Understanding Money: Functions, Demand, and Financial Systems

The Nature and Functions of Money

Money is a generally accepted medium of exchange or payment. Its key features include serving as a medium of exchange and a unit of account.

Factors Influencing the Demand for Money

The demand for money is influenced by several factors:

• The average level of prices.
• Income or real wealth.
• The interest rate (representing market risk).

The Price of Money and Loan Factors

The price of money, or the interest rate, is the payment received for lending capital. Factors influencing this include:

• Risks of the operation: Higher solvency generally leads to easier lending.
• Liquidity: Assets that can be converted into cash quickly without significant loss of value.
• Duration of the loan: Longer loan terms may require higher interest rates from the lender.

Solvency refers to the ability to meet payments. Individuals with higher incomes tend to be more solvent.

Types of Money and Banking

Money includes legal tender, such as circulating coins and banknotes. Bank deposits also represent money, recorded in various forms and supported by banks, even if virtually held.

Banking involves attracting funds from savers to lend to those needing financing.

Monetary Policy and ESCB Functions

Monetary policy consists of measures taken by central banks to achieve specific economic targets.

The European System of Central Banks (ESCB) has several functions:

• Deciding and implementing monetary policy in the EU.
• Executing foreign exchange operations to promote the smooth functioning of payment systems.
• Supervising credit institutions and ensuring financial system stability.

The Financial System Structure

The financial system is structured as a set of intermediaries that channel resources from savings to financing. This includes private consumption (families), business investment, and government spending.

Financial Intermediaries and Market Types

Bank and Non-Bank Financial Intermediaries

Bank financial intermediaries, such as private banks and savings banks, offer financial products accepted as payment. Non-bank financial intermediaries, like insurance or leasing companies, offer products that are not directly accepted as money.

Differences Between Private Banks and Savings Banks

Savings banks, often structured as foundations, may offer tax advantages and allocate a portion of their profits to social benefits in areas like sports, culture, education, and social welfare. However, they cannot raise capital through variable market instruments (like stocks).

Stock Market Concepts

A stock market index indicates market evolution based on the prices of representative, liquid securities.

• Primary Market: Where savings are channeled towards investment through the creation of new assets, such as capital increases.
• Secondary Market: Where existing securities are traded between investors.

A continuous market is an interconnected system, like the Spanish stock exchanges, that allows for real-time trading of certain securities via computer terminals.