THE MONETARY

SYSTEM
 What is money?
The word money comes from the name of the goddess
JUNO MONETA in whose temple Romes money was
coined.
Barter depends on a double coincidence of wants, which
occurs when one trader is willing to exchange his or her
product for something another trader has to offer.
Example: a hunter willing to exchange hides for a farmers
corn, vice versa.
 Meaning of Money
The set of assets in an economy that people
regularly use to buy goods and services from
other people.
Money is any commodity that acquires a high
degree of acceptability throughout an economy.
 Three Important Functions of Money
Medium of Exchange
Anything that is generally accepted in payment for goods and services.

Unit of Account
A common unit for measuring the value of each good and services.

Store of Value
Anything that retains its purchasing power over time.
 Properties of the Ideal Money
Quality Rationale Good Examples Bad Examples
1. Durable Money should never wear out quickly Coins; sea shells Strawberries; seafood
2. Portable Money should be easy to carry, even Diamonds; paper money Lead bars; potaoes
relative large sums
3. Divisible Market exchange is easier id Honey; paper money Cattle; diamonds
denominations support a range of and coins
possible prices
4. Uniform Quality If money is not of uniform quality, Salt bricks; paper Diamonds
people will hoard the best and spend money; coins
the rest, reducing the quality in
circulation
5. Low Opportunity Cost The fewer resources tied up in Iron coins; paper money Gold coins; diamonds
creating money, the more available
for other uses.
6. Stable Value People are more willing to accept and Anything whose supply Farm crops
hold money if they believe it will can be limited by issuing
keep its value over time. authority
 The Kinds of Money
Commodity money items used as money that also have intrinsic value in some
other use.
Example: gold bars it represents another form of commodity money. For
hundred of years, it could be used directly to buy things but also had other uses
such as making jewelries to dental fillings.
Fiat, or token money items designated as money that are intrinsically worthless.
Legal Tender money that a government has required to be accepted in
settlements of debts.
Currency: Coins + Paper Money the paper bills and coins in the hand of
public.
 The Kinds of Money
Demand deposits balances in bank accounts that depositors can
access on demand by writing a check.
Checkable Deposits
Institutions that Offers Checkable Deposits
Commercial Banks are the primary depository institutions. They
accept the deposits of households and businesses, keep the money
safe until it is demanded via checks, and in the meantime use it to
make available a wide variety of loans.
 Value of Money
Acceptability
Currency and checkable deposits are money because people accept them as money. These two
perform the basic function of money: they are acceptable as medium of exchange.
Legal Tender
Our confidence in the acceptability of paper money is strengthened because government has
designed currency as legal tender.
This note is legal tender for all debts, public and private that means paper money is a valid
and legal means of payment of debt.
Relative Scarcity
The value of money, like the economic value of anything else, depends on its supply and demand.
Money derives its value from its scarcity relative to its utility.
The utility of money lies in its capacity to be exchanged for goods and services, now or in the
future.
 Definition of Money
Money Definition M1 (Narrow Money) currency
in circulation; the base measurement of the money
supply and includes cash in the hands of the public.
Currency (coins and paper money)
All checkable deposits
Travelers check
 Definition of Money
Money Definition M2 (Broad Money) includes a broader set of
financial assets held principally by households.
Savings deposits deposits that earn interest but have no specific
maturity date
Time deposits deposits that earn a fixed interest rate if held for a
specific period; also called certificate of deposits.
Money market mutual funds
 Definition of Money
M3 or Broad Money Liabilities includes M2 plus money
substitutes such as promissory notes and commercial papers..

M4 or Liquidity Money includes M3 plus transferable

deposits, treasury bills and deposits held in foreign currency
deposits; almost all short term, highly liquid assets will be
included in this measure.
Categories of M1 Currency
Broad Money + Checking Acct.
M2 +Savings Acct.
+ More Liquid
M1 Time Deposit
M3 + Less Liquid
Time Deposit
M2

M3
 Money and Banking
Bank comes from the Italian word banca, meaning bench, which was a money changers table.
Banking spread from Italy to England, where London goldsmiths offered safekeeping for money
and other valuables.
The goldsmith gave depositors their money back on request, but because deposits by some tended
to offset withdrawals by others, the amount of idle cash, or gold, in the vault changed little over
time.
Goldsmiths found that they could earn interest by lending from this pool of idle cash.
Goldsmiths offered depositors safekeeping, but visiting the goldsmith to get money to pay for
each purchase became a nuisance.
Depositors soon grew tired of visiting the goldsmith every time they needed money, they began
instructing the goldsmith to pay someone from their account.
The payment amounted to moving gold from one stack to another stack. These written
instructions to the goldsmith were the first checks.
 Money and Banking
Check a written order instructing the bank to pay someone from an amount
deposited.
Bank Notes were pieces of paper promising the bearer specific amounts of gold
or silver to anyone who presented them to issuing banks for redemption. Today,
these are merely paper money.
Representative money bank notes that exchange for a specific commodity such
as gold.
Fiat money money not redeemable for any commodity; its status as money is
conferred initially by government decree but eventually by common experience.
Legal Tender currency that constitutes a valid and legal offer of payment or
debt.
 Birth of the FED
-Before1863, banks were chartered by the states in which they operated, so they were
called state banks.
-The National Banking Act of 1863 and later amendments created a new system of
federally chartered banks called national banks, which were authorized to issue notes
and regulated by the Office of Comptroller of the Currency, part of the U.S Treasury.
-During the 19th century, the economy experienced a number of panic runs on banks
by depositors seeking to withdraw their money. To reduce such panics, Congress
created the Federal Reserve System in 1913 as the central bank and monetary
authority of the United States.
-Throughout most of its history, the United States had what is called a decentralized
banking system. All national banks had joined the Federal Reserve System and were
subject to the new regulation issued by the Fed.
 Powers of the Federal Reserve System
-The Federal Reserve was authorized to ensure sufficient money
and credit in the banking system to support a growing economy.
-The power to issue bank notes was taken away from national
banks and turned over to Federal Reserve System.
-Other powers granted are: to buy and sell government securities, to
extend loans to members banks, to clear checks in the banking system, and to
require that member banks hold reserves equal to at least some specified
fraction of their deposits.
FEDERAL RESERVE SYSTEM (the Fed) the central
bank and monetary authority of the United States
-The name reserve bank comes from the responsibility to
hold member bank reserves on deposit.
Reserves are funds that banks have on deposit with the
Fed to promote banking safety, to facilitate interbank
transfers of funds, to satisfy the cash demands of their
customers, and to comply with Federal Reserve regulations.
History of U.S Banking System
Banking Troubles During the Great Depression
1913 1929. Both the Federal Reserve System and the national
economy performed relatively well. But the stock market crash of
1929 was followed by the Great Depression.
Between 1930 and 1933. About 10,000 banks failed. Most depositors
at the failed banks lost everything.
Bank legislation passed during the Great Depression shored up the
banking system and centralized power with the Fed in Washington.
 Some features of the legislation:
1. Board of Governors consists of 7 members appointed by the
president and confirmed by senate, became responsible for setting and
implementing the nations monetary policy.
2. Federal Open Market Committee makes decisions about the key
tool of monetary policy. It consists of 7 board governors plus 5 of the 12
presidents of reserve banks; the chair of the Board of Governors heads
the group.
3. Regulating the Money Supply the Fed has a variety of tools to
regulate the money supply:
- conducting open-market operations
-setting the discount rate
-setting legal reserve requirements for member banks
 Six Goals of Todays FED
1. A high level of employment in the economy
2. Economic Growth
3. Price Stability
4. Interest Rate Stability
5. Financial Market Stability
6. Exchange Rate Stability
Organization Chart of the Federal Reserve
System
 Bangko Sentral ng Pilipinas
The central bank of the Philippines.
It was established on July 3, 1993.
The current governor is Amando M. Tetangco, Jr.
Currency: Philippine Peso
Roles and Responsibilites:
Liquidity Management
Currency Issue
Financial supervision
Management of foreign currency reserves
Determination of exchange rate policy
 Bangko Sentral ng Pilipinas
The primary objective of BSP's monetary policy is to
promote price stability because it has the sole ability to
influence the amount of money circulating in the economy.
In doing so, other economic goals, such as promoting
financial stability and achieving broad-based, sustainable
economic growth, are given consideration in policy decision-
making