A BRIEF HISTORY OF MONEY

Monetary Policy and Central Banking

 Development of Monetary System
 Barter system was the first
stage of monetary
development. It is the
direct exchange or
swapping of goods for
goods, services for
services, goods for
services, or services for
goods.
 Barter Economy-
moneyless economy that
relies on trade or barter
 Development of Monetary System
 Society abandoned the barter system for the
following reasons:
1. It was difficult to look for that person who has the things
you need and who also wants the things you are offering
for exchange.
2. There is no common denominator to measure the value
of goods and services sought for exchange.
3. Most of the goods traded have unequal values.
4. It is time consuming, cumbersome and very inconvenient
for individuals to use the barter system.
5. It lacks generalized purchasing power.
 Early Commodity Money
 Until around
3000BC,
commodities such
as livestock and
grain were used as
money for many
societies
 Early Money
 Early Societies developed forms of proto-money
which were commodities that everyone agreed
to accept in trade
 Examples:
Aztecs-Cacao Beans (aka cocoa beans)
Norwegians-Butter
Colonists- Tobacco leaves, animal hides
China, India, Thailand, and West Africa-Cowrie shells
 China: 1200 BC
 The Chinese
began using
cowries as money
 China: 1200 BC
 By 1000 BC, “tool
currencies” were
adopted. These
were miniature
metal models of
spades, hoes,
blades, etc.
 The First True Coins: 561 BC
 The Lydian King
Croesus created
the first true coin.
 Middle Ages: 800 – 1500 AD
 Medieval coinage
was standardized
by Charlemagne
when he
conquered most of
Europe around
800AD
 Chinese Paper Currency: 806 AD
 Due to a severe
copper shortage,
the Chinese begin
issuing paper
currency.
Frequent reissues
fuel inflation
 1100 AD: British Tally Sticks
 King Henry issued
the first Tally Sticks
in 1100AD. This
practice lasted in
England for over
700 years!
 Evolution of Money
 The goldsmiths were instrumental in the
evolution of money.
 They helped develop the use of money by
accepting gold bullions to be converted
into coins.
 They also accepted gold deposits for safe-
keeping.
 They also helped in the transfer of
precious metal by means of receipts.
 Evolution of Money
 Minting of coins
- Gold bullions were converted into coins
- Coins were considered the first type of modern
money
- They were not in standard form, so each
transaction required weighing and testing for its
quality.
- The kings, goldsmiths and bankers found the
method to be cumbersome, they stamped the
coins to guarantee its integrity as to weight and
fineness. Standard coins came into use.
 What would you trade?

 If we did not have Philippine currency

today, what do you feel we as a society
could trade as proto-money?
 What is Money?
 We normally think of currency when we
think of money. However, more generally
speaking, money is any commodity which
satisfies the following:
 Unit of account
 Store of Value
 Medium of exchange
 I. CONCEPT OF MONEY
 Money defined –
 In economics, money is anything that is
generally accepted as payment for goods
and services or as repayment for debts
 By Riboud, money is nothing other than a
transferrable acknowledgment of debt, a
promise to pay, arbitrarily created and
usually with an indeterminate maturity
and exchange value
 Money is defined broadly as any
liquid financial asset representing a
claim from a financial institution that
is used primarily for payment of
goods and services
 As a financial asset, money
represents a claim against income or
wealth of a business firm, household
or unit of government, represented by
a certificate, receipt or other legal
document
 Money consists of currency and cash
holdings in the form of notes, coins and
checks
 Money refers to wealth or other assets
that can easily be exchanged for cash
 Money could also mean some capital
earnings or one’s returns from an
investment or capital
 In terms of usage, money facilitates the
functioning of the economy
- consists of assets that can be used as
a general medium of exchange (to
avoid direct barter); means of payment
(to settle contracted debts); standard of
value (for comparison in decision-
making); unit of account (for additions
and subtractions in record-keeping) and
store of value (over longer periods).
 S ignificance of Money
 Has power over  Leads to a
economic goods. progress in the
 It induces economy.
employment.  Encourages
 Generates individual to work.
consumption  Leads to division of
 Encourage more labor.
production.
 Unfavorable E ffects of Money
 Manufacturers sacrifice the quality of their
products.
 Management and labor dispute arise
 Money price and money incomes
becoming a measure for judging people
and things.
 Society has the tendency of becoming too
materialistic.
 Depletion of our natural resources.
 II. F UNC TIONS OF MONE Y
1. As a medium of exchange
 Money is used as a means of
payment for transactions for the sale
and purchase of goods and services.
 Enables goods and services to be
transferred from person to person.
 Money is available as cash, checks
or electronic cards
 II. F UNC TIONS OF MONE Y
2. As a standard to measure the value of
goods and services
 Money measures the value of goods
and services.
 It is used as a yardstick in the pricing
of things.
 The monetary unit of the country is
used as a standard of value.
 II. F UNC TIONS OF MONE Y
3. As a store of value
 Money can be kept for future use.
 It is widely acceptable thus enjoys a
generalized purchasing power and
can serve as a store of value.
Question:
 What is the possible disadvantage of
storing money?
 II. F UNC TIONS OF MONE Y
Two ways of keeping money for future use:
1. By saving
- depositing it to banks
2. By investing
- business
- corporate or government
securities such as stocks and
bonds
- money market
- real estate properties
- jewelries
 II. F UNC TIONS OF MONE Y
4. As a means of deferred payment
 Money enables people to buy goods
on credit. Goods and services can be
obtained at the present time in
exchange for a promise to pay at a
future date.
 III. ATTR IBUTE S OF MONE Y
1. General Acceptability
- It refers to the willingness of people to
accept the money in exchange for goods
and services.
- It should be acceptable to everybody in a
specific territory.
 III. ATTR IBUTE S OF MONE Y
2. Stability of Value
- Before a particular kind of money
becomes acceptable, it must first have a
stable value.
- The purchasing power of money should
not change abruptly.
- If ever there will be changes, such change
should be gradual.
 III. ATTR IBUTE S OF MONE Y
3. Portability
- This refers to the quality of money being
easily carried from place to place.
- It is important that the material used as
money should conform to this
characteristics.
 III. ATTR IBUTE S OF MONE Y
4. Cognizability
- The money circulating within a country
can be easily distinguished from other
kinds of money.
- A fake bill can be recognized from a
genuine bill.
- The best way to determine a counterfeit
bill from a genuine bill is through the red
and blue fibers scattered all over the
paper bill.
 III. ATTR IBUTE S OF MONE Y
5. Divisibility
- The material used as money must be
capable of being divided into smaller
denominations without impairing or
destroying the value of the whole.
 III. ATTR IBUTE S OF MONE Y
6. Homogeneity
- The material used as money should not
only be capable of being divided into equal
parts or smaller units, but that such equal
parts should have equal weight and
fineness and must be made of the same
material and possess equal value.
 III. ATTR IBUTE S OF MONE Y
6. Elasticity
- This characteristic refers to the volume of
money being capable of manipulation by
monetary authorities.
- Money supply can easily be increased or
decreased depending upon the needs of our
economy.
- Thus, when there is too much money in
circulation, the Central Bank institutes
measures or monetary policies that would
absorb the excess liquidity in the economy by
increasing the discount rates.
 III. ATTR IBUTE S OF MONE Y
7. Durability
- This characteristic enables money to
withstand wear and tear.