James d. Gwartney

Monetary Stability
Money is vitally important for the operation of an economy. Most importantly, money is a
means of exchange. It reduces transaction costs because it provides a common denominator
into which the value of all goods and services can be converted. Economists refer to this
property of money as being a “medium of exchange.” We have discussed elsewhere the
benefits of division of labor
(?)
. Imagine, however, a world where people specialized but
exchanged goods directly for other goods through what is known as the barter system
(?)
. How
many apples would equal one cow? How would you make change if someone had enough
apples to buy only one-third of a cow?
Money makes it possible for people to gain from complex exchanges that take place
over time, such as the sale or purchase of a home or car, which involve the receipt of income or
payment of a purchase price across lengthy time periods. Money also provides a means to store
purchasing power for future use. This enables the accumulation of funds for investments that
drive productivity and economic growth. Economists call this function of money a “store of
value.” Money is also a “unit of account” that enhances people’s ability to keep track of
benefits and costs, including those incurred across time periods. Without money it’s almost
impossible to compare benefits and costs which occur over time, and it’s this comparison
which allows people to make better decisions regarding when to spend and when to save, and
what to buy and what not to buy.
The productive contribution of money, however, is directly related to the stability of its
value. In this respect, money is to an economy what language is to communication. Without
words that have a clearly defined meaning to both speaker and listener, communication would
be difficult. So it is with money. If money does not have a stable and predictable value, it will
be difficult for borrowers and lenders to find mutually agreeable terms for a loan, saving and