Julie An S. Paala

BSED-III-1

Refers to all things generally acceptable in payment of debt and as payment for goods and services whatever its legal status may be.

Evolution of

Money

Autarky- refers to a family or tribal group, which in the absence of trade, produces that level of goods and services equal to their consumption; the output of production is then shared according to the groups distribution rules.

Barter system- involves trading of goods and services for other goods and services.

Commodity money- overcome the inconvenience that next with barter system by using uncoined metals like gold, silver or copper. These also had the advantage of ease of transport and durability.

Coinage- solved the problem of adulteration and short weighing with king’s seal being stamped on the metals for authentication. However, some more problem came up like storage, theft, costly, and risky transport and so on.

IOU’s- tend to minimized risk in transport since coins were left to reputable person with a “vault or safekeeping” means IOU’s were simply written on paper/receipt instead of going to the safe keeper to transact.

Bank notes- involves the promise to pay a debt (IOU) which was evidenced by a piece of paper backed by a specie.

Specialized bankers- evolved because it was observed that not all people who deposited this money were demanding payment at the same time. Hence, there are no need to hold all the gold and silver while holding on the rest for safekeeping paved the way for fractional reserve banking.

Electronic money- make use of computer terminals for transaction and automated computer hou8se that does away with physical medium of exchange.

Functions of

Money

Money served as a medium of exchange

-In modern society, goods are exchange for money. The want of coincidence between buyers and sellers is overcome by the used of money, for money is always wanted in exchange for goods.

Money is used as a standard of value or a unit of account

-Money furnishes the common standard or common denomination in comparing the value of goods and services. When we a buy a good and express its value in terms of money, we are stating its price.

Money serves as a store of value

-Money can be saved in excess to have something to spend in the future. Other commodities cannot be used as such because they don’t last for a long time.

Standard of deferred payments

-People generally borrow and pay their debts in terms of money and not goods. Contracts and obligations involves deferred payments.

Reserve or guaranty of solvency

-Financial institutions must have cash in their vaults and legal reserves to meet demands for money in order to guarantee their solvency. A banking institution or a business firm may have plenty of assets like lands, real estate, buildings and other properties but creditors do not readily accept them.

Characteristics of

Money

General acceptability- a commodity that is generally wanted must have a great utility. They are standards of deferred payments.

Portability- unless the medium of exchange can be easily carried from place to place, it cannot conveniently serve as money. The precious metals have displaced other commodities as money because they are portable.

Durability- it must not lose its value through deterioration.

Uniformity- each monetary unit of whatever denomination should have the same weight and finesse as any other unit. If they deferred in their contents, there would be confusion and difficulty on their used and acceptability.

Divisibility- the commodity used as money must be capable of being divided into small units to effect small exchange without loss of value.

Cognizability- people, even illiterates, should be able to recognize easily the medium of exchange. Counterfeit and mutilated coins should be easily distinguished from the genuine coin

Kinds of Money

-is in itself wealth besides being used as money. It contains an amount metal the value of which is the same whether it is in the form of coin or bullion. It is the money upon which the other kinds of money are based and from which they derived their value because they are redeemable into standard money.

Two kinds of Paper Money

• Representative money is in the form of certificates issued by the government certifying to the fact that the government has on the deposit standard money which will be issued to the bearer on demand.

• Convertible or fiduciary paper money, consist of notes promising to pay on demand.

-consist of subsidiary coins. It is issued on small denominations to permit the “making of change”. It is made of metals base on those standard coins. Token coins are worth more as coins or money than as metal or bullion, that is, their intrinsic value is less than their nominal or face value.

-consist of irredeemable paper money issued by financially embarrassed government as a result of the breakdown of the ordinary monetary systems. It is usually called fiat money because it is generally made acceptable by the fiat or order of the government.

Reference

Quijano, Jodlyn and Jovie Bonifacieo. Basic Economics . Makati City: Kriss V Print Haus, 2003