CHAPTER 1

THE CONCEPT AND

DEVELOPMENT OF MONEY
INTENDED LEARNING OUTCOMES

At the end of the chapter the students should be able to:

1. discuss the concept of money and the origin of the word money"
2. define money and discuss the concept of legal tender
3. explain barter, how it works, and its applicability in today's world
4. explain the system of coinage as an important stage in the history
and development of money
5. differentiate the different types of money and apply their use in
modern-day finance
6. analyze the role of credit card in today's economy and its pros
and cons
7. discuss the different plastic cards or plastic money being used in
today's world
8.appreciate the value of 8. barter exchanges and explore the
possibility of dominating the current trade and how it will affect the
economy of the country
9. elaborate on the functions of money and how it serves men
10. differentiate a check from a draft and discuss the parties
involved in them
11. demonstrate how the warehouse receipt system works
INTRODUCTION OF BASIC FINANCE

This chapter will discuss the evolution of money, starting with

barter in the early years, to the use of different forms of money—
from shells to metals, until coinage came into being followed by
paper money. In the Philippines, we use coins and bills or paper
money. Some countries use polymer or plastic money. In time, credit
card and other forms of plastic cards were introduced. Nowadays,
there are people who prefer to use credit cards rather than pay in
cash, which may cause trouble if not properly managed
ORIGIN OF THE WORD "MONEY"

 derived from the Latin word moneta, surname of the Roman

goddess Juno; also, refers to a mint or a place for coining
money
 in ancient Greece, moneta meant advisor, one who warns, or
makes people remember; also, from the Latin monere,
meaning advise or warn
 comes from the Old French monoie and the Modem French
monnaie meaning money, coin, currency, or change
 MONEY:
DEFINITION
 Anything authorized by law to be generally accepted
as:
1. legal tender (accepted for payment of
debt);
2. a medium of exchange in payment of
goods and services; and
3. a standard of value (basis of comparison
of values).
 BARTER
1. the exchange of things for other things
2. used in olden times, such that what one produces, he exchanges it
with the things he needs (e.g., a farmer producing vegetables
exchanges it with fish caught by fishermen; a person who takes care
of pigs can slaughter the pig and get the meat to be exchanged for
whatever he needs, say sugar for one who has sugar or for rice that a
farmer has)
3. applied in today's world through the barter exchanges; barter
exchange members exchange whatever commodities they have with
whatever commodities are being sold by other members. Even gift
certificates are traded in the barter exchanges
 BARTER
4. paved the way for the olden forms of money called commodity
money which include:
i. Cattle - probably the oldest of all forms of money; described
as mankind's fist working capital asset.
ii. Cowrie Shell - shell of a mollusk; first used in China; the most
widely and longest used currency in history.
iii.Wampum — an oblong-shaped clamshell sawed into beads,
polished, and strung together and used as ornament.
iv. Metals - silver, gold, etc.
 COINAGE

Coinage is the conversion of metals into coins.

Mint — place where metals are made into.
Coin - an ingot of metal; the weight and
fineness of which are certified by the integrity of
the design on its surface and the power of the
issuing authority.
 BASIC PURPOSES OF COINAGE

1.prevent confusion
2.ensure uniformity and fineness (ratio of weight of pure
metal to total weight, expressed in decimal or carat) of
coins
3.facilitate exchange
4.ensure confidence on the part of the citizenry with respect
to the government's monetary system
 KINDS OF COINAGE

1. Free Coinage or Gratuitous Coinage - a system whereby metals are brought

to the government mint and converted into standard money without any
charge.
2. Brassage — the fee charged by the government to mint metals into coin is
just sufficient to cover the cost of minting with no profit for the government.
3. Seigniorage/Seignorage — people bring precious metals like gold to be
minted and the government charges seigniorage with a profit for the
government.
4. Limited Coinage — government, at its option, buys precious metals in the
open market and mints them as coin money.
PAPER MONEY
1. 618-906 AD — the Chinese invented printing and
the use of paper money during the Tang Dynasty.
2. 11th Century - Mongolia was the second country to
begin using paper money.
3. 12th Century — Moors established the frst paper
mill in Europe (now Spain).
4. 17th Century - The Bank of Sweden issued the frst
paper money in Europe; the Bank of England was
founded and began issuing promissory notes,
originally handwritten but later printed.
Philippine PIOO, P500 and P1000 bill, a faa paper
money.
PLASTIC (POLYMER) MONEY
 Plastic (Polymer) Money is made of super resistant polymer film.
 1983 - Costa Rica and Haiti issued the first Tywek, and the Isle of
Man issued the first Bradvek polymer banknotes printed by the
American Banknote Co. and developed by DuPont.
 1988 - Australia was the first to develop and use polymer notes in
general circulation.
 1996 — Australia became the first country to have a full set of
circulating polymer banknotes of all denominations.
 2005 - Bulgaria issued the world's first hybrid paper-polymer
 Present - 23 countries use polymer banknotes (BBC News
Magazine, November 18, 2011).
The following are examples of plastic polymer money used by different
countries:
The following are examples of money used
by different countries:
PLASTIC MONEY

1. hard plastic cards used in everyday

exchange transactions in place of actual
bank notes
2. more portable than money and less
risky; allows one to lengthen" or "stretch"
his budget
CLASSIFICATIONS OF PLASTIC MONEY

1. Credit Card - allows owners to buy products and services on credit from
different establishments; widely used, as it allows individuals and businesses to
"stretch" their budget, enabling them to buy what they need without the use of
money. However, there are interest and finance charges that accompany its use.
2. Debit Card — payments are immediately charged to the cardholder's bank
account.
3. Cash Card - only allows withdrawal of money through an Automated Teller
Machine (ATM).
4. Prepaid Cash Card - purchased (immediately paid for; hence, prepaid) from
certain establishments. Examples are gift card/certificate, store card, and multi-
currency prepaid card
BARTER EXCHANGE AND
BARTER CARD
Barter Business Exchange
a network of business owners who want to trade
goods and services to increase sales and profit with
a reduction of cash outlay.
improves operational efficiency and adds value to
the firm and the stakeholders.
members receive a plastic card (barter card) and an
interest-free line of credit.
 trade points or barter money (in peso) are
credited to a person's or a business' account in
the exchange if the person or the business has
certain goods or services sold in the exchange.
 examples are BarterPX, B2B Exchange
Network, BizXchange, and BEX Barter
EXchange Philippines.
ADVANTAGES OF TRADING THROUGH THE
BARTER EXCHANGES
1. Turn unproductive assets into a medium of exchange
2. Better cash flow
3. Increased sales
4. Greater profitability
5. Faster turnover of inventories
 ADVANTAGES OF TRADING THROUGH THE BARTER
EXCHANGES

6. Sell slow-moving or dead inventories at regular price

7. Idle time is made productive
8. Online bookkeeping
9. Eliminate billing hassle
10. Increased credit line
11. Provide employee bonuses and benefits without the use of cash
FUNCTIONS OF MONEY

1. Medium of Exchange - used for exchange of goods and

services.
2. Standard of Value - measure the value or worth of something.
3. Store of Value - savings, in the form of money or investment, is
stored for future use.
4. Means of Deferred Payment — as legal tender, money is
acceptable in payment of debts or liabilities.
5. Conveyance - means of transferring ownership.
 FORMS OF MONEY
1. Commodity Money - cattle, cowrie shells, wampum, hemp.
2. Currency (Bills and Coins) - money currently used by different countries.
3. Check - issued by those with current account with the bank to pay for things
they want to buy or for their debts.
4. Bank Draft - issued by a bank and like a check can be used like money.
5. Money Order - purchased from the post office or other outlets and used to
pay for goods, services, or debts.
6. Warehouse Receipt (WR) - evidence of goods stored in a warehouse and can
be used as a collateral for a loan.
 TYPES OF CHECKS

 Personal check - issued by persons to be drawn against

their own current/checking account with a bank.
 Business check - issued by companies (businesses) drawn
on their current/ checking account with a bank.
 Cashier's/Manager's check - issued by a bank and signed
by its cashier or manager against the bank's own account
ensuring availability of funds.
 TYPES OF CHECKS

 Certified check - a personal check certified by the bank as to the availability

of funds in the account of the person issuing the check.
 Traveler's check - preprinted, fixed amount check sold by financial
institutions which make an unconditional payment to whoever has the
traveler's check in his possession and as such can be spent like an
international currency; an internationally redeemable draft in various
denominations that can be purchased from a bank or traveler's aid company.
PARTS OF A CHECK
1. Complete name and address — must be
personalized; preprinted by the bank (no PO
box).
2. Date — can be current or at a future date.
3. Bank ID Number
4. Payee- for whom the check is issued.
5. Amount - in both figures and words.
6. Bank name and address - must be printed
on check.
7. Routing number (first figures), and
8. Account number of drawer (second
figures)
9. Signature of drawer (payer or issuer)
 PARTIES TO A CHECK

 Maker - the drawer (depositor) who writes the

check.
 Drawee - the bank with which the current account is
maintained.
 Payee - the one to whom the check is to be paid.
 PARTIES TO A TRAVELER'S CHECK

 Issuer or obligor — the company issuing or producing

the traveler's check.
 Agent — the financial institution who sells the
traveler's check.
 Purchaser - the person buying the traveler's check.
 Payee - the seller of goods or services to be paid with
the traveler's check.
 TYPES OF BANK DRAFT
Demand Draft - payable upon demand or on sight (upon presentation of
the draft for payment).
Time Draft — payable sometime in the future.
Local Draft — issued by a bank in a single country and applies to local
transactions.
International Draft - globally or internationally used for any business
transaction.
Automatic Bank Draft (ABD) - takes out money from the payer's
account electronically at regular intervals; automatic "bill pay."
Benefits of the Warehouse Receipt System (WRS)

1.easy access to finance and lower financing

costs
2.reduced transaction costs
3.shorter marketing chain potentially increasing
producer profit or margin
4.better storage of commodities
5.proactive cooperation among producers and
other players
 OTHER CLASSIFICATIONS OF MONEY

1. Fiat/Fiduciary Money - money given value by the government

through a fiat or decree, which means that money became legal
tender. Fiat money has no corresponding reserve. Fiduciary
connotes trust.

2. Representative Money - backed by a government's or bank's

promise to exchange it for a certain amount of silver or gold.
CHARACTERISTICS OF A GOOD MEDIUM OF
EXCHANGE

1.Scarcity - rare or hard to find.

2.Divisibility - quality of being broken down into smaller
units.
3.Portability — ease in handling or carrying.
4.Durability - lasts for a long period of time.
SUGGESTED READINGS

Bernstein, L.A. 1993. Financial Statement Analysis Theory, Application, and

Interpretation (5th ed.). Burr Ridge, Illinois: Richard D. Irwin, Inc.
Helfert, E.A. 1994. Techniques of Financial Analysis (8th ed.). Burr Ridge, Illinois:
Richard D. Irwin, Inc.
Keown, A.J. et al. 1998. Basic Financial Management (7th ed.). Singapore: Prentice Hall
Simon and Schuster Pte. Ltd.
Laman, R.M.B. & V.P.B. Laman. 2007. Money, Credit & Banking: The Basics (5th ed.).
Manila: GIC Enterprises & Co., Inc.
Meigs, R.F., W.B. Meigs, & M.A. Meigs. 1995. Financial Accounting (8th ed.). New
York: McGraw-Hill, Inc.
Weston, J.F. & E.F. Brigham. 1993. Essentials of Managerial Finance (10th ed.). New
York: The Dryden Press.
RESOURCE AND ADDITIONAL RESOURCES

http://www•businessdictionary.com/definition/legal-tender.html.
Retrieved on April 16, 2014.
http://www•pbs•org/wgbb/nova/ancient/history-money.html. Retrieved
on April 8, 2014.
http://www.bbc.co.uk/ahistoryoftheworld/objects/7cEz771FSeOLptGIE1
aquA. Retrieved on April 15, 2014.
http://www.bsp.gov.ph/banking/bspsup.asp, retrieved on April 23, 2013.
http://thismatter.com/money/banking/depository-institutions-types.htm.
Retrieved on April 23, 2013.
http://www.bsp.gov.ph/banking/bspsup.asp, retrieved on April 23, 2013.
http://www.icba.coop/co-operative-bank/what-is-a-co-operative-
bank.html. Retrieved on May 27, 2013
THANK YOU
GODBLESS…

GRACE P. GIRON, MBA, LPT

BASIC FINANCE