CHAPTER 4

Types of Monetary standards

Monetary standards refer to the system or framework that controls or facilitates the
movement of money.

The two monetary standards are:

Commodity Standard- This standard exists where the value of monetary units equal
the value of specific amounts of commodity (for example gold).

Monometallic / metallic coin standards

A monometallic standard is when currency is convertible into just one metal at a

fixed price, as opposed to a bimetallic standard when the currency is convertible into
two metals at a fixed price.

Metallic exchange standard

A metallic standard in more than one country implies a fixed exchange rate. For
example, if the international monetary system is a gold standard, each country
defines the price of its currency in gold or silver, which is called parity.

The metallic standard was suspended during wars. In these times, no metallic
standard existed for anchoring exchange rates.

Bimetallic standard

Bimetallic Standard' A monetary system in which a government recognizes coins

composed of gold or silver as legal tender. The bimetallic standard (or bimetallism)
backs a unit of currency to a fixed ratio of gold and/or silver.

Inconvertible managed paper standard- This monetary standard the creature of

the state created by the government exists. (Another term is fiat money > legal
tender). This system only works because the government values the legal tender and
the public accepts the standard. The public has to accept the standard since the paper
itself isnt actually worth anythingits an abstraction. It fails when the government does
not exhibit proper economic restraint and responsibility (i.e. massive hyperinflation).
a monetary system based on inconvertible paper money as the standard

There are two basic monetary standards. Most are familiar with the second since it
remains predominate in developed economies.

CHAPTER 5

The Philippine Monetary Standards

A countrys monetary standard is adopted by authority of the State as a measure of

value. As such, the monetary standard may be held synonymous with standard
money or money of standard value

Aptly described, the term monetary standard means a particular type or kind of
standard money used in the monetary system of a country and to which other kinds
of money are related.

Type of Monetary Standards

Monetary standards are of two major types namely:

Commodity standard

Non-commodity standard / Fiat standard

Gold-exchange standard, monetary system under which a nations currency may be

converted into bills of exchange drawn on a country whose currency is convertible
into gold at a stable rate of exchange. A nation on the gold-exchange standard is
thus able to keep its currency at parity with gold without having to maintain as large a
gold reserve as is required under the gold standard.

The gold-exchange standard came into prominence after World War I because of an
inadequate supply of gold for reserve purposes. British sterling and the U.S. dollar
have been the most widely recognized reserve currencies. The requirement of a fixed
rate of exchange for the reserve currency has the effect of limiting the freedom of the
reserve-currency countrys monetary policy to solve domestic economic problems. The
use of gold reserves is now limited almost exclusively to the settlement of international
transactions, on rare occasions.

Characteristics of a Gold Exchange Standard

a. Gold need not be coined or held as bullion but the monetary unit of the country is
defined in a specific quantity of gold.

b. The national treasury or the central bank establishes a credit balance with
bankers in a foreign country that is operating on a gold-coin standard. This balance, it
may be stressed, may be built up by borrowing abroad or by depositing gold or credits
with the foreign bankers.

c. The government or central bank undertakes to buy and sell at an established price
unlimited quantities or drafts upon one or more banks located in one or more foreign
countries which operate on the gold-coin or gold-bullion standard.

d. All kinds of credit money are redeemable at par in gold drafts; and

e. There is a free gold market, that is, people are privileged to import and export gold,
to hoard it, and to buy it from mining companies.

Dollar Exchange Standard

A key economic influence and a major factor of international relations between the
U.S. and other countries, the dollar exchange standard once defined international
trade. It is still in use in some countries, though many are now off the standard.

The dollar exchange standard provides a fixed rate of exchange between the currencies
of participating countries and the U.S. dollar. Some 44 countries, primarily European
and Asian participated, including Japan and the UK.

Dollar-Exchange Standard In The Philippines

The Philippine under the dollar-exchange standard become redeemable in

dollars instead of gold. Thus, the dollar exchange standard, in essence, provided that
the currency should be backed up by a corresponding 100 per cent dollar reserve
requirement.

Apparently, the operation of the dollar-exchange standard appeared simple and

easy , as was observed, in the absence of pressures on our economy which made
possible 100% reserve for the currency in the circulation, the international stability of the
peso was doubtlessly was made secure.

However, in the other hand, rigidity which characterized this monetary

system, imposed no little amount of unnecessary difficulties in times of economic stress.
As a matter of fact, under this system, money supply could not be increased to meet the
growing needs of our economy.

Effects of the Dollar Standard

The dollar standard provided a common standard creating price

stability among the nations who adopted it. It also centered most of the control over the
world economy in the hands of the U.S. The efficacy of both provisions is hotly debated
even today. China took itself off the dollar standard in 2005, and put itself back on the
dollar standard in 2008. Japan stopped using the dollar standard in 1973, shortly after
the gold standard was abandoned.

Managed Currency Standard

With the abandonment of the gold standard by leading countries of the world
sometime in the early thirties, a new currency system because quite well- known. This
is so called Managed Currency System. The kind of currency system is perhaps as
common today as the gold standard prior to its abandonment in 1931. Evidently, this
standard came about as the answer for a frantic search for an ideal standard of value
in lieu of a metallic standard.

This system advocates the use of inconvertible paper money that is

irredeemable by reason that is issued against no reserve or specie. This is the reason
that inconvertible paper money under a managed currency system is termed by some
as political money or flat money. Its acceptance is predicted on its being given legal
tender power by the government.

The argument offered in support of the alleged advantage obtained from the use
of inconvertible paper money over metallic money is that it can be effectively employed
to stabilize price by regulating its supply in accordance with changes in acceptable
index numbers. Control of the discount rate on the part of the central bank authorities
would cause it to be the chief tool of currency management. Thus its advocates
contend that such inconvertible paper money could perform the monetary functions
discharged by metallic currency without producing adverse effects on the nations
currency.

It might be pointed out the danger of over-issue of inconvertible paper

money on the part of the government represents the fundamental objection to its use.
An example of this danger is, when fiscal needs exceed that of revenue thus, it is
maintained that unless the issuance of such currency can be effectively controlled, the
country will stand as a silent witness to an uncontrolled inflation.

It may be stated, in the connection, the managed currency system in order to be

a success in a country needs the unfaltering faith of the people in the wisdom and will-
power of their government which exercises reasonable safeguards in the issuance of
paper notes.
 Starting with the year 1949, the Philippines is on a Managed Currency
System

CHAPTER 6

Theories on the Value of Money

IMPORTANCE OF VALUE OF MONEY

It can be tempting to always go for the cheapest option. However, it is important

to know exactly what you are getting for your money. It is not always easy to predict
what might happen in the future to give you a need to make a claim. Perhaps think of
claims that friends and family have made and consider whether this is likely to happen
to you. It might seem difficult, but actually it should not take that long and you will have
the peace of mind knowing that you have saved money but you still have adequate
insurance over.

EFFECTS OF CHANGES IN THE VALUE OF MONEY

Fluctuating Prices create a feeling of uncertainty about the future. Transactions in

future sales or purchases cannot be made with confidence and the smooth flow of
economic life is disturbed. Wealth-getting in times of inflation degenerates into gamble
and a lottery (Keynes). It is thus clear that the distribution of wealth is altered
unjustly

MONETARY MEASURES TO STABILIZE THE VALUE OF MONEY

Some theorists charge that a free monetary system would be unwise, because it
would not stabilize the price level. Money, they say, is supposed, to be a fixed
yardstick that never changes. Therefore, its value or purchasing power, should be
stabilized to debtors and creditors with sure contracts of paying back dollars, or gold
ounces, of the same purchasing power as they lent out.
Yet, if creditors and debtors want to hedge against future changes in purchasing power,
they can do so easily on the free market. When they make their contacts, they can
agree that repayment will be made in a sum of money adjusted by some agreed-upon
index number of changes in the value of money.

The stabilizers have long advocated measures, but strangely, they rarely availed
themselves of the opportunity. Must the government then force certain benefits on
people who have already freely rejected them? Apparently, businessmen would rather
take their chances, in this world of irremediable uncertainty on their ability to anticipate
the conditions of the market. After all, the price of money is no different from any
other free prices on the market.
Money, in short, is not a fixed yardstick. It is a commodity serving as a medium
for exchanges.

Flexibility in its value in response to customer demands is just as important and just as
beneficial as any other free pricing market

THEORIES ON THE VALUE OF MONEY

QUANTITY THEORY

In monetary economics, the Quantity Theory of Money (QTM) it states that money
supply has a direct, proportional relationship with the price level.

It is the idea that the supply of money in an economy determines the level of prices
and changes in the money supply result in proportional changes in prices.

In other words, the quantity theory of money states that a given percentage change in
the money supply results in an equivalent level of inflation of deflation.

QTM describes the relationship between inflation, the money supply, real output, and
prices. Its a theory that explains how much money is needed in order for an
economy to function.

TRANSACTION THEORY

Transactions demand, in economic theory, specifically Keynesian economics, is one of

the determinants of the demand for money (and credit), the others
being speculative demand and precautionary demand. The transactions demand for
money refers specifically to money narrowly defined to include only its
most liquid forms, especially cash and checking account balances. This form of money
demand arises from the absence of perfect synchronization of payments and
receipts. The holding of money is to bridge the gap between payments and receipts.
The transactions demand for money is due to the household's motive to hold money
for daily transactions and the business's motive to facilitate daily operations.

The transactions demand for money is positively affected by the amount of real
income and expenditure, and is negatively affected by the rate of interest, which is
the opportunity cost of holding money for this or any other reason. It also depends
on the timing of expenditures and the length of the payment period.

The Baumol-Tobin model focuses on the optimal number of transactions per unit of
time for a household, which dictates the transactions balances held on average over
time.
INCOME THEORY

Thomas Tooke Originator of the theory (1844)

The prices of the commodities do not depend upon the quantity of money on
the contrary, the amount of circulating medium is a consequence of prices.

Others developed their theories based on this idea

CASH BALANCE THEORY

Popularized by some Cambridge economists named Alfred Marshall, A. C. Pigou, D.

H. Robertson, John Maynard Keynes and R. G. Hawtrey.

The value of money depends upon the demand for the money. But the demand for
the money arises not on account of transaction but on account of its being store
of value.

CASH BALANCE THEORY VS OTHER THEORIES

Both quantity theories, Cambridge and classical, attempt to express a relationship

among the amount of goods produced, the price level, amounts of money, and
how money moves but Cambridge equation focuses on money demand instead of
money supply.

The theories also differ in explaining the movement of money:

- Money moves at a fixed rate and serves only as a medium of exchange while in
the Cambridge approach money acts as a store of value and its movement
depends on the desirability of holding cash.