Evolution of Money and Financial Systems

The Origin of Money

The emergence of money is intrinsically linked to the concept of exchange. Money is widely accepted as a payment and collection tool, thereby acting as an intermediary in trade. In the earliest stages of human civilization, a subsistence economy prevailed, and money did not exist because there was no formalized exchange. However, once humans recognized the advantages of trade, they began to practice it.

From Barter to Modern Currency

Barter System

Barter was the first type of exchange, involving the direct trade of one object for another. This system became ineffective as trade became more generalized, leading to several significant problems:

• Difficulty finding someone who desired the specific item offered for exchange.
• Problems with equivalencies or determining the fair value (prices) of goods.

Commodity Money

Eventually, certain goods such as salt, furs, precious stones, and oil became accepted as forms of money. These commodities possessed key properties that made them suitable for exchange:

• Generally accepted
• Divisible
• Easily transportable and durable
• Stable value

Paper Money

Paper money emerged when money was no longer a commodity itself but a representation of value for exchange. At its inception, paper money was often backed by gold, with central banks maintaining a correlation between their gold reserves and the number of notes in circulation. While incredibly useful, modern paper currency often has no direct gold backing; instead, its value relies on trust in its use as a payment method.

Fiduciary Money

Today, we primarily use fiduciary money, which encompasses banking money, credit cards, and other digital forms. Its value is based on trust in the issuing authority rather than on a physical commodity.

Key Functions of Money

Money serves several crucial roles in an economy:

• Unit of Account: It acts as a common measure of value, allowing for the pricing of goods and services.
• Store of Value: It enables individuals to save wealth for future use.
• Medium of Exchange: It facilitates transactions, making trade more efficient than barter.

The Financial and Banking System

Financial institutions are entities that transform savings into investment, facilitating the transmission of surplus funds and financing productive activities, trade, and banking. The main types of banks are:

Types of Financial Institutions

Commercial Banks

Commercial banks are profit-oriented firms whose economic activity can be broadly classified into:

• Debit Transactions: The uptake of money through deposits to fund investments.
• Credit Transactions: Providing loans and credits to individuals and businesses.

Savings Banks

Savings banks are non-profit corporations with a beneficial character, governed by rules that often differ from those applicable to commercial banks.

Together, commercial banks, savings banks, and other financial institutions (such as insurance companies) form the Spanish financial system.