Chapter 1The Fundamentals of Money and Money Demand

Modern industrial society requires extensive division of labor. Extensive division of labor is feasible only in a market economy, that is, in an economy based on the voluntary contractual exchange of goods and services on markets. Such a system, by necessity, requires the institution of private property (clearly delineated ownership of goods and services) and a medium of exchange, money.1 Modern civilization, and the degree of material provision (wealth) that we all associate with advanced civilization and that we have come to expect from it, requires trade, markets, private property, and money. Such an economic arrangement can be called, broadly, capitalistic.

Primitive societies may be able to do without these things. A strictly self-sufficient small community, maybe a single household, a clan, or a small village, may produce the bare necessities of life and distribute them according to the diktat of a leader or group of leaders, according to some central plan or agreement, or even according to established traditional rules. But such a society does not take advantage of the benefits of an extensive division of labor that wider trade relationships allow, and its members will struggle to become more prosperous. Autarky is a recipe for poverty. Very few people today want to live in such a society, and it is no surprise that the vast majority of mankind has left this way of life behind.

For the past 200 years communism has promised ...

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