Understanding Money, Banking Systems, and Financial Markets

Types of Money

Definition: Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts.

• Commodity Money: A good that has intrinsic value equal to the value of the currency unit (e.g., gold and silver). Features include being durable, portable, divisible, homogeneous, and limited in supply.
• Fiduciary Money: Goods that meet the criteria of being printable, divisible, storable, and transportable.
• Fiat Money: Currency that has very low intrinsic value but remains a widely accepted medium of exchange.

Financial System Instruments

Modern financial systems utilize paper money without metal backing, bank checks, and bank deposits.

• Current Accounts: Funds available for immediate withdrawal.
• Savings Deposits: Funds available on demand but with lower liquidity than current accounts.
• Time Deposits: Funds committed for a fixed term; withdrawal before maturity incurs a penalty.

Money Supply and Monetary Aggregates

Definition: The monetary aggregate is the total amount of money in circulation held by the public and businesses, plus bank deposits.

Types of Monetary Aggregates

• M1: Notes and coins in circulation.
• M2: M1 plus term deposits up to two years.
• M3: M2 plus temporary assignments.

Demand for Money

Money serves as a medium of exchange, a unit of account, and a store of value. The cost of holding money is the opportunity cost of not having it invested. Demand for money is primarily driven by transaction needs and is influenced by real income.

Banking and Money Creation

The banking business originated with goldsmiths. Commercial banks are financial institutions authorized to accept deposits and grant credits.

Reserve Requirements

Banks must maintain reserves to meet withdrawal demands and regulatory requirements. A portion is kept in the bank, and the rest is held by the central bank. This fractional reserve system allows for the creation of money through the banking system.

The Spanish Financial System

• Bank of Spain: Acts as the monetary authority.
• Private Banking: Manages funds and provides credit.
• Savings Banks: Similar to commercial banks, focused on granting loans.
• Credit Cooperatives: Provides funds to the public.
• Non-bank Financial Intermediaries: Includes the ICO (Official Credit Institute), insurance companies, pension funds, mutual funds, leasing, and factoring corporations.

The Stock Market

Definition: The stock market is where the supply of securities (from new emissions or existing titles) meets the demand of investors.

• Primary Market: Connects savings to investment.
• Secondary Market: Provides liquidity, allowing investors to sell titles purchased in the primary market.