The Fundamentals of Money and Money Demand
Money is the medium of exchange. Money is useful only if there is exchange, and exchange is possible only if property or, more precisely, private property exists.1 In a communist commonwealth, where every resource is owned and allocated by the state, there would be no place for money. In contrast, capitalism can be defined as “a social system based on the explicit recognition of private property and of nonaggressive, contractual exchanges between private property owners.”2 In such a system money will quickly become indispensable.
Of course, private property owners can exchange property without the help of money. But in such a barter economy people cannot realize the full benefits of trade because transactions are possible only whenever both parties want precisely what the other party has to offer. Person A will sell his good “p” to person B only if whatever B has to offer in exchange, let us say good “q,” is precisely what A wants. The same is naturally true for person B. If one of the two parties has nothing to offer that the other party has use for, then the trade will not take place. Economists call this condition “double coincidence of wants,” and it severely restricts the number of transactions that will occur in a barter economy. An additional impediment to trade is that many goods are indivisible. Double coincidence of wants and limited divisibility hamper not only the exchange of physical goods for other physical goods ...