Functions of Money and the Spanish Financial System

Functions and Demand for Money

The functions of money serve three primary purposes:

• Medium of exchange: It facilitates transactions and speeds up the exchange of goods and services compared to barter.
• Unit of account: It provides a standard measure of value, allowing us to assess the worth of different items.
• Store of value: It allows individuals to save and potentially earn profitability.

When holding money, one gives up the possibility of purchasing other goods. Therefore, the opportunity cost of holding money is the interest lost by not placing those funds into less liquid assets or investments that offer higher profitability.

The Demand for Money

The transaction demand for money depends largely on real income. As income increases, the volume of goods purchased typically rises, increasing the demand for money. Furthermore, this demand is sensitive to interest rates.

Banks and Money Creation

Financial intermediaries are responsible for transferring funds from lenders to borrowers. Commercial banks are financial institutions that accept deposits and grant credits; through this process, they create deposit money.

Reserves and Control

Reserves are assets that banks hold in cash or as funds deposited in the Central Bank. Through these reserves, the Central Bank can control the amount of money that commercial banks are able to create. Banks create deposit money by issuing credits that are backed by their deposits.

The Spanish Financial System

The Spanish Financial System consists of a set of institutions that mediate between the suppliers and applicants of financial resources. Financial intermediaries are entities whose financial assets are generally accepted as payment (i.e., money or debt). Non-bank financial intermediaries can also generate financial assets.

Types of Banking Intermediaries

• Bank of Spain: This institution finances the public sector and manages foreign exchange. It operates by purchasing from other financial intermediaries and providing special credits.
• Private Banking: These banks finance both the public and private sectors, utilizing deposits and the issuance of fixed income and equities.
• Savings Banks: While similar to commercial banks, the relative stability of their liabilities often allows them to increase long-term lending more effectively.
• Credit Cooperatives and Rural Banks: These institutions share characteristics with savings banks and commercial banks, often established to serve the specific needs of their members.