Module 1 Monetary Policy & Central Banking PDF

lOMoARcPSD|38143604 Module 1 Monetary policy & Central banking Management (Central Luzon State University) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded...

lOMoARcPSD|38143604 Module 1 Monetary policy & Central banking Management (Central Luzon State University) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Novie Cendurot ([email protected])  lOMoARcPSD|38143604 MODULE 1 MONEY AND ITS EVOLUTION After this lesson, the reader must be able to comprehend and demonstrate mastery of the following: 1. Origin of Money 2. Functions of Money 3. Characteristics of Good Money 4. Kinds of Money 5. Managed Currency 6. Different types of Money used in the Philippines Introduction Origin of Money The objects that was used in the creation of money were tobacco in continental Virginia, cattle in ancient Persia, iron in China as well as in ancient Greece, lead for Burma, cowry shells for India, metal in the Philippines and copper by ancient Hebrews. The commodity chosen by different countries as their medium of exchange was influenced by climatic conditions, locations of the community, degree of cultural development. With the development of trade, silver was the commodity used by China and India, Greece and Rome and the 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, silver and gold are melted down and used for industrial purposes. 5. Metals cannot 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 of the earth and refine, and therefore have a floor value Downloaded by Novie Cendurot ([email protected])  lOMoARcPSD|38143604 Significance of coinage The first step toward the system of coinage took place when the practice of cutting the metal into pieces of a fixed weight developed. When made in the form of a coin, money becomes not only a convenient commodity for comparing and storing values but moreover, it becomes the symbol of the State. A coin is merely “an ingot of metal, of which the weight and fineness are certified by the integrity of the designs upon its surface.” The purpose of a government monopoly in the minting of coins is to ensure the uniformity in weight as well as fineness of coins, thereby ensuring the presence of stability in the country’s monetary system. Functions of money Accordingly, money is generally described as “anything which is used as a medium of exchange and is widely acceptable for the payment of goods and services without reference to the general standing of the person who offers it.” From the above definition, it appears quite clear that the basic function of money is to facilitate exchange transaction of goods and services. However, in the performance of such basic function, money has been observed to discharge 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 eliminate certain difficulties that attend to every barter transaction but, at the same time, enables consumers to manifest their preferences for certain goods which they purchase in the market. As such, it exerts a powerful influence on the character of goods that are produced. Thus, as a medium of exchange, money serves as a specialized tool by which economic activities are fostered and promoted, smoothly and expeditiously. (2) as a measure of standard of value The importance of the role of money as a common denominator of value may be best appreciated by recalling to mind the numerous difficulties that attend every barter transaction. As observed under a barter (money-less) system, every commodity must necessarily be measured in terms of every other commodity which enters into the exchange transaction. Downloaded by Novie Cendurot ([email protected])  lOMoARcPSD|38143604 Without the ability to evaluate goods or services in 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 present and future transactions give rise to its use as a store of value. Knowing that it represents general command over a variety of goods, people may decide to hold money, that is save and thereby store “value” thus enabling them to obtain the goods they may want and need any time in the future. As may be noted, money is not only useful at the actual moment of exchange. Rather, it is just as useful even when lying “idle” in somebody’s cash balance for it is held and kept waiting for possible exchange in the future – immediate or remote. (4) as a means of deferred payment Money serves as a standard of deferred payments in all debts, which are contracts expressed in terms of money. All debts which specify the repayment of a definite sum in the future are using money as a standard deferred of payment. So long as the value of money is constant, it serves as an equitable standard of deferred payments. But when the value of money changes, some persons gain at the expense of others. Characteristics of good money (1) Cognizability. The standard money must be capable of easy recognition. This will help minimize counterfeiting and eliminate confusion. This is the purpose behind the minting of coins 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 and store of value, money should possess this quality covering fairly long periods of time. Originally, in the history of coinage, coins were made of pure metals , like that of gold and silver. However, because these metals are soft in their pure form, 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 from a few centavos to tens, if not hundreds or thousands of pesos, the circulation of money in various denominations becomes imperative. (4) Malleability. The material should lend to the minting process. It should be capable of being stamped with a proper design and, moreover, sufficiently durable to maintain its form and quality for an indefinite period of time. Last but not the least, it must be elastic. Downloaded by Novie Cendurot ([email protected])  lOMoARcPSD|38143604 (5) Convertibility. Not to be glossed over is another important characteristic of good money. Such attribute enables money to be convertible, that is, exchangeable in terms of its equivalent In other money. Kinds of money Basically there are 2 types of modern money namely: (1) metallic money and (2) paper money. Their titles express what they actually mean. Thus, metallic money is a special type of commodity money in which some metal, as for instance, gold or silver is used. On the other hand, paper money used in the form of bills and notes. They may or may not be backed up by a particular commodity. While there is no single acceptable classification of money, nevertheless, 3 important kinds may be noted: (1) commodity money, (2) credit money and (3) fiat money. (1) commodity money Under a modern monetary system, commodity money appears in metallic form, the face value of which approximates that of the value of the metal itself. As such, commodity money, 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 loss in value. (2) credit money Credit money may be described briefly as in the nature of a promissory note. Thus, the use of credit money presupposes the existence of another form of money in which it may be exchanged or redeemed. That money is usually referred to as the standard money or money of final redemption. In a country where commodity money is in circulation, such kind of money represents standard money into which coins, notes and deposits are freely convertible. Clearly then, standard money establishes the value of all kinds of money and, therefore, represents a common denominator into which the values of all other money may be safely 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 its redemption. However, from the moment certain obstacles are placed or encountered in the process of redemption, the value of 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”. Such kind of money may consist of coins or paper bills whose value is fixed by the government edicts or decrees and at a level that bears no relation to the value of the material used to represent such kind of money. Unlike credit money in the form of representative paper money, fiat money is not convertible in other forms of money. Downloaded by Novie Cendurot ([email protected])  lOMoARcPSD|38143604 (4) electronic money Money evolves as the requirement for its use become more sophisticated. Advances in technology made possible the introduction of newer forms of money. The first to be developed is electronic money which simply means money stored electronically and is also known as E- money. Forms of electronic money include debit cards, stored value cards, electronic cash, and electronic checks. Managed Currency Managed currency is the opposite of currency whose exchange rate is determined by the amount of supply and demand for the currency in the global marketplace. Most currencies, however, are managed by their central banks to some degree in order to achieve or maintain economic stability. How Does Managed Currency Work? Illustration: Let's say Country X's currency is called the Widget. The Country X central bank does a lot of trade with Country Y, which uses the Gidget as its currency. The Country X central bank decides to manage its currency by setting the exchange rate at 5 Gidgets per Widget. Country Y does not manage its currency. Accordingly, in Country Y, the number of Gidgets required to buy a Widget varies according to how much demand there is for Widgets and Gidgets. Why does Managed Currency Matter? Managed currency is currency whose exchange rate is controlled by a central bank. Different Types of Money used in the Philippines Pursuant to the New Central Bank Act, the BSP has the sole power and authority to issue currency, within the territiry of the Philippines. Notes and coins issued by the BSP are liabilities of the BSP and may be issued only against, and in amounts not exceeding, its assets. All notes and coins issued by the BSP are fully guaranteed and are legal tender in the Philippines for all debts, both public and private. The following are the current banknotes and coins in circulation issued by BSP:  BSP Coin Series (1995 - Present)  New Generation Currency Banknotes Series (2010 - Present)  New Generation Currency Coin Series (2018 - Present) Source: https://en.wikipedia.org/wiki/Banknotes_of_the_Philippine_peso Downloaded by Novie Cendurot ([email protected])  lOMoARcPSD|38143604 Source: https://www.sunstar.com.ph/article/1865633/Cebu/Business/BSP-adds-design-security-features- on-banknotes Source: http://www.bsp.gov.ph/bspnotes/images/NGCCoins.jpg Downloaded by Novie Cendurot ([email protected])