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
 CBP, established on January 3, 1949, was
to promote a rising level of production,
employment and real income
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
The creation of the Bangko Sentral Ng
Pilipinas
 BSP to promote price stability conducive
to a balanced and sustainable growth of
the economy
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,
 Granted BSP the central monetary
authority fiscal and administrative
autonomy
Created an independent Monetary
Board (MB) as the highest monetary
policy-making 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
Members of the MB are appointed by
the Pres. of the Phils. and cannot be
removed from office without undue
cause
MB is the highest policy-making body of
the BSP
MB provides policy directions aimed at
promoting soundness and stability of the
banking system and financial system
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
M3 = C + D,
where D = dd + sd + td + ds