3FMA Preliminary Written Report on Monetary Policy and Central Banking (PDF)

Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NE...

Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ A Written Report on Monetary Policy and Central Banking (Preliminary) Submitted by: ARCENAL, Mary Grace P. CASER, Annaferre GUIMARY, Shierelyn C. LOZADA, Jemarie A. ODERIO, Chrestel Ann D. QUITOS, Clifford E. ROSETE, Mary Grace SERAPION, MJ M. TAJONERA, Jolina Submitted to: Dr. Floresito D. Calub 3FME Thu 10:30 AM - 12:00 PM  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ MONETARY POLICY INTRODUCTION: Monetary Policy is the central bank’s use of changes in interest rates, the money supply and the exchange rate in order to influence the level of aggregate demand within an economy. Central bank is a public institution that manages the currency of the country or group of countries and controls the money supply- the amount of money in circulation. This learning material covers the following aspects: Money in the Nation’s Economy Monetary Standards Monetary System INTENDED LEARNING OUTCOMES 1. Discuss and trace the origin of money as to its kinds, functions of and features. 2. Elaborate practices and standards of money in the economic system. 3. Discuss the current issues in the Philippines and global perspective of the monetary system. TOPIC I: MONEY IN THE NATION’S ECONOMY Money is a medium of exchange; it allows people and businesses to obtain what they need to live and thrive. Bartering was one way that people exchanged goods for other goods before money was created. Money is important because it allows you to live a better life by giving you options and putting you in charge. Having money and being financially secure also provides you the freedom and options to choose how you want to live and support the things that are most important to you in life. For us students, saving money brings security for any future expenses. The earlier in life an individual begins to save, the better they will be set financially in the years to come. There are several reasons why it is important to save money. HISTORY OF MONEY The Spanish introduced the coins to the Philippines. The cobs or macuquinas of colonial mints were the earliest coins that were brought in. These were minted in various Spanish countries around  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ the world. The Spanish dos mundos that were extensively circulated worldwide from 1732-1772 also reached the Philippines. During 1521-1897, the Spanish introduced coins to the Philippines. They also brought the first paper money in. Pesos Fuertes was the first paper money in circulation, which was issued by the first bank in the Philippines: El Banco Español Filipino de Isabel II. Evolution Of Money - In 1898, the country issued its currency backed by the Philippines’ natural resources. - In 1902, the US captured the Philippines and established a new currency pegged to gold, about half the price of a US dollar then. - In 1993, the Philippine peso became a floating currency. Stages Of Money Evolution 1. Commodity Money - is money whose value comes from a commodity of which it is made. Commodity money consists of objects having value or use in themselves (intrinsic value) as well as their value in buying goods. In 1903, the United States government introduced a gold standard monetary system in the Philippines, with a theoretical gold peso and a token silver peso in circulation. This currency reform was part of a wider American diplomatic offensive to expand the sphere of gold-based currencies in the world, in which American capital could be safely invested. The Philippine currency reform ended a period of monetary confusion in the islands during the late-nineteenth century. 2. Metallic Money The Spanish Occupation During 1521-1897, the Spanish introduced coins to the Philippines. They also brought the first paper money in. Pesos Fuertes was the first paper money in circulation, which was issued by the first bank in the Philippines: El Banco Español Filipino de Isabel II. Revolutionary Period In the period 1898-1899, the Spanish-Filipino was replaced. Emilio Aguinaldo, the first Philippine president, issued independent coins and paper currency under the Malolos Constitution. 3. Paper Money - The New Design Series (NDS) was the name used to refer to banknotes of the Philippine peso issued from 1985 to 2013; it was also known as the BSP Series when the Bangko Sentral ng Pilipinas was established in 1993. It was succeeded by the New Generation Currency (NGC) Series issued on December 16, 2010. 4. Credit Money - A credit history is a record of your past borrowing and repayments, including information about late payments, delinquency, and bankruptcy. In the Philippines, there are data  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ service providers which process and organize credit information on the clients of financial institutions. 5. Electronic Money - In the Philippines, electronic money refers to money stored digitally in an electronic account or device and can be withdrawable in cash or cash equivalent. Electronic devices broadly refer to mobile phone wallets, cash cards, store cards, and other related products. CONCEPT OF MONEY Money is any item or medium of exchange that is accepted by people for the payment of goods and services, as well as the repayment of loans. Economies rely on money to facilitate transactions and to power financial growth. Typically, it is economists who define money, where it comes from, and what it's worth. Here are the multifaceted characteristics of money. The word “money” is derived from the Latin word “Monet”. The origin of money is lost. SIGNIFICANCE OF MONEY The Bangko Sentral ng Pilipinas has the exclusive power and authority to issue coins and notes for circulation in the Philippines. The BSP has recently launched enhanced Philippine coins and notes that are more responsive to the needs of the elderly and the visually impaired, and feature the latest anti-counterfeiting technology. It also issues legal tender commemorative coins and notes of limited quantity to celebrate or recognize the significance of a person, place and event in Philippine history. UNFAVORABLE EFFECTS OF MONEY Moral degradation. Having lots of money may also subject one to immoral acts by thinking they can cover up or escape their actions with wealth. It depends on one's character, morals, and values. An upstanding individual may not experience any negative impact from having too much money or focusing on acquiring it as a goal. Money can lead to addiction. Focusing too much on acquiring money can be addicting, and once you have lots of it in your possession, it can open more opportunities to avail of things that can trigger addiction. More money means more purchasing power that can lead you to chase  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ materialistic values like keeping up with trends, buying the latest gadgets, or ensuring you always possess something better than others. Greed and pride. The desire to acquire money can lead to an endless cycle of wanting more and never having any satisfaction. One may not see enough money to fulfill all their needs and wants, so they may keep working and doing things to earn more, including perhaps illegal activities. It can make someone lose sight of what's important to pursue. Also, once you start having more money, you may form a mentality where you think you stand at the higher levels of society and see most people who don't have the same wealth as you to be of lower standards. Money can make you lose sight of what's important. If you put earning money as your goal, you may lose sight of what can give you happiness and fulfillment. Of course, money is necessary to buy happiness and satisfaction to a certain degree because you need it to buy some things that act as the things you want to achieve, such as a house, car, or establishing your business. However, the real goals are the feelings you get after acquiring such things, not the objects and money itself. Money only acts as the bridge to achieving what you want. FUNCTIONS OF MONEY - It is a medium of exchange that we use to purchase goods and services, and it plays a central role in the functioning of economies around the world. Money also serves as a unit of account, which is an important role. This means that money is used as a common measure of the value of goods and services. Money also plays a critical role in the functioning of financial markets and institutions. Banks, for example, use money to make loans to individuals and businesses, and investors use money to purchase stocks, bonds, and other financial assets. ATTRIBUTES OF MONEY 1. General Acceptability - It is the very essence of money. Unless a person knows that the money which he accepts in exchange for his goods or services will be taken without any objection by others as well, he will not accept it. 2. Stability of Value - The value of money cannot change for a long period of time and hence remain stable. If the value of money keeps changing, then it will fail to function as a measure of value and as a standard of deferred payment.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ 3. Portability - Money must be easily moved around. Large or bulky items, such as boulders or heavy gold bars, cannot be transported easily from place to place. 4. Cognizability - By this name we may denote the capability of a substance for being easily recognized and distinguished from all other substances. As a medium of exchange, money has to be continually handed about, and it will occasion great trouble if every person receiving currency has to scrutinize, weigh, and test it. 5. Divisibility - Money must be capable of being divided into smaller parts. Divisible forms of money help make transactions of all sizes and amounts possible. 6. Homogeneity - Money must have the same value, shape, and equality nationwide. 7. Elasticity - a term that is used to identify changes in the availability of currency and coin as changes in the economy occur. In many instances, the balances of checking and savings accounts are also understood to fall under the designation of elastic money. 8. Durability - If money stays the same in terms of shape and substance over time, it is said to be durable. This means that it does not easily change form and can be used for a long period of time. KINDS OF MONEY 1. Commodity Money - Money whose value comes from a commodity of which it is made. - Consists of objects having value or use in themselves (intrinsic value) as well as their value in buying goods. - The circulation of silver commodity money had tied the Philippines to China, with cross-border flows of products and silver dollars. Under the gold standard, fund trade linkages were shifted to the United States. 2. Credit Money Types of credit money: a. Representative Paper Money - backed up by 100% gold or silver reserve. This money circulates in a country adopting the full gold or silver reserve. b. Fiduciary Paper Money - backed up by partial gold or silver reserve. This money circulated in the Philippines when the country adopted the gold exchange standard.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ c. Bank Notes - This refers to the promise of a bank to pay the bearer or holder of the note a sum certain in standard money upon demand or upon presentation of the note. Before the establishment of the Central bank in the Philippines, there were two banks that were allowed to issue bank notes; these were the Philippine National Bank and the Bank of the Philippine Islands. 3. Fiat Money - paper money issued by a government edict or decree. It is most often issued during a war whereby the occupying country circulates a kind of paper money whose money value has no relationship at all with its intrinsic value. It is an inconvertible paper money because the government holds no reserves to back it up. 4. Legal Tender Money - money that circulates because of its legal tender power. By legal tender we mean that the debtor is authorized by law to offer it in payment of his debt or of his existing obligation.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ TOPIC II: MONETARY STANDARDS Monetary Standards are set of rules and institutions that control the supply of money in a country’s economy. The idea is to have rules and regulations in place to constrain the production and supply of money. TYPES OF MONETARY STANDARDS: A. METALLIC STANDARD 1. Monometallism – refers to the monetary system in which the monetary unit is made up or convertible to only one metal. Essential features of monometallic standard are given below: (i) Standard coins are defined in terms of only one metal. (ii) These coins are accepted as unlimited legal tender in the discharge of day-to-day obligations. (iii) There is free coinage (i.e., manufacture of coins) of the metal. Types of Monometallism: a. Silver Standard: - Under silver standard, the monetary unit is defined in terms of silver. The standard coins are made of silver and are of a fixed weight and fineness in terms of silver. - During this period, Rupee was the standard coin and its weight was fixed at 180 grains and fineness 11/12. - The coinage of the Rupee was free and people can get their silver converted into coins at the mint. Similarly, silver coins could be melted into bullion. - Silver standard lacks universal recognition as compared to gold standard. - There is greater instability of both internal and external values of money under silver standard because silver price fluctuates more than that of gold. - This is a standard in which the monetary unit is kept at par with a fixed weight or value of silver. Under this standard, all other forms of money circulated are all redeemable in silver. b. Gold Standard: - Gold standard is the most popular form of monometallic standard; the monetary unit is expressed in terms of gold. The standard coins possess a fixed weight and fineness of gold.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ - Gold standard is the most popular form of monometallic standard. Under gold standard, the monetary unit is expressed in terms of gold. The standard coins possess a fixed weight and fineness of gold. - Germany adopted the gold standard in 1873, France in 1878 and the U.S.A. in 1900. Classification of Gold Standard: a) Gold Coin Standard - this is a standard where a country adopting it, mints gold coins of the weight and fineness defined by its law and make these coins available for general circulation as a medium of exchange. Under this standard, all other forms of money are kept at par with the gold coins in circulation. b) Gold Bullion Standard - It is a standard where the monetary unit consists of gold bars that contain a definite weight of gold with specific fineness. Under this standard, all other forms of money are redeemable in gold bars. c) Gold Exchange Standard - this is a standard wherein the paper money circulated is redeemable by means of gold drafts drawn on a foreign bank situated in a country that is under the gold bullion or gold coin standard. Under this standard, the monetary unit of the country adopting it, is defined as a Fixed quantity of gold with specific fineness held abroad or by another country under the gold standard and the local currency is interconvertible at a fixed ratio with foreign gold drafts, which in turn are convertible to gold. Types of Gold Exchange Standard: Pure-gold exchange standard - this is a standard wherein the country adopting it, does not maintain gold reserves at home for their standard money. In short, the gold reserves for their standard money are all kept or maintained in a foreign country that is operating as gold coin standard or gold bullion standard country. (e.g., India) Mixed-gold exchange standard - under this standard, the country adopting it, maintains partial gold reserves at home and partial gold reserves in a foreign bank operating under the gold coin standard or gold bullion standard country.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ Merits of Monometallism: Monometallic standard has the following advantages: i. Simplicity - Since only one metal is used as a standard of value, monometallism is simple to operate and easy to understand. ii. Public Confidence Since the standard money is made of a precious metal (gold or silver), it inspires public confidence. iii. Promotes Foreign Trade Monometallism facilitates and promotes foreign trade. Gold or silver standard is easily acceptable as an international means of payment. iv. Avoids Gresham's Law Monometallism avoids the operation of Gresham’s law. According to this law, when both good as well as bad money exist in the economy, bad money tends to drive out of circulation good money. v. Self-Operative It makes the supply of money self-operative. If there is surplus money supply, the value of money will fall and the people will start converting coins into metal. This will wipe out the surplus money, thus creating a balance. Demerits of Monometallism: The following are the demerits of monometallism: i. Costly Standard Monometallism proves to be an expensive standard, rendering it unfeasible for all nations, particularly those with limited financial resources. ii. Lacks Elasticity One of the notable limitations of monometallism is its inflexibility in adjusting the money supply. This rigidity stems from its direct dependence on metallic reserves. iii. Retards Economic Growth Monometallism's potential to hinder economic growth arises from the scarcity of metal reserves. This scarcity can lead to a shortage of money supply, hampering overall economic progress.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ iv. Lacks Price Stability Due to the inherent instability in metal prices, monometallism struggles to maintain a consistent value of money (or internal price level). 2. Bimetallism - represents a monetary system striving to ground the currency in two distinct metals. In the words of Chandler, "A bimetallic or double standard is one in which the monetary unit and all types of a nation’s money are kept at constant value in terms of gold and also in terms of silver." Bimetallism functions through the simultaneous operation of two metallic standards. Features of Bimetallism (i) A bimetallic standard is based on two metals; it is the simultaneous maintenance of both gold and silver standards. (ii) There is free and unlimited coinage of both metals. (iii) The mint ratio of the values of gold and silver at the mint is fixed by the government. (iv) Two types of standard coins (i.e., gold coins and silver coins) are in circulation at the same time. (v) Both the coins are full-bodied coins. (vi) Both the coins are unlimited legal tenders. (vii) There is free import and export of both the metals Merits of Bimetallism: The merits of bimetallism are discussed below: i. Convenient Full-Bodied Currency Bimetallism provides a versatile range of full-bodied coins suitable for various transaction sizes. It ensures that gold coins are available for larger transactions, while silver coins serve smaller payment needs. However, with the advent of credit money, this advantage has become less significant. ii. Price Stability This monetary system can counteract shortages of one metal by increasing the production of the other metal. This feature contributes to stability in the prices of both metals, thereby maintaining consistency in internal price levels.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ iii. Exchange Rate Stability Bimetallism fosters exchange rate stability. When gold and silver maintain stable values relative to each other, currencies of nations with fixed values in either gold or silver tend to exchange with each other at a relatively constant rate. iv. Sufficient Money Supply A sufficient money supply is important for a stable economy. It ensures that there's enough currency available for transactions and economic activities without causing inflation or deflation. Central banks typically manage the money supply to achieve this balance. v. Maintenance of Bank Reserve Maintenance of bank reserves refers to the requirement imposed by central banks for commercial banks to hold a certain percentage of their deposits in reserve. vi. Low Interest Rates Low interest rates refer to the situation in which the prevailing interest rates in an economy are relatively low. Central banks and policymakers often set and adjust interest rates as a way to influence economic conditions. vii. Stimulates Foreign Trade Stimulating foreign trade, also known as international trade or exports, is often a goal for countries to boost their economic growth and increase their presence in global markets. Demerits of Bimetallism: i. Operation of Gresham’s Law Bimetallism in a single country is a temporary and not workable monetary standard due to the operation of Gresham's law. ii. Inequality Between Mint and Market Rates Bimetallism can operate successfully only if the equality between the market rate and the mint rate can be maintained. iii. No Price Stability The argument that bimetallism ensures internal price stability and there will be an automatic adjustment between supply and demand for money is illusionary.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ iv. Payment Difficulties Bimetallism leads to difficult situation in the settlement of transactions when one party insists on payment in terms of a particular types of coins. v. Encourages Speculative Activity It encourages speculative activity in the two metals when their prices fluctuate in the market. vi. No Stimulus to Foreign Trade International trade is stimulative if all the countries adopt bimetallism. But this is a rare possibility in the present circumstances. vii. Costly Monetary Standard Bimetallism is a costly monetary standard and all nations, particularly the poor nations, cannot afford to adopt it. GRESHAM'S LAW Gresham's law in its simple form states the when good and bad money are together in circulation as legal tender. Bad money tends to drive good money out of circulation. This law was enunciated by Sir Thomas Gresham who was the financial adviser to Queen Elizabeth I in the 16th century in England. Gresham was, however, not the first to develop this law, but it became associated with his name after he explained a problem faced by the Queen. With a view to reform the currency system, the Queen tried to replace bad coins of the previous regime by issuing new full-weighted coins. But to her surprise, as soon as new coins were circulated, they disappeared and the old debased coins continued to remain in circulation. She sought the advice of Sir Thomas Gresham, who provided his explanation in the form of the law which states- “Bad money tends to drive out of circulation good money.” The theoretical explanation of this law is in terms of the divergence of the market rate of exchange of the two currencies from mint rate. If the mint rate (i.e., the official rate of exchange between two types of money) differs from the market rate of exchange between the two types of money, then the over- valued money at the mint will tend to drive the under-valued money out of circulation Operation of the Law When both good and bad money together are in circulation as legal tender, good money disappears in three ways:  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ i. Good Money is Hoarded People tend to keep and store good money than the bad money. ii. Good Money is Melted Both good and bad coins have the same value and amount that's why people tend to make good coins more valuable by melting and making it as an art. iii. Good Money is Exported Foreign nations frequently accept payments based on the weight of the currency rather than its value. This one is being exported to them since good money has more stable conditions. B. PAPER STANDARD The term "paper standard" describes a monetary standard where unlimited legal tender is available in the form of unconvertible paper money. Even though the standard form of money is paper, coins and paper money can both be used to make payments under the paper money standard. There is no need for gold reserves to support domestic paper money or to enable international transactions. The characteristics of the paper standard include: (i) Paper money, consisting of paper notes and token coins, is the standard form of payment and used as unrestricted legal tender to fulfill commitments. (ii) A commodity is not used to establish the unit of currency. (iii) The circulating currency's intrinsic worth or commodity value is especially zero. (iv) Paper money cannot be exchanged for gold or any other precious metal. (v) The monetary unit's purchasing power is not maintained at parity with any commodities, like gold. (vi) The national nature of the paper standard. No connection exists between the many paper money schemes. (vii) The parity of the currency used to calculate the foreign exchange rate is currencies' ability to buy diverse goods and services. Merits of Paper Standard: Various merits of proper standard are described below: 1. Economical Since under paper standard no gold coins are in circulation and no gold reserves are required to back paper notes, it is the most economical form of monetary standard.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ 2. Proper Use of Gold Wastage of gold is avoided and this precious metal becomes available for industrial, art and ornamental purpose. 3. Elastic Money Supply Since paper money is not linked with any metal, the government or the monetary authority can easily change the money supply to meet the industrial and trade requirements of the economy. 4. Ensures Full Employment and Economic Growth Under paper standard, the government of a country is free to determine its monetary policy. It regulates its money in such a way that ensures fall employment of the productive resources and promotes economic growth. 5. Avoids Deflation Under paper standard, a country avoids deflationary fall in prices and incomes which is the direct consequence of gold export. This results in the outflow of gold and contraction of money supply. 6. Useful During Emergency Paper currency is very useful in times of war when large funds are needed to finance war. It is also best suited to the less developed countries like India. 7. Internal Price Stability The monetary authority of a country can establish domestic price stability under this system by controlling money supply in accordance with the changing needs of the economy. 8. Regulation of Exchange Rate The paper standard operates on imports and exports and restores equilibrium whenever exchange rates fluctuate as a result of an imbalance between demand and supply forces. Demerits of Paper Standard: The paper standard suffers from the following defects: 1. Exchange Instability There are significant changes in foreign exchange rates since the currency under paper money has no connection to any metal.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ 2. Internal Price Instability Even the much-touted benefit of the paper standard, namely domestic price stability, might not be realized in practice. In fact, the countries today operating on the paper standard go through equally ferocious internal price swings as they did when operating on the gold standard earlier. 3. Dangers of Inflation The government under paper standard generally has a tendency to use managed currency to cover up its budget deficit. This results in inflationary rise in prices with all its evil effects. 4. Dangers of Mismanagement Even the minor mistake in the management of paper currency can bring such disastrous result that cannot be conceived of in any other form of monetary standard. 5. Limited Freedom The adoption of a paper standard in the current economic environment makes it nearly impossible for a specific country to isolate itself and avoid being influenced by global economic changes. 6. Absence of Automatic Working The paper standard does not function automatically. To make it work properly, the government has to interfere from time to time. HISTORY OF PHILIPPINE MONEY Philippine money–multi-colored threads woven into the fabric of our social, political and economic life. From its early beadlike form to the paper notes and coins that we know today, our money has been a constant reminder of our journey through centuries as a people relating with one another and with other peoples of the world. Pre-Hispanic Era 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.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ 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. 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.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ The 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 (1942-1945) 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. 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  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ 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.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ TOPIC III: MONETARY SYSTEM Monetary System is a system by which a government provides money in a country's economy. Modern monetary systems usually consist of the national treasury, the mint, the central banks and commercial banks. THREE TYPES OF MONETARY SYSTEMS 1. Commodity Money This is made up of precious metals or other commodities that have intrinsic value. In order words, the monetary system uses the commodity physically in terms of currency. This form of money retains its value even if it’s melted down. For example, gold and silver coins have been commonly used throughout history as a form of money. 2. Commodity-based Money This draws its value from a commodity but doesn’t involve handling the commodity regularly. The notes don’t have tangible value but can be exchanged for the commodity it is backed by. For example, the US Dollar used to draw its value on gold. This was known as the Gold Standard. 3. Fiat Money In this monetary system the currency, which by government decree is legal tender, i.e., that the government guarantees the value of the currency. Money Supply Indicators - The money supply is the total amount of cash and cash equivalents such as savings accounts that is circulating in an economy at a given point in time. - Variations of the money supply number take into account non-cash items like credit and loans. M1: Narrow Money - M1 is a narrow measure of the money supply that includes currency, demand deposits, and other liquid deposits, including savings deposits. -M1 does not include financial assets, such as bonds. M2: Broad Money - Broad money is the most flexible method for measuring an economy's money supply, accounting for cash and other assets easily converted into currency.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ M3: Broad Money Liabilities - Liquid liabilities are also known as broad money, or M3. They are the sum of currency and deposits in the central bank (M0), plus transferable deposits and electronic currency (M1), plus time and savings deposits, foreign currency transferable deposits, certificates of deposit, and securities repurchase agreements (M2), plus travelers’ checks, foreign currency time deposits, commercial paper, and shares of mutual funds or market funds held by residents. M4: Liquidity Money - Liquidity money refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself. -The more liquid an asset is the easier and more efficient it is to turn it back into cash. Less liquid assets take more time and may have a higher cost. MONETARY POLICY IN THE PHILIPPINES Open Market Operations Consist of repurchase and reverse repurchase transactions, outright transactions, and foreign exchange swaps. Repurchase and Reverse Repurchase This is carried out through the Repurchase Facility and Reverse Purchase Facility of the Bangko Sentral ng Pilipinas. In Purchase transactions, the Bangko Sentral buys government securities with a dedication to sell it back at a specified future date, and at a predetermined interest rate. In Reverse Repurchase, the government acts as the seller, and works to decrease the liquidity of money. These transactions usually have maturities ranging from overnight to one month. Repos and reverse repos represent opposite sides of the transaction. For the party selling the security and agreeing to repurchase it in the future, it is a reverse repurchase agreement (RRP). For the party buying the security and agreeing to sell in the future, it is a repurchase agreement (RP). Outright Transactions The term outright is used in the forex (FX) market to describe a type of transaction where two parties agree to buy or sell a given amount of currency at a predetermined rate at some point in the future. Also called a forward outright, an FX forward, or a currency forward, the outright is a tool that companies that buy goods or services overseas in different currencies can use to lock in favorable exchange rates.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ Foreign Exchange Swaps A foreign exchange swap (also known as an FX swap) is an agreement to simultaneously borrow one currency and lend another at an initial date, then exchanging the amounts at maturity. It is useful for risk-free lending, as the swapped amounts are used as collateral for repayment. Acceptance of Fixed Term Deposits in a Fixed Deposit, you put a lump sum in your bank for a fixed tenure at an agreed rate of interest. At the end of the tenure, you receive the amount you have invested plus compound interest. FDs are also called term deposits. Standing Facilities Are instruments available to banks at their own initiative without restriction under normal circumstances. They consist of instruments providing and absorbing overnight liquidity. The interest rates on these instruments provide the corridor in which the money market interest rates can fluctuate. Reserve Requirements In banking institutions, there are required amounts that banks cannot lend out to people. They always need to maintain a certain balance of money, which are called "reserves". Once these reserve requirements are changed and are varied, changes in the monetary supply will be observed greatly. Two Forms: 1. Regular or Statutory Reserves Regular or Statutory Reserves Statutory reserves are the minimum amounts of cash and readily marketable securities that insurance companies must hold. They are mandated under state insurance regulations. Insurance companies are free to set their statutory reserves above the minimum level, using a principles-based approach. 2. Liquidity Reserves Liquidity Reserves Liquidity Reserves means cash at hand, immediately available funds at bank or postal accounts or securities held for cash management purposes.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ PHILIPPINE NEW GENERATION CURRENCY The central bank of the Philippines released the new banknote designs for the P20, P50, P100, P200, P500 and P1000 denominations. Malacañang Palace can be seen at the front side of P20 bill, together with Manuel L. Quezon (the second President of the Philippines) The Banaue Rice Terraces can be seen at the back of P20 bill, together with paradoxurus hermaphroditus philippinesisor palm civet (musangor alamid in the Philippines) The Leyte Landing Memorial Park can be seen at the face of P50 bill, together with Sergio Osmeña (the fourth President of the Philippines) Taal lake and Taal volcano can be seen at the reverse side of P50 bill along with caranx ignobilisor maliputo (a large type of fishes inhabiting Taal lake), and Batangas embroidery design.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ Philippines President Manuel A. Roxas is currently featured on the front side of P100 bill, while the Mayon Volvano and the whale shark (locally known as butanding) are featured on the reverse side. The portrait of Diosdado Macapagal was revised, the Arroyo oath taking was moved from the reverse to the lower left of the obverse with the Aguinaldo Shrine at the background and the Barasoa in Church was added on the lower middle. The reverse now features the Chocolate Hills and the Philippine Tarsier. On the front side of P500 bill, the monument of Ninoy can be seen, together with his wife and former president Corazon C. Aquino. The Puerto Princesa subterranean underground river can be seen at the back side of P500 bill, along with the blue-napped parrot.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ War heroes: Josefa Llanes Escoda, Jose Abad Santos and Vicente Lim Centennial of Philippines independence 1998 Medal of honor Seal of Republic of the Philippines. Tubbataha reefs natural park can be seen at the reverse side of P1,000 bill, along with south pear.  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ References: https://web.archive.org/web/20171223160638/http://www.businessdictionary.com/definition/monetar y-system.html http://ssrn.com/abstract=377760 http://www.investopedia.com/terms/f/fiatmoney.asp https://fred.stlouisfed.org/series/DDO10?fbclid=IwAR1a0FM0KA6Rzut2QHZ63WI06ZXQev0Qso QNXZehXrB9-5_hRVYt-BHN6m8 https://www.investopedia.com/terms/m/m1.asp https://www.investopedia.com/terms/m/moneysupply.asp https://www.federalreserve.gov/monetarypolicy/openmarket.htm#:~:text=Open%20market%20opera tions%20(OMOs)%2D%2D,Open%20Market%20Committee%20(FOMC) https://www.investopedia.com/ask/answers/06/outrights.asp#:~:text=The%20term%20outrights%20i s%20used,some%20point%20in%20the%20future https://corporatefinanceinstitute.com/resources/derivatives/foreign-currency- swap/#:~:text=A%20foreign%20exchange%20swap%20 https://www.bankofalbania.org/Monetary_Policy/Monetary_Implementation/Standing_Facilities/#:~: text=Standing%20facilities%20are%20instruments%20available,market%20interest%20rates %20can%20fluctuate https://www.bsp.gov.ph/SitePages/CoinsAndNotes/NewGenerationCurrencyBanknotes.aspx# https://asiasociety.org/philippines/new-generation-philippine-peso-bills https://www.google.com/amp/s/www.geeksforgeeks.org/significance-of-money/amp/ https://www.oanda.com/currency- converter/en/currencies/majors/php/#:~:text=In%201898%2C%20the%20country%20issu ed,peso%20became%20a%20floating%20currency https://www.scribd.com/document/191453074/Commodity-Money https://www.jstor.org/stable/42633661  Republic of the Philippines Northeastern Mindanao State University Formerly Surigao Del Sur State University Rosario, Tandag City, Surigao del Sur 8300 Telefax No. 086-214-4221 Website: www.NEMSU.edu.ph ___________________________________________________________________ https://www.brittany.com.ph/blogs/philippines-currency- guide/#:~:text=The%20Spanish%20Occupation,Espa%C3%B1ol%20Filipino%20de%20Isabe l%20II https://www.statista.com/statistics/1245880/electronic-money-accounts- philippines/#:~:text=In%20the%20Philippines%2C%20electronic%20money,cards%2C%20a nd%20other%20related%20products https://roboticsandautomationnews.com/2023/01/18/why-is-money-important-in-our-lives/59144/