Monetary Notes PDF

FM 5 -- Monetary Policy and Central Banking Money and its Evolution Just as Humans have evolved -- money has evolved - First it was Barter -- The direct exchange of one commodity or service for another without the use of money is termed \"Barter\" in economics. Barter system is that in...

FM 5 -- Monetary Policy and Central Banking Money and its Evolution Just as Humans have evolved -- money has evolved - First it was Barter -- The direct exchange of one commodity or service for another without the use of money is termed \"Barter\" in economics. Barter system is that in which no money exists. In other words, it is moneyless economy up to some extent it is still available in our villages. Now this system has been given up by the civilized world due to the following reasons: - Lack Of Double Coincidence Of Wants: The direct exchange of one commodity for another requires direct satisfaction of both the parties. - Lack Of Common Standard Of Value:-All the goods which are be exchanged are not of the same value, so it is very difficult to determine the ratio of exchange [between](http://www.google.com/url?q=http%3A%2F%2Fstudypoints.blogspot.com%2F&sa=D&sntz=1&usg=AOvVaw0JQttCpmBF3YcdeVYsycpK) the different goods. - Shells -- Shells became the first medium of exchange -- the prototype of money, for the reason that barter was unfair to extent. - Metal Money -- Coins were created with holes in the middle so that they could be strung together, making it easier to handle large sums of money. - Silver Coins -- Following the introduction of metal money, silver coins were put into circulation. These coins bore the imprints of emperors and gods to denote their value. Subsequently, other metals like bronze and gold were also used for coinage. - Leather Money -- Deerskin was utilized to create leather banknotes, providing an alternative form of currency. The money came into existence to overcome the drawbacks of the barter system. Earlier, people use to exchange goods and services as a form of commerce. This often led to many disadvantages, one of which was the double coincidence of wants. To solve this problem, a standard medium of exchange, money, was introduced. DEFINING MONEY The term \"money\" traces its roots to the Latin word \"moneta.\" The connection between \"money\" and \"moneta\" is historically significant and reflects the evolution of money from a physical substance to a symbolic medium of exchange. Here's a deeper look into its origins: The Latin word \"moneta\" was derived from the name of the Roman goddess Juno Moneta. The temple of Juno Moneta in ancient Rome was where the Romans first minted their coins, establishing a tradition where \"moneta\" became associated with the production of currency. The term \"moneta\" gradually became synonymous with money itself, due to the association with coinage and the institution responsible for minting coins. As Latin evolved into Old French, \"moneta\" became \"moneie\" and later \"money\" in Middle English. The term retained its fundamental association with the concept of currency and value. Money is not valuable itself; rather, it represents value. It's worth is derived from what it represents---the ability to acquire goods and services. Money\'s value is supported by law. Governments designate certain forms of currency as legal tender, meaning that they must be accepted in payment of debts and transactions within a specific area. This legal support ensures its widespread acceptance and use. Money is managed and regulated by government authorities. This includes controlling its supply, ensuring its stability, and safeguarding the integrity of the monetary system. Governments, through central banks, oversee money. Central banks regulate the supply of money, implement monetary policies, and supervise the financial system to ensure stability and trust in the currency. The management of money is vital for economic health. It involves controlling inflation, influencing interest rates, and ensuring that money retains its purchasing power. While money itself may be worthless, it serves as a symbol of wealth. Its ability to be exchanged for goods and services gives it value. The wealth of an individual or a nation is often measured by the amount of money they control. Money vs currency Money serves as a medium of exchange that enables us to buy goods and services without the need for direct item swaps. On the other hand, currency refers to the physical form of money, such as coins and bills, that a government has designated as legal tender. FUNCTIONS OF MONEY 1. Money as a Medium of Exchange: By serving as a medium of exchange, money removes the need for a double coincidence of wants and the inconveniences and difficulties associated with barter. The introduction of money as a medium of exchange decomposes the single transaction of barter into separate transactions of sale and purchase thereby eliminating the double coincidence of wants. Thus money gives us a good deal of economic independence and also perfects the market mechanism by increasing competition and widening the market. As a medium of exchange, money acts as an intermediary. It facilitates exchange. When acting as the intermediary, helps one good or service to be traded indirectly for others. It helps production indirectly through specialization and division of labor which, in turn, increases efficiency and output 2. Money as a Unit of Account or Standard of Value: Due to money\'s use as a medium of exchange for buying and selling and as a value indicator for all kinds of goods and services, money can be used as a unit of account. That means money can keep track of changes in the value of items over time and multiple transactions. People can use it to compare the values of various combinations or quantities of different goods and services. Money as a unit of account makes it possible to account for profits and losses, balance a budget, and value the total assets of a company. 3. Money as a Store of Value: Money\'s usefulness as a medium of exchange in transactions is inherently future-oriented. As such, it provides a means to store a monetary value for use in the future without having that value deteriorate. So, when people exchange items for money, that money retains a particular value that can be used in other transactions. This ability to function as a store of value facilitates saving for the future and engaging in transactions over long distances.  4. Money As a Standard of Deferred Payment: To the extent that money is accepted as a medium of exchange and serves as a useful store of value, it can be used to transfer value over different time periods in the form of credits and debts. One person can borrow a quantity of money from someone else for an agreed-upon period of time, and repay a different agreed-upon quantity of money at a future date CHARACTERISTICS OF GOOD MONEY 1. General Acceptability - Money should be widely accepted as a medium of exchange. Everyone should be willing to use it for buying and selling goods and services. Consider a bustling marketplace where vendors and buyers use the local currency for all transactions. Even in an international trade agreement, both parties agree to settle payments in a widely accepted currency because it is trusted globally due to being a traditionally strong sovereign nation, backed by persistent economic growth. 2. Durability - Money should be able to last a long time without wearing out or being easily damaged, so it can be used consistently. A business owner keeps cash in a safe place or form for months without it getting damaged. For example, polymer banknotes like those used in Australia---made from polypropylene, a synthetic resin built up by the polymerization of propylene--- are chosen over paper notes because they are more durable and can withstand wear and tear from frequent handling. 3. Portability - Money should be easy to carry and transfer from one person to another, making convenient transactions. A customer in a busy city can carry a small wallet with bills and coins to make multiple purchases throughout the day. In modern economies, portability is enhanced or considered by electronic money (credit cards, debit cards, or digital wallets), which allows large sum of money to be easily transferred without carrying cash. 4. Divisibility - Money should be easily divided into smaller units to facilitate transactions of all sizes, from small purchases to large ones. At a coffee shop, a customer can pay for a \$3 coffee using smaller denominations, such as a \$5 bill, and receive \$2 in change. Divisibility allows people to transact in various amounts, from buying a small snack to purchasing an expensive piece of equipment. 5. Stability of Money Value - The value of money should remain relatively stable over time, so it can be trusted to store value and maintain purchasing power. A retail store prices its goods in the local currency, knowing that the value will not change drastically overnight. In economies with stable currencies (like the Swiss Franc), businesses can plan for long-term investments and savings without worrying about the money losing value quickly. 6. Cognizability - Money should be easily recognized and distinguished to avoid confusion and ensure that it is trusted and not counterfeited. A cashier at a store quickly identifies a genuine banknote from a fake one due to distinctive designs, watermarks, and security features. Easily recognizable money builds trust among businesses and customers, reducing the risk of fraud 7. Homogeneity or Uniformity - All units of money should look and feel the same, so they are easily recognized and accepted without doubt. All 100 bills look and feel the same, so a customer is confident that any 100 bill they receive is equivalent to any other 100 bill. In an economy, this uniformity ensures that all units of money are accepted equally without doubt. 8. Malleability - Money should be capable of being shaped or formed (like metal coins) but still retain its value without being easily destroyed or altered. Coins used in vending machines or parking meters are often made of metals like copper or nickel, which are malleable enough to be shaped but sturdy enough to last. This allows money to be created in shapes and sizes that are easy to recognize and handle. Why money is important? 1. Money simplifies matters: Money eliminates the complexities of the barter system, where people had to find someone who wanted what they had and had what they wanted. With money, people can easily buy and sell goods or services without needing a double coincidence of wants, making transactions much more straightforward. 2. Money becomes the medium of exchange: This is because money is accepted universally in trade and transactions, allowing people to buy goods and services. It acts as a common denominator, facilitating exchanges in the economy and enabling people to trade goods and services easily, efficiently, and widely. 3. With money, there is a low-uncertainty-high-exchangeability requirement: Money reduces uncertainty in trade by providing a consistent, predictable value for goods and services, making transactions reliable. Since money is highly exchangeable, it is easy to convert into goods, services, or other forms of value. This lowers transaction costs and increases confidence in economic transactions. 4. Money also contributes to economic development and growth: Money authorize investment in businesses, infrastructure, education, and innovation, driving economic development. It facilitates savings, investments, and lending activities, which provide capital for growth, job opportunities, and improve living standards. Economies grow when money circulates efficiently, allowing businesses and governments to be strategic, invest, and expand. 5. Money is a store of value: Money allows people to save and preserve value over time, unlike perishable goods or services. Individuals and businesses can hold money to use in the future, ensuring they can buy goods and services later. This stability and ability to store wealth encourage saving and planning for future expenses, investments, or emergencies. LAWS RELATED TO OUR PHILIPPINE MONETARY SYSTEM 1. Philippine Coinage Act of 1903: A monetary system based on the golf standard providing for a Philippine Peso pegged to the U.S. Dollar. This act provided coinage and insurance of Philippine Silver Peso substantially of the weight and fineness as the Mexican Peso, which should be the value of 50 cents gold and redeemable in gold at the insular treasury, and which was intended to be the sole circulating medium among people. 2. U.S. Coinage Act of 1903: A legislative act that made adjustments to the coinage laws of the United States, specifically focusing on the composition of Minor coins and how the U.S. Mint operated. This Act dealt primarily with the materials used for certain denomination of coins and provided for changes in how the Mint produced minor coinage, which included the pennies, nickels and other smaller coins. 3. Gold Reserve Act of 1943: A law that took away the title of all gold and Gold Certificates held by private individuals and institutions and transferred it to the United States Treasury. This Act also included gold held by the Federal Reserve Bank signed into law by President Franklin D. Roosevelt, Banks, Financial Institutions and the Federal Reserve could no longer exchange U.S Dollar for gold. 4. Dollar Exchange Standard: A monetary system where countries ped their currencies to the US Dollar, and hold a substantial portion of their foreign exchange reserves in US Dollars. This system ensures that the value of country\'s currency is linked to the US Dollar Influencing International Trade and Financial transactions. 5. "Mickey Mouse" Notes: There are some monetary notes that were circulated during the Japanese occupation of the Philippines during World War II. Filipinos also dubbed this money \"mickey mickey money\" which is implies that it was fake. The Japanese during their 3 and 1 years, they had printed billions of dollar that worthless paper money which was widely circulated and used for all business purposes. 6. Managed Currency System: where a nation\'s government or central bank intervines and influences its value or buying power on the market, especially in foreign exchange markets. COINAGE The place for the manufacture of money is called the 'mint", and the process is called 'minting' or 'coining' or 'coinage' It is the process of making uniform coins from metals and stamping them with a specific design to guarantee their weight and fitness and the integrity of the country they represent. In making coins, they use various metals like silver and gold, as well as base metals like copper, nickel and zinc. Here in coinage the designs and history of the coins reflect our culture, historical and economic aspects in our society. Kinds of Coinage - Free coinage: a system where anyone can take precious metal, usually gold or silver, to a government mint and have it turned into coins without any fees or restrictions. This means that individuals have the freedom to create their own money by bringing their own metal to be minted. Although the minting of coins was free, the government still imposed certain charges on the owner of the metals with brassage or seigniorage fees. These fees refer to the cost of production, which includes the price of metal, the labor to melt and shape it, the machinery used, and any other expenses.\" - Gratuitous coinage: Total responsibility for minting is borne by the government. - Limited coinage: Government purchases precious metal in an open market and mint them as a medium of exchange at face values higher than material content to facilitate trade. COMMODITY MONEY: is a type of money that has intrinsic value, meaning that its value is derived from the value of the [commodity](https://en.wikipedia.org/wiki/Commodity_money) that it is made from. PAPER MONEY: a type of currency issued by governments or central banks. It consists of paper or polymer notes and is typically printed on a special type of paper or polymer designed to be durable and secure. The value of paper money is not backed by a physical commodity like gold or silver, but rather by the trust and credit of the issuing authority. It represents a promise that it can be exchanged for goods and services. To prevent counterfeiting, security features such as watermarks, holograms, and intricate designs are incorporated. Paper money plays a crucial role in modern economies by facilitating trade and transactions. - Representative Money: a type of currency that represents a claim on a commodity or a valuable asset, rather than having intrinsic value itself. It can be exchanged for a specific amount of a commodity, such as gold, silver, or other goods. Essentially, representative money is a receipt or a promise that can be traded as money, with its value derived from the backing asset it represents. For example: Paper money issued by a bank that could be redeemed for a certain amount of gold or silver is considered representative money. - Convertible Money a currency that can be easily exchanged for another currency or asset at a stable rate. This implies that the money can be converted into a widely accepted currency or valuable asset, such as a major foreign currency or a commodity like gold, without losing much value. - Inconvertible Money/fiat Money: Inconvertible or fiat money is one that we have in our pocket and use in daily business. The face value of such money is more than the value of the paper. METALLIC MONEY The money made of any metal such as gold, silver, etc., is called metallic money. It exists in the form of coins. Metallic money has the following two types: - Full-Bodied Coins: When the face value of the coin is equal to the value of metal contained in the coin, the coin is called a full-bodied coin. - Token Money: When the face value of a coin is greater than the value of the metal it contains, it is called token money. In our country, all the coins are token money. Example of token money: Casino chips-used in casinos a substitute for real money. They can exchange for actual currency or used to place bets within the casino. BANK MONEY This is the most modern form of money this money is also called credit. It only consists of the following: - Cheques: A cheque is an unconditional order by the client on his bank to pay a certain sum of money to him or to any other party. - - PLASTIC MONEY Plastic money means the credit cards, smart cards. Plastic cards which have specially printed set of characters. Recently the use of this money has increase. CLASSIFICATIONS OF MONEY Money According to Material Used - Commodity money: This can be metallic in nature. It is used for purposes other than as a medium of exchange if so desired like rice, salt, sugar, and the like satisfying physiological needs. Precious metals like gold and silver are also used as commodity money. - Paper money: High-quality paper materials are used to stand for long periods and to minimize counterfeiting. - Bank money: These are checks or other paper notes issued by financial intermediaries. Money According to the Character of the Issuer - Treasury money: Those issued by the National Treasury before 1949. They are notes and coins of various denominations. - Central Bank money: Those issued by the Central Bank after 1949. They are the Central Bank's notes and coins circulating in the Philippines. - Commercial Bank money. Those issued by the Philippine National Bank and other commercial banks serve as promises to pay, legal tender, payable on demand or future time to bearer or order. Money According to Popularity - - - Money According to Face Value - Standard money: This is full-bodied money, authorized by law, where the weight, fineness, denominations, and designs are prescribed by the government as the standard basis for coinage. **Introduction to Monetary Standards** A monetary standard refers to the system a country adopts to regulate its currency. This system ensures a stable medium of exchange for internal transactions and serves as a reliable means of settling international obligations. It helps maintain the value of money, ensuring that the currency remains trustworthy for both citizens and international trade partners. 2\. Commodity Standards (Metallic Standards) Overview: This system ties the value of currency to a specific commodity, such as gold or silver. The purchasing power of money depends on the value of the commodity it represents. **A COMMODITY STANDARD** is a monetary system in which the purchasing power or value of the monetary unit is equal to the value of a designated quantity of a particular community or set of commodities. - so, a community standard is like a way to make sure money is connected to the things we need and want. The value of money is tied to the value of that basket. Kay If the basket gets more valuable, money gets more valuable too. And If the basket gets less valuable, money gets less valuable. It\'s like a balance. When money is connected to real things, it\'s more stable. It doesn\'t go up and down wildly. This makes it easier for us to plan and budget, and it helps to prevent big problems with money. We can make better decisions about how to use our money, and we\'re less likely to get caught off guard by sudden changes Monometallic Standard: Only one type of metal, either gold or silver, is used as the basis for currency. o Gold Standard: A system where the value of a currency is fixed to a certain weight of gold. It ensures stability, as money can be converted into gold at a set rate. \- A monetary system in which the monetary unit is kept at par with a fixed weight or value of gold. The gold standard is a system where a country's money is directly connected to a certain amount of gold. This means the government promises that you can trade your money for a specific amount of gold. \- This system was used in many countries in the 1800s and early 1900s because it helped keep the value of money steady and made people feel secure that their money was worth something real, like gold. But there were some downsides to the gold standard. Since the amount of money a country could use depended on how much gold it had, it could sometimes cause problems. If there wasn't enough gold, there wouldn't be enough money, which could make it hard for people to buy things or for businesses to grow. It also made it difficult for countries to respond to economic problems because they couldn't easily print more money without having more gold. o Silver Standard: Similar to the gold standard but using silver as the base. The value of the currency is determined by a specific amount of silver. \- The monetary standard is based upon silver as the standard metal. is a type of monetary system where the value of a country\'s currency is directly linked to a specific amount of silver. Under the silver standard, the value of a country\'s money is determined by its value in silver. For example, a unit of currency might be defined as equivalent to a fixed amount of silver, such as one ounce. This means that for every unit of currency in circulation, there is a corresponding amount of silver held in reserve. This backing helps maintain the currency\'s value. Bimetallic Standard: Both gold and silver are used. The currency can be exchanged for either metal based on predetermined values, providing flexibility during periods when one metal may be scarce or overvalued. 3\. Gold Standard Variants Gold Coin Standard: Currency is directly linked to gold coins, which contain a defined amount of gold. This system assures that the value of money corresponds with a physical asset. 1.) A standard unit of account and of gold of specified fitness for instance, the dollar was defined as 25.8 grains gold 0.9 fineness Think of a standard unit of money, like the dollar. The Gold Coin Standard said that one dollar was equal to a certain amount of gold (25.8 grains) that was 90% pure. This made it easy for people to know what they were getting when they used money. 2\. The gold unit was made a full unlimited legal tender in payments between citizens and to and by the government. Gold was like a universal currency that everyone accepted. If someone owed you money, you could ask for gold instead of paper money, and they had to give it to you. It was like a guarantee that you\'d get paid in something valuable. 3\. The free and unlimited coinage of gold was provided for holders of gold bullion subject to such brassage or seigniorage change as the government might make. If you had gold, you could take it to the government and they\'d turn it into coins for you. They might charge a small fee, but basically, anyone could turn their gold into money. This made people want to hold onto gold and use it as money. 4.) Subsidiary and token coinage was on government account, and for these coins the legal tender was limited and the market value of the mental content was less the nominal the nominal value of the coin. - The government also made smaller coins, like pennies and nickels, that weren\'t made of gold. These coins weren\'t as valuable as gold coins, and you couldn\'t use them to pay big debts. But they were still useful for small purchases, like buying candy or a newspaper. It was like having a special kind of money just for small things. 5\. No effort was made by the government to control the supply of gold coins this was left to the will and convenience of bullion holders, varying with the output of the mines, the consumption of the industrial arts, the balance of international payments, the relative popularity of gold coins and credit substitutes. The government didn\'t try to control how much gold was in circulation. Instead, the number of gold coins available depended on factors like gold mining output, industrial demand, international trade, and how popular gold coins were compared to other forms of money. This meant the money supply was somewhat self-regulating. 6\. Gold reserves were maintained to provide for the free and unhindered convertibility of all forms of government paper money, banknotes, and deposits into gold coins at part. To ensure that all forms of money, including paper bills and bank deposits, could be exchanged for gold coins, the government maintained gold reserves. This guaranteed that if you wanted to trade your paper money or bank deposit for gold, you could do so freely and easily. It was like having a safety net to back up the value of your money. 7.) The government stood ready to purchase at a fixed price unlimited quantities of gold from anyone presenting it and to sell to any applicant with equal freedom. The government guaranteed that it would buy or sell gold at a fixed price. Anyone could sell gold to the government, and anyone could buy gold from the government, without restrictions on the amount. This created stability because people could trust that the value of gold would remain consistent. 8.) No penalty of any kind moral, civil or criminal was imposed on hoarders of gold. People were allowed to keep as much gold as they wanted without facing any legal consequences. There was no punishment or tax on those who hoarded gold rather than using it or depositing it into the banking system. 9.) The free movement of gold from money into the industrial arts and from the arts into money was authorized. Gold could freely move between being used as currency (money) and being used in industrial applications (such as in jewelry or electronics). This meant that gold was not limited to just one function---it could be used in whichever way was needed at any given time. 10.) Gold was free to move internationally; it might be exported, оr imported at the will of bankers, merchants, or others. Allowing gold to move internationally emphasizes the global nature of the gold standard. This principle facilitated international trade by enabling countries to settle balances in gold, thus maintaining equilibrium in the global monetary system. The unrestricted movement of gold helps prevent trade imbalances and supports the stability of exchange rates between currencies tied to gold. 11.) The international movement of gold was the result of all the factors determining the international balance of payments. The international flow of gold because of various factors affecting the balance of payments illustrates the interconnectedness of global economies. Under the gold standard, countries with trade surpluses would see gold inflows, while those with deficits would experience outflows. This automatic adjustment mechanism helped stabilize currencies and maintain international economic balance. Gold Bullion Standard: The government controls gold reserves, which reduces the demand for gold coins while enabling a larger issuance of paper money. Currency is not directly backed by gold coins but can be exchanged for gold bullion. All gold is under the control of the government which decreased the demand for gold and made it possible to issue a larger amount of money on the same gold base. The Gold Bullion Standard is a monetary system where the currency is backed by gold, but unlike traditional gold standards, it prohibits the circulation of gold coins. Instead, gold is held in reserve and can be exchanged for currency at a fixed price. This system allows for the shipment of gold in international transactions while maintaining a gold bullion reserve to support the currency\'s value. Characteristics of the Gold Bullion Standard 1\. Fixed Price for Gold - Under this system, the government sets a fixed price for gold, which is used to determine the value of the currency. 2\. No Circulation of Gold Coins - Unlike traditional gold standards where gold coins circulate as currency, the gold bullion standard prohibits this. 3\. International Transactions - The gold bullion standard allows for the shipment of gold for international payments, facilitating trade between countries while maintaining fixed exchange rates based on gold values. 4\. Government Control - The government retains control over the gold reserves, which can lead to a decrease in the demand for gold in the market. Gold Exchange Standard: Instead of redeeming money in gold directly, the currency can be exchanged for the currency of another country that is on the gold standard. This system allows for greater flexibility in international trade. The money of a country is redeemable not in gold but in the currency of a foreign country. The Gold Exchange Standard is a monetary system in which a country\'s currency is not directly backed by gold. Instead, its value is tied to the currency of another country that is on the gold standard. Basically, instead of holding gold reserves, the country holds reserves in a foreign currency (like the U.S. dollar or British pound) that can itself be exchanged for gold. WHICH WAS THE FIRST COUNTRY TO ADOPT THE GOLD STANDARD? United Kingdom USA India France The United Kingdom was the first country to adopt the gold standard in 1821. This system linked the value of the country\'s currency directly to a specific amount of gold. This meant that people could exchange their paper money for a set amount of gold. The UK adopted the gold standard to stabilize its economy after the Napoleonic Wars, which had caused high inflation. By tying the pound to gold, the government built trust in the currency, making sure its value remained steady. The gold standard became a key part of the global financial system until the 20th century, when most countries abandoned it due to challenges during economic crises. 4\. Silver Standard Variants Silver Coin Standard: Similar to the gold coin standard, currency is backed by silver coins, each with a specific weight and purity. A monetary system where silver coins are the primary medium of exchange. In this system, the currency is based on the value of the silver contained in the coins, and their worth is determined by their silver content. Unlike the silver standard, where currency could be backed by silver reserves, the silver coin standard involves using actual silver coins for transactions. Silver Bullion Standard: Paper money is backed by silver bullion stored in reserves. This allows for greater circulation of currency, similar to the gold bullion standard. Silver Bullion standard is a monetary system which a country's currency is not tied to the value of silver coins in circulation but is instead backed by silver bullion-unminted or refined silver held in. Silver bullion is stored in large quantities by the government or central bank in reserves. These reserves act as a guarantee that the issued currency can be exchanged for a specified amount of silver at any time. The government doesn't need to circulate silver coins; instead, the currency is represented by paper money that corresponds to the amount of silver bullion held. The idea is that if people or institutions want to convert their paper currency back into a physical asset, they could theoretically exchange it for the equivalent value of silver bullion. This creates a system where the currency's value is stable and directly linked to the price of silver. Having a bullion-backed currency allows the government to issue paper money that is more convenient to use in day-to-day transactions while ensuring the stability and credibility of the currency due to its backing by silver. However, such a system can limit the government\'s flexibility in printing new money. If silver prices rise or the country experiences a shortage of silver, it could lead to economic constraints or currency devaluation. The Silver Bullion Standard has been less common than the Gold Standard, but it was adopted by some countries in the 19th and early 20th centuries, particularly when silver was more abundant or when countries wanted to avoid fluctuations of gold prices. Silver Exchange Standard: Currency is not directly redeemable in silver but is tied to the currency of a country operating on a silver standard. This creates indirect backing by silver without direct convertibility. Silver exchange standard, where a country's currency is linked to another country's currency that operates on a silver standard. It offers indirect stability by using another nation's silver-backed currency to maintain the value of the local currency, making it a system that allows for broader stability without directly managing silver reserves. Countries used this system when they didn\'t have sufficient silver reserves to back their own currency but still wanted the benefits of being tied to silver for stability and credibility in international trade. The system allows smaller or economically weaker countries to tie their monetary system to a stronger economy that operates on a Silver Standard. This can help stabilize their currency without requiring large amounts of physical silver reserves. This system was used by various colonies and smaller countries in the 19th and early 20th centuries. For example, several British colonies linked their currencies to the British pound under a silver exchange system, with the pound redeemable in silver in other parts of the world. It allowed countries to effectively maintain their currency\'s convertibility to silver without directly managing silver bullion. Advantages: Countries could enjoy the stability that comes with being linked to a precious metal standard without needing to stockpile silver themselves. It also simplified international trade, especially if the linked country had a strong economy. Challenges: Countries adopting this standard became heavily dependent on the policies and economy of the foreign country they were linked to. If the foreign country experienced inflation or economic issues, it would directly affect the smaller country's currency. 5\. Bimetallic Standard Explanation: Both gold and silver are used as the monetary base, allowing for flexibility. The currency can be exchanged for either gold or silver at a fixed ratio. This system helps countries avoid shortages of one metal by relying on both. It also provides a safeguard in case the value of one metal fluctuates due to market or mining conditions. Bimetallic Standard is a system where both gold and silver are used as the foundation of currency. It provides economic flexibility in times of metal shortages and allows for broader monetary stability. However, the difficulty of maintaining a fixed exchange ratio between the two metals and market fluctuations eventually led to the system\'s decline. One of the major challenges with the Bimetallic Standard was maintaining the fixed exchange rate between gold and silver. In the real world, the market value of gold and silver could change based on global supply and demand. If silver became more abundant, its value might drop, making it more attractive to use in transactions, while people would hoard gold because it would be worth more. This phenomenon is known as Gresham's Law, which states that \"bad money drives out good.\" In practice, people tended to use the metal that had lower market value (bad money) and hoard the one with higher value (good money), which destabilized the system over time. The Bimetallic Standard was popular in the 19th century, particularly in countries like the United States and France. However, due to the challenges of maintaining a stable ratio between gold and silver, many countries eventually abandoned the Bimetallic Standard in favor of the Gold Standard, which exclusively used gold as the basis for currency valuation. 6\. Non-Commodity Standard (Fiat Currency) Overview: In this system, the value of money is not based on any physical commodity but instead on the government's authority. The face value of the currency is higher than the material it's made from. Utopian Paper Standard: A theoretical concept where the currency is issued without any backing or reserves, based purely on trust and legal authority. This is an idealized version of fiat money where stability relies entirely on faith in the currency. ▪ This concept refers to an idealized version of a fiat money system, where the currency has no backing by physical commodities like gold or silver. ▪ The value of the currency is based solely on trust in the government or authority that issues it, and legal frameworks that enforce its use as a medium of exchange. ▪ While all fiat currencies function similarly today, this is an ideal or theoretical model where absolute faith in the currency\'s value ensures stability, without relying on any material reserves. Involuntary Fiat Standard: This arises when a government, unable to maintain a commodity standard (such as gold), transitions to fiat money. It is often a necessity rather than a planned choice. ▪ This occurs when a government abandons a commodity-backed standard (such as the gold standard) due to circumstances that force it to adopt fiat money. ▪ The transition is often out of necessity, perhaps due to economic crises, war, or a depletion of reserves, rather than a planned policy change. ▪ The currency is no longer backed by commodities, but the government must still convince people to use and accept the new fiat currency. It can be a difficult and unstable transition, leading to inflation or loss of confidence in the currency. Managed Currency Standard: Central banks actively manage the supply of money without commodity backing. The central bank adjusts money circulation based on the needs of the economy, influencing inflation, interest rates, and growth. ▪ This is a form of fiat money system where the central bank actively manages the money supply to meet the needs of the economy. ▪ There is no commodity backing the currency, but the central bank adjusts the amount of money in circulation based on economic indicators like inflation, interest rates, and growth. ▪ The goal is to stabilize the economy, influence inflation, control interest rates, and promote economic growth. Central banks use tools like adjusting the interest rate and conducting open market operations to achieve these goals. COMPARISON Gold Standard Basis of Value: Currency is backed by a specific amount of gold. Flexibility: Low. The money supply is constrained by the availability of gold. Stability: High. Provides long-term stability in currency value and low inflation. Risks: Vulnerable to gold supply fluctuations; limits the ability to respond to economic crises. Types of Gold Standards: Gold Coin Standard: o Currency is directly backed by gold coins. Citizens can exchange paper money for gold coins at a fixed rate. o Flexibility: Very Low. The supply of currency is tightly linked to the amount of gold coins in circulation. o Stability: High. As long as gold reserves are stable, this system ensures a consistent value of money. o Risks: Constrained by the availability of gold; hoarding of gold coins can reduce the money supply. Gold Bullion Standard: o Currency is backed by gold bullion, but not necessarily by gold coins. Paper money can be exchanged for gold bullion in large quantities. o Flexibility: Low. Allows for some flexibility as the government controls gold bullion reserves. o Stability: High. Provides stability but is less prone to hoarding compared to the gold coin standard. o Risks: Still dependent on gold reserves; large-scale conversions to gold bullion can strain reserves. Gold Exchange Standard: o Domestic currency is backed by gold held in foreign reserves. The currency is indirectly linked to gold through foreign currency that is convertible to gold. o Flexibility: Moderate. Allows countries to hold reserves in foreign currency rather than physical gold. o Stability: Moderate. Stability depends on the foreign currency's link to gold. o Risks: Dependence on foreign countries' monetary policies; vulnerable if the foreign currency loses its gold backing. Silver Standard Basis of Value: Currency is backed by a specific amount of silver. Flexibility: Low. Similar to the gold standard, it is constrained by the availability of silver. Stability: Moderate. Stability depends on the silver market, which can be more volatile than gold. Risks: Vulnerable to changes in silver supply and demand; less stable than gold due to its industrial uses. ▪ Silver Coin Standard Basis of Value: Currency is directly backed by silver coins with a defined weight and purity. Flexibility: Low. The money supply is tied to the availability and minting of silver coins. Stability: Moderate. Stability is tied to the value of silver. Risks: Limited by the physical supply of silver coins; vulnerable to fluctuations in silver prices. ▪ Silver Bullion Standard Basis of Value: Currency is backed by silver bullion (uncoined silver) held in reserves. Flexibility: Moderate. More flexible than the Silver Coin Standard since the government controls bullion reserves. Stability: Moderate. Provides a stable value as long as silver prices remain steady. Risks: Still vulnerable to fluctuations in silver prices; less practical for everyday transactions. ▪ Silver Exchange Standard Basis of Value: Currency is indirectly backed by silver through a foreign currency that is tied to silver. Flexibility: High. Allows for more currency issuance without holding large silver reserves. Stability: Moderate. Stability depends on the foreign currency's value and its link to silver. Risks: Dependence on the foreign currency\'s stability; vulnerable if the foreign country changes its monetary policy. Bimetallic Standard Basis of Value: Currency is backed by both gold and silver, with a fixed exchange ratio between the two. Flexibility: Moderate. Offers more flexibility than monometallic standards by using two metals. Stability: Moderate. Aims to balance the value of both metals, but stability can be affected if the market values diverge. Risks: Difficult to maintain the fixed ratio; Gresham\'s Law can cause one metal to disappear from circulation. Fiat Standard (Non-Commodity Standard) Basis of Value: Currency is backed by government decree, without any intrinsic value or commodity backing. Flexibility: High. The money supply can be adjusted as needed by the government or central bank. Stability: Variable. Stability depends on the government\'s ability to manage the money supply and economic conditions. Risks: High risk of inflation or hyperinflation if the money supply is mismanaged; dependent on public trust and confidence. UTOPIAN PAPER STANDARD BASIS OF VALUE: Completely reliant on trust and government decree with no tangible asset or reserve backing the Currency FLEXIBILITY: HIGH- Because of the combination of high quality material, advance production technique versatility, durability, sustainability and customizability STABILITY: LOW -- Due to a variety of economic social and political factor RISK: HIGH RISK -- Because of inflation, public confidence manipulation and economic stability INVOLUNTARY FLAT STANDARD BASIS OF VALUE: Not backed by physical asset introduced as a necessity during economic crisis when commodity standard (e.g cold) FLEXIBILITY: MODERATE -- Because it balance the advantages of predictability and stability with the need some level of adaptability. STABILITY: VARIABLE -- Because it influence by a complex interplay of economic, political, social and external factors. RISK: HIGH RISK- Because of lack adaptability, potential to create economic imbalances and increase market volatility. MANAGED CURRENCY STANDARD BASIS OF VALUE: The currency's value is managed and maintained by a central bank through monetary policy tools, with no intrinsic commodity backing. FLEXIBILITY: VERY HIGH- Due to the ability of Central Authorities such as central bank, to intervene and influence the value of the currency. STABILITY: MODERATE -- Due to a combination of factors that influence it's performance and reliability. RISKS: MODERATE -- Because of risk management, limited transparency, and potential for Currency Manipulation. The various monetary standards have evolved to address different economic needs and challenges. Commodity standards provide stability by tying currency to physical assets, while noncommodity standards offer flexibility by allowing governments to adjust the money supply. Each system has its own advantages and limitations, depending on the economic conditions and goals of the country. **MONETARY SYSTEM** **The Philippine monetary system is based on the Philippine peso (₱ or PHP), which is the** **official currency of the country. The Bangko Sentral ng Pilipinas (BSP) is the central bank,** **responsible for managing the currency, regulating the banking system, and ensuring price** **stability. The BSP controls the money supply through various tools, such as setting** **interest rates, reserve requirements, and open market operations, to influence inflation** **and economic growth. The currency is a fiat money system, meaning its value is not backed** **by physical commodities like gold but by the government's authority and economic stability.** **Philippine banknotes and coins are issued by the BSP and are used as legal tender for all** **transactions. The monetary policy of the Philippines focuses on targeting inflation to maintain** **economic stability and encourage sustainable growth. Additionally, the BSP oversees foreign** **exchange rates and maintains foreign reserves to help stabilize the peso against other** **currencies.** **PHILIPPINE NUMISMATIC HISTORY** **Pre-Spanish Period** **In the Philippines, during the early times, barter system was practiced where one simply** **exchanged his goods with another person\'s goods. Their inconvenience of the barter system** **led to the adoption of certain items as media of exchange like sea shells, gold dust, fiber cloth,** **betel nuts, coconuts, beads and even pearls.** **Between the 8th to the 14th centuries, our ancestors began trading in gold. A coin in the form** **of a button-shaped gold nugget was next developed as a medium of exchange and was called** **a Piloncito a named after sugar receptacles they resembled called \"pilon\".** **The inscription at the base of the piloncito has been interpreted as representing the syllable** **\"ma\" in the ancient script, meaning MA-I, a name that the Philippines was called during the** **pre-hispanic times.** **Spanish Era** **With the advent of Spanish colonization came the Galleon trade. The earliest coins brought to** **the country from Mexico were the Macuquinas or the Cobs. These were irregular, oddlyshaped coins stamped with a cross on one side and a royal coat of arms on the other.** **From 1732-1772, the Spanish dos mundos were circulated extensively. 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 shortage of fractional coins, the barrillas were produced, the first copper coins to** **be minted in the Philippines.** **- A crude bronze or copper coin worth about one centavo** **- Came from the Filipino term "barya", referring to small change** **First mint, the Casa Moneda de Manila was established in 1861. For the first time, the** **country\'s name, Filipinas appeared in the coins called Isabelinas.** **American Period** **With the coming of the Americans 1898, modern banking, currency and credit systems were** **instituted. 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 first paper currency issued by the Americans were Silver Certificates which the bearer** **could redeem in gold or silver coins. These certificates were the first to carry the** **\"Philippine peso\" mark. In 1919, these certificates were replaced by Philippine Treasury** **Certiificates.** **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.** **Japanese Period** **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 since it was next to "worthless".** **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 to show resistance against the Japanese** **occupation.** **PH MANAGED CURRENCY SYSTEM** **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".** **The \"Victory\" series of banknotes in the Philippines was introduced immediately after the** **country gained independence from the United States in 1946, following World War II. These** **notes as stated in the slide were essentially old treasury certificates, originally issued during** **the American colonial period, but they were reissued with an overprint of the word \"Victory.\"** **This overprint signified the country\'s liberation from occupation during the war and the** **subsequent transition to independence. The use of these \"Victory\" notes continued until the** **introduction of new banknotes by the newly established Central Bank of the Philippines in the** **early 1950s. Since this mark the start of Philippine Managed Currency System, the \"Victory\"** **notes have since become a part of the country\'s historical currency and are now considered** **collectible items among numismatists.** **English Series** ** 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.** ** These English Series were in denominations 1, 2, 5, 10, 20, 50, 100, 200 and 500** **pesos; all bearing portraits of Filipino heroes on the obverse, vignettes in Philippine** **history on the reverse, and worded in English language.** **Pilipino Series** ** In 1967, coinage series were introduced that featured historical personages with** **inscriptions in Filipino. Thus, these coins are known as the Pilipino Series. In 1969,** **the Central Bank likewise started issuing paper currency in Filipino. Filipino heroes were** **featured in the notes, and greater security measures were taken againts counterfeiters.** ** To complete the Filipinization of Philippine currency, the Central Bank started to issue** **the series of multi-colored Central Bank notes worded in Pilipino and similarly bearing** **the portraits of Filipino heroes on the reverse. This series called Pilipino series came in** **denominations 1, 5, 10, 20, 50 and 100. The first five notes have been widely circulated** **while the issuance of the 100-piso bills was limited. Together with the English Series,** **this Pilipino Series was considered demonetized after February 28, 1974 pursuant to** **PD 378.** **Ang Bagong Lipunan Series** ** In the 70's, the Ang Bagong Lipunan (ABL) series notes were circulated, which were** **printed at the Security Printing Plant starting 1978.** ** Ang Bagong Lipunan which literally means New Society legend overprinted on the** **banknotes was meant to symbolize the President Marcos' Sr New Society which** **marked the era of reforms on social, economic and political structure of the government.** **This legend was the main difference in the design between ABL and Pilipino series. The** **lowest denomination in the ABL series was 2-piso and the highest was 100-piso. The 2-** **piso denomination carried the design elements of the 1-piso Pilipino series. The ABL** **banknote series was considered demonetized after February 2, 1996.** **Flora and Fauna Series** ** A new wave of change swept through the Philippine coinage system with the Flora and** **Fauna Coin Series initially issued in 1983.** ** The coins featured portraits of renowned Filipino patriots and heroes on the obverse** **and rare species of fauna, flora and marine life indigenous to the Philippines were** **represented on the reverse. The coins were made of different metals, such as copper,** **nickel, and aluminum. It was in circulation until the introduction of BSP Coin Series** **New Design Series** ** The New Design Series of banknotes issued in 1985 replaced the ABL series.** ** When Martial Law was lifted in 1981, the Central Bank introduced a new series of** **currency notes and coins with anti-counterfeiting features. The New Design Series** **began in 1985 with the release of banknotes featuring national heroes, such as** **Emilio Aguinaldo on the 5-piso and Apolinario Mabini on the 10-piso. In 1986, the 20-** **piso note was released, followed by the 500-piso note with Benigno Aquino, Jr. in 1987.** ** The 1000-piso note, featuring portraits of national figures namely, Jose Abad Santos,** **Josefa Llanes Escoda and Vicente Lim was introduced in 1991. The series expanded** **to include the 200-piso note in 2002 after the the second major political upheaval** **called EDSA II in 2001 and this is the last denomination added in the New Design** **Series. The notes showcased the country's political, social, and economic** **developments with ethnic designs. This was demonetized on June 30, 2017, following a** **BSP circular.** **New Generation Currency** ** In 2009, the Bangko Sentral ng Pilipinas announced that it launched a massive redesign** **for current banknotes and coins to further enhance security features and improve** **durability. It is called the New Generation Currency series.** ** The new banknote design features famous Filipinos and iconic natural wonders.** **Philippine national symbols will also be depicted on coins. To provide a smooth** **transition from the New Design Series to New Generation Currency (NGC) series, BSP** **purposely retained some NDS features, such as, the size, predominant colors and the** **featured personalities in the NGC, except for the portrait of President Corazon Aquino** **which is an added portrait on the 500-piso note. The BSP started releasing the initial** **batch of new banknotes on December 16, 2010. The BSP launched in 2020 the** **enhanced NGC banknotes that are more responsive to the needs of the elderly and the** **visually impaired, and feature the latest anti-counterfeiting technology.** **INFLATIONARY PERIOD OF MARTIAL LAW** **During the inflationary period of martial law in the Philippines under President Ferdinand** **Marcos (1972-1981), the country\'s monetary system faced significant challenges. The period** **was marked by economic mismanagement, corruption, and global economic pressures,** **which had profound effects on the monetary system.** **The inflationary period affected the cost of living, eroded savings, and reduced purchasing** **power for many Filipinos. It also led to social unrest and dissatisfaction with the regime.** **Inflation was fueled by expansionary monetary and fiscal policies. It was also during this** **period, specifically in 1972 that martial law was declared. It started off at 14.85 percent in** **1970 peaking at 34.16 percent in 1974 during the oil crisis. Inflation was trimmed down to** **single-digit levels averaging at 8.31 percent from 1975-1978 until 1979 when it shot up to** **16.51 percent.** **In 1980, the Philippine economy began to experience the main symptoms of an economic** **crisis, namely:** **\* Declining growth rates.** **\* Deteriorating terms of trade.** **\* Rising inflation.** **\* Growing Balance of Payments deficit.** **\* Accumulating large external debt.** **In 1981, the financial system was shaken by the fleeing of a rich financial tycoon leaving** **millions of dollars in debt in various Philippine banks. This generated panic among money** **market investors and depositors and it led to massive withdrawals. The financial panic** **eventually brought many investment houses, off-shore banking units and commercial banks** **into trouble.** **G- 4** **PHILIPPINE MONETARY POLICY** **Monetary Policy** **- it refers to a credit control measure by the central bank of a county. - Monetary Policy \"as policy employing central banks control of the supply of moneyasan instrument for achieving of general economic policy\"** **- Monetary Policy is employed by Central Bank or Banko Central ng Pilipinas, control thesupply of money and interest rates in the economy. Its primary goal is to manageinflation, stabilize the currency, and promote economic growth and employment. Full employment** **- is economic situation in which all available labor resources are being used in themost** **efficient way possible. - full employment embodies the highest amount of skilled and unskilled labor that canbe employed within an economy. - which all the people who are willing to work and able to work are able to find** **employment, skilled or unskilled labor that can be employed within an economy at anygiven time. Price Stability** **- one of the policy objectives of monetary policy is to stabilize the price level. - both economics and favor this policy because fluctuations in price bring uncertaintyand instability to the economy. - The goal of Price Stability is to stabilize the increase or decrease in the price of goodsand services. If a businessman frequently changes prices, it will affect small vendorsand the people. The more stable the price, the less complaints the government receives frompeople. This is beneficial for businesses and consumers.** **Economic Growth** **- one of the most important objectives of monetary policy in recent years. - economic growth is defined as the process whereby the real per capita incomeof acountry increases over a long period of time. - We can see if economic growth is happening by looking at whether taxes are beingcollected properly and going to the right places, or if they are being pocketed by** **government employees. Our economy is growing now, so we expect to see an increasein wealth and the ability of people to purchase goods and services in the comingyear. Balance of Payment** **- another objectives of monetary policy since the 1950s has been to maintain** **equilibrium in the balance of payments. - The Balance of Payments (BOP) is a record of all transactions of a country withtherest of the world. It shows us the income and expenditure from exports and importsof** **goods, services, and financial assets, as well as aid received fromother countries. There are three main tools of monetary policy that can be used to maintain the balanceof money flowing into and out of the Philippines: - If the BOP is not balanced, it can lead to a decrease in the value of the currency andthe Philippines might end up in debt. Exchange Rate stability** **- exchange rate is the price of a home currency expressed in terms of any foreigncurrency. - if the exchange rate is very volatile leading to frequent ups and downs in the** **exchanging rate, the international community might lose confidence in our economy. - the monetary policy aims at maintaining the relative stability in the exchange rate. The exchange rate is the price of one currency expressed in terms of another currency. For example: If one dollar is equivalent to 50 pesos. If the exchange rate is not stable, it can have a significant impact on businesses, especially those that import their products.** **For example, if a business owner invests in a product that was imported and theexchange rate changes, the cost of the product will increase, potentially affectingtheir** **profit margins. This can make it difficult for them to continue operating. Naturality of Money - economists such as Wicksted, Robertson has always consideredmoney as a passive factor. - According to them, money should pay only a role of medium of exchange andnot morethan that. - Therefore, the monetary policy should regulate the supply of money** **Money is a passive factor in the economy, meaning it is not actively involved indrivingeconomic activity. According to economists like Wicksted and Robertson, the roleof** **money is to be a medium of exchange and should not be used for other purposes. Why We Need Money?** **We need money either it\'s a paper money, card or Bitcoin to make transactions moreeasier. Equal Income Distribution** **- many economists used to justify the role of fiscal policy and maintaining economicequality. However, in recent years economists have given the opinion that the monetarypolicy can help and play a supplementary role in attaining an economic equality. - We need this to address the inequality in income, wages, taxes, subsidies, andgovernment programs. Settings of Monetary Policy** **Constrationary** **- when there is \"too much money\" in the economy supporting overall demand for goodsand services which, in turn, increases inflationary pressures, the BSP tightens thefaucetto reduce the money supply.** **This action dampens demand which could lead to lower inflation** ** Higher interest rates** ** Less lending/borrowings** ** More savings** ** Less spending** **Expansionary** **- when there is \"too little money\" and the economy which dampens overall demandfor** **goods and services, the BSP \"loosens\" the faucet to expand money supply. Lower interest rates** ** More lending/borrowings** ** Less savings** ** More spending** **Advantages of Monetary Policy** ** Targeting an interest rate controls inflation** ** Easy to implement Central banks are independent and politically neutral Weakening currency can boost exports** ** Encourage higher levels of economic activity** ** Encourage a global economy** ** Promote additional transparency** **Limitations of Monetary Policy** **1. Time Gap** **- refers to one of the major limitations of monetary policy. It involves timetakenin formulating and implementing monetary policy** **2. Case of Deflation** **- compared to inflation, deflation is usually hard to control. During deflationaryperiod, Central banks reduce their policy rates to a slow as zero** **3. Liquidity Trap** **- a liquidity trap is when an interest rates are close to zero and savings ratesarehig, rendering monetary policy ineffective. 4. Difficulty in Forecasting** **- implies that monetary policy can be effective if there is proper analysisof** **economic problems for which the policy to be implemented should be addressedproperly. 5. Non-Banking Financial Intermediaries** **- refers to that the growth of financial market has decreased the scopeof** **monetary policy with the emergence of non-banking financial intermediaries suchasindustrial development bank insurance companies and mutual funds. Monetary and Banking Policy** **- refers to the measures or actions taken by the central bank to influence the general** **price level and the level of liquidity in the economy. - the Central Bank uses monetary policies to regulate money through the credit andbanking system in order to maintain monetary stability conducive to economic** **development. Monetary Policy** **- actions taken to manage the availability and cost of money and credit to attainstable** **prices. To create monetary policy the monetary authorities have to use instruments tomakepolicies workable under four realized objectives the use of those instruments shouldbeflexible enough to content with the dynamics forces that they direct. Financial instrument issued by the Central Bank to attain price tability ( Short-runTools Affecting Money Supply )** **1. Reserve Requirements** **- are the amount of cash that banks must have. - it is the portion of the assets of a particular bank that is restricted for use. - refers to the minimum amount funds that a particular banks must hold in a reserveagainst their deposit liabilities. This reserve can be kept as cash in the banks vault or asdeposits with the Central Bank. The reserve requirement is typically expressedasapercentage of the banks total deposits. - when the reserve requirement is high, banks have less money available to lend, whichcan restrict the money supply in the economy. Conversely, lowering the reserverequirement allows banks to land more, increasing the money supply. - by adjusting reserve requirement , Central Bank can exert control over the moneysupply. Increasing reserve requirement tightens liquidity and reduces inflationary** **pressure, while decreasing them can stimulate economic growth by encouraginglending. - reserve requirements also help maintain stability within the banking systemby** **ensuring that banks have enough liquidity to meet withdrawal demand fromdepositors. This is particularly important during financial crisis when depositors may rush towithdraw their funds. 2. Rediscounting** **- refers to the process by which a central bank such as the Bangko Sentral ng Pilipinasprovides loans to a particular banks by purchasing their short-termpromissory notesorother financial instruments at a discounted rate. This allows banks to access fundsthey** **can use to meet their liquidity needs or extend more credit to customers. - when a particular bank needs liquidity, it can present its eligible financial instruments, such us promissory notes to the Central Bank. - The Central Bank purchases these instruments at a discount, meaning it pays lessthan their face value. - by providing loans through radiscounting, Central Banks increase the reservesavailable to a particular banks. This additional liquidity allows banks to lend moremoney to businesses and consumers, effectively increasing the money supply intheeconomy. - rediscounting serves as a tool for stabilizing the economy during periods of highdemand for credit or economic downturns. By adjusting rediscounting policies, Central** **Banks can help ensure that credit flows smoothly throughout the economy, supportinggrowth or controlling inflation as needed. 3. Open Market Operations** **- are crucial tools used by central banks, particularly the Bangko Sentral ng Pilipinas, toinfluence the money supply and interest rates in the economy. - refers to the buying and selling of government securities such as treasury bondsbyacentral bank in an open market. - when a central bank buys government securities, it injects liquidity into the bankingsystem. The payment of these securities increases the reserves of a particular bank, enabling them to lend more money. This action typically lowers interest rates andencourages borrowing and spending, stimulating economic activity. - Conversely, when a central bank sells government securities, it withdraws liquidityfrom the banking system. This reduces the reserves of a particular banks, makingthemless able to lend money. The decrease in money supply usually leads to higher interest** **rates, which can slow down borrowing and spending.** **Banks are financial intermediaries that facilitate the flow of funds fromsavers toborrowers. they provide a range of financial services such as accepting depositslendingand payment services. FUNCTIONS** **Accepting Deposits** **Lending Money** **Payment services** **Credit creation** **TYPES OF BANK** **Commercial Banks** **Islamic Banks** **Central Banks** **Investment Banks** **Development Banks** **FISCAL POLICY** **- the word fice means \"state treasury\" and fiscal policy refers to policy concerningtheuse of \"state treasury\" or the government finances to achieve the macroeconomicsgoals. - is the use of government spending and taxation to influence the economy. - government typically used fiscal policy to promote strong and sustainable growthandreduce poverty. - the role and objectives of fiscal policy have gained prominence in the current crisisasgovernments have stepped and to support financial systems, job start growth, andmitigate the impact of the crisis on vulnerables group.** **How does Fiscal Policy Work ?** **- the Central banks industry target activity by influencing the money supply throughadjustments to interest rates, bank reserve requirements, and sale of government** **securities and foreign exchange. - government influence the economy by changing the level and types of taxes, theextentand component of spending, and the degree and form of borrowing. - in the short term the government may focus only on macroeconomics stabilization. However, in the long term the aim of the government may be to foster sustainablegrowth or reduce poverty with actions on the supply side to improve infrastructureor** **education. Objectives of Fiscal Policy** **1. Development by effective mobilization of resources** **2. Reduction in inequalities of income and wealth** **3. Price stability and control of inflation** **4. Employment generation** **5. Reducing the deficit in the balance of payment** **6. Increasing Nation income** **7. Development of Infrastructure** **Types of Fiscal Policy** **1. Contractionary Fiscal Policy** **- when government policy makers cut spending or increased taxes, they engagein contractionary fiscal policy. Government may enact contractionary measures toslowan economic expansion and prevent inflation. - This occurs when the government reduces spending or increases taxes to slowdowneconomic growth. The goal is often to reduce inflation by curbing economic expansion.** **2. Expansionary Fiscal Policy** **- uses increased government spending, reduce taxes or combination of thetwo. The primary objective of a fiscal expansion is to increase aggregate demand for goodsand services across the economy, as well as to reduce unemployment. - In this type, the government increases spending or reduces taxes to stimulate** **economic growth. The aim is to boost demand for goods and services, often withthegoal of reducing unemployment. 3. Discretionary Fiscal Policy** **- is the portion of the Federal government\'s action that can be changedyear toyear by Congress and the President. it is usually executed through each years budget orthrough changes in the tax code. - This refers to actions taken by the government, usually through Congress andthePresident, to influence the economy. It is typically done through changes in government** **spending and taxation that are adjusted annually. Key Different of Fiscal Policy VS. Monetary Policy** **- The policy of the government in which it utilizes its stocks revenues and expenditurepolicy to influence the aggregate demand and supply for products and services theeconomy is known as fiscal policy. - The policy through which the central bank controls and regulates the supply of moneyin the economy is known as monetary policy. - Fiscal Policy is carried out by the ministry of finance whereas, the Monetary Policyisadministered by the central bank of the country. - Fiscal Policy is made for short term duration normally one year while the MonetaryPolicy lasts longer. - Fiscal Policy gives direction to the economy on the other hand Monetary Policy bringsprice stability.** **Key Aspects of Coordinating these policies** **1. Shared Objectives** **2. Crisis Management** **3. Inflation Control** **4. Debt Management** **5. Economic Growth** **6. Potential Conflict Effective coordination between fiscal and monetary authorities is crucial for abalanceand thriving economy.**