Monetary Standard

Topics: Money, United States dollar, Currency Pages: 7 (2097 words) Published: January 20, 2013
Chapter 2: History of Philippine Currency and Philippine Monetary Standards Source: Financial System, Market & Management- the basics-
Laman, Rose Marie et al., 2008

Nature of the Monetary Standard
• A country is said to have established a monetary standard or system when it sets down rules to govern the creation of money and control the quantity in circulation whether the rules are strictly followed or are to be accepted simply as guidelines for its own money managers • Standard money is the monetary unit recognized by the government as the ultimate basic standard of value upon which all other kinds of money are convertible. • In the Philippines, the monetary system is the managed currency system, and the monetary unit is the Peso.

A. Commodity Standard
• is a monetary system in which the purchasing power or value of the monetary unit is equal to the value of a designated quantity of a particular commodity or set of commodities • sometimes called full-bodied money because it is one hundred percent (100%) backed-up by gold or silver reserves 1) Monometallic Standard

• subdivided into: gold and silver standard
• gold and silver standard are further subdivided into: coin standard, bullion standard and exchange standard a. Gold coin standard – a country is said to be in the gold coin/silver standard when the government allows the conversion of gold bullion into coins which are freely obtained by the citizens of the country in exchange for other forms of money b. Gold bullion standard- system wherein the monetary unit or standard money of the country is expressed in a definite weight and fineness of gold in bar or bullion form c. Gold exchange standard- the monetary unit of the country is expressed in terms of gold. Gold does not have to be coined or used as bullions but the monetary unit of the country must be defined in terms of specific quantity of gold ( In the Philippines, the Peso was equivalent to 12.9 grains of gold, of .9 fine, whereas the US Dollar was equivalent to 25.8 grains of gold of .9 fine) 2) Bimetallic Standard- when each of two metals provides the basis for the money in circulation and the issuer stands ready to buy or sell either of two metals at stated prices, the monetary system is called a bimetallic standard - May also be defined as a monetary system in which coins of two different metals at a fixed legal ratio of weighs and fineness are used as the monetary unit or the standard unit if value - Legal ratio /coinage ratio/mint ratio refers to the ratio between the weights of gold coins and silver coins in the mint - Market ratio refers to the ratio of the value of gold and silver as being bought and sold in the market Gresham’s Law states , that the bad or overvalued money drives out the good or undervalued money from circulation. Given a sufficient supply of bad or overvalued money which has the qualities of general acceptability, the good or undervalued money will be displaced by the lighter or overvalued money. The law operates whenever the market ratio of silver to gold shifts away from the mint or legal ratio.

B. Non-Commodity or Fiat Standard- refers to a monetary system in which the face value of the monetary unit is much higher than that of the value of the material used as money Types of Fiat Standard

1) Utopian Paper Standard/ Pure Fiat Standard- proposes the adoption of standard money that is desired primarily because of what it can buy for the individual and not because of its gold or silver content. This is the forerunner of the Involuntary and managed currency system. 2) Involuntary paper Standard- adopted by a country that finds itself in a dilemma of not being able to redeem its currency in either gold or silver and so is forced by circumstances to adopt the involuntary paper standard. This is often the standard used...
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