for
goods or services or for paying off debts.
The Barter System
a. Difficulties with the barter system
1. Barter tends to slow down trade, it being cumbersome or burdensome.
2. Barter is difficult because of lack of double coincidence of wants.
3. Barter is also difficult due to the lack of a proper way to equate the
values of the things exchanged.
b. Living without money
Communities were so small that everything was shared out between them.
They lived in caves and their food came from hunting and fishing.
c. Trading Goods
Early people found it useful to trade food for pots or weapons. It was not only
goods that were swapped.
d. Importance of Metal
Of all the goods used in exchange, metals proved the most useful. They did
not wear out quickly and were scarce enough to be in great demand.

The First Notes

The earliest country to use paper money was China, as long as the 7 th
century AD.
In Europe, paper money first came into use when merchants issued
receipts for the gold and other precious things left with them for
safekeeping.
Paper notes were not issued by banks until 17 th century in Europe.
Today, banknotes are circulated by the central bank of each country
and their number is controlled by the government
Early banknotes could be exchanged for gold on demand.
The big difference between money today and in the past is that very
little of it now is exchangeable into gold or silver as it is used to be.
When we receive new banknotes, it does not necessarily mean that
more money has been created.
Traditional Characteristics of Money
1. Utility this meant that the object or commodity could be used not only as
money but in its own original form.
2. General Acceptability the object or commodity must be of general
acceptance.
3. Portability this means that the commodity should be easily carried or
transported from place to place.
4. Uniformity it is achieved through the use of standard and uniform metal or
paper, as the case may be.
5. Malleability this means that the commodity used as money could be melted
down and shaped into different forms as well as imprinted with any desired
design.
6. Durability the commodity chosen as money would have to withstand normal
wear and tear.
Functions of Money
1. As a medium of exchange.
2. As a standard of value.
3. As a store of value.
4. As a standard of deferred payment.
5. As a reserve or guaranty for solvency under the system of partial reserve.
Classification of Money
1. Full-bodied money
2. Representative full-bodied money
a. Issued by government
i. Token coins
ii. Representative token money
iii. Circulating promissory notes
b. Issued by banks
i. Circulating promissory notes issued by central banks
ii. Circulating promissory notes issued by other banks
iii. Demand deposits subject to check
Types of Money Issued in the Philippines
Types
Money Issued
Standard Money
Central Bank Notes
Representative Money
Philippine Treasury Certificates
1903
Convertible Representative
Philippine Treasury Certificates
Money
1903
Fiat Money (Old Concepts)
Japanese War Notes
Fiat Money (Current Concept)
Bangko Sentral Notes
Token Coins
Metallic Coins (Php .50 Php
10.00)
Credit Money
Bangko Sentral Notes

Establishing a Monetary System

Metallic-based System
Historically, gold and/or silver served as money, with gold being more
widely used than silver. These metals received the approval of the
state to serve as money long after they were assigned the role by
society.
The Gold Coin Standard
Gold circulates as currency in the form of coins having a given weight,
fineness, and shape. Thus, the value of a coin is easily recognizable
and the problem of non-standardized shape is eliminated.
The Gold Bullion Standard
The monetary unit is again defined in terms of a fixed quantity of gold.
However, instead of the gold being circulated as coins, paper money
convertible into gold is used as the hand-to-hand currency.
The Gold Exchange Standard
The gold exchange standard bases the monetary reserves of one
nation on the holdings of claims against another nation on the gold
bullion standard.
Paper Currency Systems
Limitations on the supply of gold and the failure of the supply of gold
to increase in proportion to the growth of the demand for money make
a paper money supply necessary.
Mickey Mouse Money
As the Japanese settled down to occupy the Philippines, they
introduced and circulated huge amounts of military peso-notes that
eventually came to be known a Mickey Mouse money.
Do We Need Gold?
Domestically, there is no need for gold convertibility of the currency.
Internationally, the question of convertibility of currencies into gold was
different because of tradition, the number of countries involved, a greater
belief in the ability of gold to act as a restraint in money supply expansion,
and the lack of agreement on a different international monetary system.