Money and Banking in Philippine Setting Chapter 2
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
Money 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 decisionmaking); unit of account (for additions and subtractions in record-keeping) and store of value (over longer periods).
II. Functions of Money A. As a medium of exchange § Money is used as a means of payment for transactions for the sale and purchase of goods and services § Money is available as cash, checks or electronic cards B. Unit of account § Money is used to measure the value of goods and services
C. As a store of value § Money serves as a repository of purchasing power over time § If prices increase, the value of money decline; which means that the cost of holding cash will mean fewer goods that can be purchased brought after the price increase § Other assets that are store of value: stocks, bonds, land, jewelry
III. Evolution of BSP’s Mandate • Under RA 265 of 1948, “The Central Bank Act” signed by then Pres. Elpidio Quirino v CBP, established on January 3, 1949, was to promote a rising level of production, employment and real income v. CBP’s primary duties and responsibilities was to promote economic development in addition to the maintenance of internal and external monetary stability.
• Under PD 72 of November 29, 1972, by then Pres. Ferdinand Marcos CBP is (1) to maintain internal and external monetary stability and to preserve the international value of the peso and its convertibility (2) to foster monetary credit and exchange conditions conducive to a balanced and sustainable growth of the economy
• Under RA No. 7653, New Central Bank Act, of July 3, 1993 v. The creation of the Bangko Sentral Ng Pilipinas v BSP to promote price stability conducive to a balanced and sustainable growth of the economy
v. Under Sec. 20, Art. XII of the 1987 Philippine Constitution, (1) Congress shall establish an independent central monetary authority to “provide policy directions in the areas of money, banking and credit. ” (2) The central monetary authority shall have supervision over the operations of banks and exercise regulatory powers over finance companies and NBFIs performing similar functions
• Under Sec. 1, Art. 1 of the New CB Act, q Granted BSP the central monetary authority fiscal and administrative autonomy q. Created an independent Monetary Board (MB) as the highest monetary policymaking body in the country. MB is composed of 7 members with fixed term of 6 years each, except for the sole representative of the government
q. Members of the MB are appointed by the Pres. of the Phils. and cannot be removed from office without undue cause q. MB is the highest policy-making body of the BSP q. MB provides policy directions aimed at promoting soundness and stability of the banking system and financial system
q. MB issues rules and regulations for the effective implementation of its responsibilities and directs the management, operations and administration
IV. Money Creation Process • BSP is the central depository for the reserves of the banking system and the major sources of new reserves • BSP is responsible for the retirement or disposition of domestic currency • BSP is in a unique position to control the supply of money essential in the promotion of economic growth and stability
• Money Supply Process The supply of money is defined as the currency in circulation or the currency held by the non-bank public (C) plus deposit liabilities of commercial banks (D) which include demand deposits (dd), savings deposits (sd), time deposits (td) and deposit substitutes (ds), thus, domestic liquidity is M 3 = C + D, where D = dd + sd + td + ds
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