Course Code and Title: FINE 6 – Global Finance with Electronic Banking

Professor: Dave Kieth J. Lappay

Lesson Number: 5
Topic: International Monetary System and the Role of Money

Learning Objectives:

At the end of this lesson, the student should be able to:

1. discuss the nature and concept of money,
2. classify the three functions of money, and
3. cite the requirements of a good international monetary system.

Pre-Assessment
Direction: Read the questions carefully. Provide the answers in the separate sheet of paper/s.

1. What are the features of money?

2. Identify the major types of money.
3. Explain how various currencies play in international foreign exchange.

Lesson Presentation:

Money makes the world go around.

Economies rely on the exchange of
money for products and services.
Economists define money, where it
comes from, and what it's worth. Here
are the multifaceted characteristics of
money. Money is any item or verifiable
record that is generally accepted as
payment for goods and services and
repayment of debts, such as taxes, in a
particular country or socio-economic
context (Kelly, 2021).

Money is any object that is generally

accepted as payment for goods and
services and repayment of debts in a
given country or socio-economic
context. The main functions of money
are distinguished as: a medium of
exchange; a unit of account; a store of
value; and, occasionally, a standard of Photo Credit: By Stalnyk, Time is money.
Link: https://www.dreamstime.com/royalty-free-stock-photo-time-money-old-watch-dollar-banknotes-image39349145
deferred payment (McCumiskey, 2002).

Understanding the Features of Money

The use of money as currency provides a centralized medium for buying and selling in a market. This was first
established to replace bartering. Monetary currency helps to provide a system for overcoming the double
coincidence of wants. In order to be most useful as money, a currency should be: 1) fungible, 2) durable, 3)
portable, 4) recognizable, and 5) stable.

1. Fungible - Units of the good should be of relatively uniform quality so that they are interchangeable with one
another. If different units of the good have different qualities, then their value for use in future transactions may
not be reliable or consistent. Trying to use a non-fungible good as money results in transaction costs of
individually evaluating each unit of the good before an exchange can take place.

2. Durable - The physical character of the good should be durable enough to retain its usefulness in future
exchanges and be reused multiple times. A perishable good or a good that degrades quickly with use in
exchanges will not be as useful for future transactions. Trying to use a non-durable good as money conflicts
with money's essentially future-oriented use-value.
3. Portable - The physical character of money can be carried with and transfer to others. In the modern world of
developed countries, they use currency in the form of bills (paper money) and coins that can be easily carried.

4. Divisible - It should be divisible into small quantities so that people appreciate its original use value - highly
enough that a worthwhile quantity of the good can be conveniently carried or transported. An indivisible good,
immovable good, or good of low original use-value can create issues. Trying to use a non-portable good as
money could produce transaction costs of either physically transporting large quantities of the low value good or
defining practical, transferable ownership of an indivisible or immobile object.

5. Recognizable - The authenticity and quantity of the good should be readily ascertainable to the users so that
they can easily agree to the terms of an exchange. Trying to use a non-recognizable good as money produces
transaction costs of agreement on the authenticity and quantity of the goods by all parties to an exchange.

6. Stable - The value that people place on a good in terms of the other goods that they are willing to trade should
be relatively constant or increasing over time. A good whose value varies widely up and down over time, or
consistently loses value over time is less suitable. Trying to use a non-stable good as money produces
transaction costs of repeatedly revaluing the good in each successive transaction and the risk that the exchange
value of the good might drop below its other direct use-value or not be useful at all, in which case it will no longer
circulate as money.

Types of money

1. Fiat Money - Fiat money (fiat currency)

is money whose value is not based on its
inherent value but is based on an
authoritative decision (fiat) by the
governing body. Examples: Banknotes
(paper money) and coins

2. Commodity Money - Unlike fiat currency,

the value of commodity money is intrinsic;
its value comes from the commodity it is
made from. If the money is destroyed, it
cannot be replaced. Examples: Precious
metals (i.e., gold), salt, beads, alcohol

3. Representative Money - Representative money, like fiat money, has no value of its own. Unlike fiat money, it
is backed by a commodity. Examples: Certificates, paper money, token coins

4. Fiduciary Money - Deriving from the Latin word fiducia, to trust, fiduciary money works on the promise and
trust that it will be exchanged for fiat or commodity money by the issuer (bank). Examples: Checks, bank drafts

5. Commercial Bank Money - Commercial money (also known as demand deposits) is a claim against a bank
for the purchase of goods and services (through the means of withdrawing in person, check, ATMs, or online
banking). It is a debt-created currency by the bank. Example: Funds in a checking account

Three Functions of Money:

1. Medium of Exchange – Money used for buying and selling goods and services.
2. Unit of Account/ Value – Common standard for measuring relative worth of goods and services.
3. Store of value – Convenient way to store wealth.

International monetary systems are sets of internationally agreed rules, convenience and supporting institutions,
that facilitate international trade, cross border investment and generally their allocation of capital between nation
states. It refers to the system prevailing in world foreign exchange markets through which international trade
and capital movement are finance and exchange rates are determined.
Features of International Monetary Systems
• Efficient and unrestricted flow of international trade and investment.
• Stability in foreign exchange aspects.
• Promoting balance of payments adjustments to prevent disruptions associated.
• Providing countries with sufficient liquidity to finance a temporary balance of payments deficit.
• Should at least try to avoid adding further uncertainty.
• Allowing member countries to pursue independent monetary and fiscal policies.

Requirements of Good International Monetary System

• Adjustment: A good system must be able to adjust imbalances in balance of payments quickly and at a
relatively lower cost.
• Stability and Confidence: The system must be able to keep exchange rates relatively fixed and people
must have confidence in the stability of the system.
• Liquidity: The system must be able to provide enough reserve assets for a nation to correct its balance
of payments deficits without making the nation run into deflation or inflation.

Application:

Direction: Read the questions carefully. Provide the answers in the separate sheet of paper/s.
1. What would possibly happen if money did not evolve to its current form?

Evaluation:

Direction: Read the questions carefully. Provide the answers in the separate sheet of paper/s.
1. How can you tell that money is the most liquid form of asset in all kinds of transactions?

Generalization:

Money is an essential commodity and fundamental for survival that helps us run our life. Exchanging goods for
goods is an older practice and without any money, you cannot buy anything you wish. Money has gained its
value because people are trying to save wealth for their future needs. Philosophically speaking, money cannot
buy everything but practically money is the basic thing that is used for calculating the status of any person.
.

Reinforcement:
Direction: Read the questions carefully. Provide the answers in the separate sheet of paper/s.

1. As a student, what policy would you like to impose in order to improve the quality and usage of money in
the Philippine economy?

References:

Online:

Kelly, R. (2021, June 22). Investopedia. Retrieved from What is money?:

https://www.investopedia.com/insights/what-is-money/
McCumiskey, J. (2002). What is money? Retrieved from Positive money:
https://positivemoney.org/2011/05/what-is-money/
https://www.slideshare.net/sureshthengumpallil/international-monetary-system-56855798

Books:

Madura, J (2008). International Financial Management, Ninth Edition. U.S.: Thomson South-Western

Brigham, E (2007). Financial Management: Theory and Practice, 10 th Edition. Florida, U.S.: The Dryden Press,
Hardcourt Brace College Publishers.

Brigham, E (2007). Fundamentals of Financial Management, Concise Edition. U.S.: The Dryden Press,
Hardcourt Brace College Publishers.

Gitman, L (2007). Principles of Managerial Finance. Pearson Education, Inc.