BB&T Academic Programs
What Capitalism Is
The Nature of Government
Economics of Capitalism
Money in a capitalist economy is a commodity chosen by individuals to serve as a medium of exchange and a store of value. Money arises as a means of facilitating calculation and trade. In a society without money, individual producers who wish to trade must exchange the commodities or goods that they produce directly for other goods. Although money has existed since ancient times, it can only perform all of its functions fully under a system of capitalism and its protection of individual rights.
The existence of money is what makes a division of labor economy possible. Without money, the only means of trade would be direct exchange, for example, a wheat farmer trading his wheat for pigs or tools. The men who raise hogs and make tools would face a similar situation. This barter system inhibits the division of labor because it makes calculation difficult—how many bushels of wheat count for one hog? How do you divide a living hog into fractions when wheat or tools are only needed in that amount? How do you price the exchange of pigs, which vary in quality even when they weigh the same, and hammers, where each additional hammer is indistinguishable? How long would the wheat stock have to remain on hand spoiling before the farmer could attain enough value to exchange for a tool or a pig? Individuals can solve this problem by executing their exchanges in terms of a third commodity, money.
Money is a means of solving the problems of complex exchange and trade. It acts as a medium of exchange, a unit of account, and as a store of value. Money serves as a tool of exchange, a commodity that producers agree to use as a medium of exchange for other commodities. It can be used to pay for goods or services. When all producers in an economy recognize the value of the exchange commodity, it can be used to store productive value. In other words, the wheat farmer can buy his ham from the hog farmer with money, which he has received for his previous production of wheat.
Over time, individuals have used various commodities for money (including everything from shells to tulip bulbs to cigarettes and precious stones), but gradually settled on the use of precious metals, especially gold, as the best for use as money. The use of gold reflects the objective requirements for such a tool of exchange and saving. Money must be a material commodity that is rare, durable, homogenous, and relatively stable in its inherent value. This commodity acts like a yardstick of the unit of account—it is fixed in value.
In a capitalist economy, where the control of money is entirely free from governmental interference, money is a symbol of productivity. To the extent that men are productive and act long-range, their money will serve as a means of increasing their future productivity and their standard of living. To the extent that the government protects individual rights, especially the right to property in every commodity including money, an economy can benefit from the increased productivity and wealth that a stable medium of exchange can provide.