Understanding Surplus Production, Money Evolution, and Financial Systems
Surplus Production, Money, and Financial Systems
Surplus Production: The natural resource exploitation that provides resources for daily use.
Production Specialization and Division of Labor: This occurs when the population not needed for agricultural tasks can dedicate themselves to other occupations. This leads to exchange, where a specialist producer of a needed good exchanges their goods. This exchange is based on barter, which requires a double coincidence of needs.
The Evolution of Money
Money evolved towards money-merchandise, which has several key properties: durable, transportable, divisible, and scarce. Throughout history, many goods have met these properties, but precious metals like gold and silver became prominent and were later turned into coins. This is known as cash.
During the Middle Ages, traders, fearing the transport of currency, left it in the custody of goldsmiths. The goldsmiths provided receipts with their signature and seal to depositors, thus creating paper currency, a precursor to modern banknotes.
Towards the end of the medieval period, money changers specialized in exchanging safeguards for gold and silver coins. This facilitated the rise of banking. The intervention of governments inevitably led to the creation of central banks, which were granted a monopoly on the manufacture of coins and bills. The growing need and scarcity of gold and silver forced the use of other materials such as bronze.
In the Eurozone, the European Central Bank is responsible for issuing banknotes and coins, which are made by the respective states through their central banks. Coins and banknotes are known as money-sign because their value lies in government recognition.
- Cash: Started as precious metals such as gold and silver but was later turned into coins used today.
- Paper Money: Refers to the banknotes used today.
- Token Money: Coins and banknotes with a value recognized by the government.
The Functions of Money
- Medium of Payment
- Store of Value: Keep in mind that inflation reduces the value of money.
- Unit of Account: Used for the valuation of all products.
Kinds of Money
- Lawful Money: Issued by the ECB and includes two types:
- Metallic money (coins)
- Paper money (bills)
- Deposit Money: Includes checks, transfers, or cards.
Financial System
The set of institutions that mediate between buyers and sellers of financial resources.
Types of Financial Intermediaries
- Banking Intermediaries: Banks and savings institutions that have the ability to create money.
- Non-Bank Intermediaries: Investment companies or leasing entities that do not have the ability to create money. These intermediaries make investments in financial assets by offering good conditions of safety, liquidity, and profitability.
Objectives of the Financial System
- Promote private saving.
- Efficiently allocate available financial resources to meet the economy’s needs.
Assets: Any good with a market value whose possession provides wealth.
- Real Assets: Physical assets, e.g., machines.
- Financial Assets: Titles that qualify as income securities or debt. Families and companies have financial surpluses while others need financing. The connection is made through the financial system.
Banks
Banks are financial intermediaries that receive funds from some customers (depositors) to lend to others (financing applicants). Banks pay an amount for the funds, which is less than the amount they receive from loans to individuals or companies. This difference is called interest. Banks also tend to charge fees for certain transfers and operations, as well as benefits obtained from the investments they make for their customers.
Functions of Banks
- Uptake of Resources: Attracting customers is the basis of the business. This is considered a passive fundraising operation because the funds have to be returned. Resources are captured in three ways:
- Current Accounts: Customers can deposit funds, perform transfers, and make payments. Customers seek cash services and liquidity, and the profitability is low.
- Savings Accounts: Customers do not have checks or checkbooks.
- Term Deposits: Deposits remain in the financial institution for a period of time. The bank pays the customer a higher interest rate.