Money was around before capitalism. There was some commodity production in pre-capitalist societies. Commodity production being production for the purpose of selling the commodity for money, not production just to fulfil an immediate need. Capitalism is obviously based upon commodity production. Capitalists produce commodities to sell at a higher price than cost. They aim to make a profit.
Just what is money? Money is that special commodity that acts as the universal equivalent: it measures the ‘price’ of every other commodity. In theory, any commodity could take on the role of universal equivalent, but historically it has fallen to commodities that act as good stores of value & can easily be carried around, such as gold & silver. These precious metals actually take labour time to produce, & the only thing that all commodities have in common is labour time (they are qualitatively different).
If all commodities sold at prices that reflected the labour time that actually went into their production, then their individual prices would equal their individual values. But because different commodities take different proportions of direct labour time & indirect labour time (in the form of factories, machines, energy) to produce, there is a tendency for profit rates to equalise across different industries with different labour intensities. This means that individual commodities rarely sell at their labour value equivalent, but at their ‘production price’ which takes account of the different mixes of variable capital (labour time) & constant capital (factories, machines, energy, etc). There are also fluctuations in supply & demand for individual commodities to take into account. But overall, & across the business cycle, aggregate prices should equal their aggregate value equivalent.
The business cycle means most of the time even in aggregate prices do not equal values. Due to the ability of finance capital to issue credit money (to leverage), people & organisations can pay for commodities on credit, that is with money that represents future labour time. This means that aggregate prices can exceed aggregate values. This is why we can talk about a difference between prices & values. The capitalists have an intuitive notion of it when they talk about prices being out of line with the fundamentals. Hence credit money is a destabilising factor, as eventually debt saturation is reached & a recession is needed to devalue capital to restore balance. The boom & bust of the business cycle.
Attempts have been made to abolish the business cycle, or at least dampen it, by regulating the creation of credit money. The Bank Act of 1844 tried to do. It failed, even under a gold standard, because capitalists always find a way to leverage & when the panic strikes there’s a rush to cash. Gordon Brown also thought he could end boom & bust, but by allowing light touch regulation of the City of London financiers actually ended up giving us an even bigger bust.
This takes us onto the source of profit. If aggregate prices equal aggregate values in the long-run & all values represent labour time, doesn’t all profit originate from the value created by labour?
From the perspective of the individual capitalist, he spends money on labour power, but also capital, say a building & some machines. For him his profit comes not just from the work done by the workers, but from what he gets out of the machines. For the capitalist, fix capital depreciates over time & this is recorded in his accounts. But what he fails to see is that the machines, the building, even the energy used, took labour time. Other capitalists paid other workers. All capital is ultimately produced by labour. The capital depreciation in the accounts merely reflects the transfer of this value over time into the commodities produced.
We are still left with a problem though. If all profits come from the labour value created by workers, why doesn’t the market reward the workers accordingly? Why don’t workers’ wages equal the value created by workers? This stumped the classical economists. What they didn’t understand, as Marx pointed out, was that labour power & labour value are two different things. The owners of capital (capitalists), who we have to sell our labour power to, extract more value from us than they pay us. This is the source of profit. It is exploitation just as much as lords exploited serfs, it is just hidden, to some extent anyhow, by money.