The Wealth of Nations

F THE ORIGIN AND USE OF MONEY.

When the division of labour has been once thoroughly established, it is
but a very small part of a man’s wants which the produce of his own labour
can supply. He supplies the far greater part of them by exchanging that
surplus part of the produce of his own labour, which is over and above his
own consumption, for such parts of the produce of other men’s labour as he
has occasion for. Every man thus lives by exchanging, or becomes, in some
measure, a merchant, and the society itself grows to be what is properly a
commercial society.

But when the division of labour first began to take place, this power of
exchanging must frequently have been very much clogged and embarrassed in
its operations. One man, we shall suppose, has more of a certain commodity
than he himself has occasion for, while another has less. The former,
consequently, would be glad to dispose of; and the latter to purchase, a
part of this superfluity. But if this latter should chance to have nothing
that the former stands in need of, no exchange can be made between them.
The butcher has more meat in his shop than he himself can consume, and the
brewer and the baker would each of them be willing to purchase a part of
it. But they have nothing to offer in exchange, except the different
productions of their respective trades, and the butcher is already
provided with all the bread and beer which he has immediate occasion for.
No exchange can, in this case, be made between them. He cannot be their
merchant, nor they his customers; and they are all of them thus mutually
less serviceable to one another. In order to avoid the inconveniency of
such situations, every prudent man in every period of society, after the
first establishment of the division of labour, must naturally have
endeavoured to manage his affairs in such a manner, as to have at all
times by him, besides the peculiar produce of his own industry, a certain
quantity of some one commodity or other, such as he imagined few people
would be likely to refuse in exchange for the produce of their industry.
Many different commodities, it is probable, were successively both thought
of and employed for this purpose. In the rude ages of society, cattle are
said to have been the common instrument of commerce; and, though they must
have been a most inconvenient one, yet, in old times, we find things were
frequently valued according to the number of cattle which had been given
in exchange for them. The armour of Diomede, says Homer, cost only nine
oxen; but that of Glaucus cost a hundred oxen. Salt is said to be the
common instrument of commerce and exchanges in Abyssinia; a species of
shells in some parts of the coast of India; dried cod at Newfoundland;
tobacco in Virginia; sugar in some of our West India colonies; hides or
dressed leather in some other countries; and there is at this day a
village in Scotland, where it is not uncommon, I am told, for a workman to
carry nails instead of money to the baker’s shop or the ale-house.

In all countries, however, men seem at last to have been determined by
irresistible reasons to give the preference, for this employment, to
metals above every other commodity. Metals can not only be kept with as
little loss as any other commodity, scarce any thing being less perishable
than they are, but they can likewise, without any loss, be divided into
any number of parts, as by fusion those parts can easily be re-united
again; a quality which no other equally durable commodities possess, and
which, more than any other quality, renders them fit to be the instruments
of commerce and circulation. The man who wanted to buy salt, for example,
and had nothing but cattle to give in exchange for it, must have been
obliged to buy salt to the value of a whole ox, or a whole sheep, at a
time. He could seldom buy less than this, because what he was to give for
it could seldom be divided without loss; and if he had a mind to buy more,
he must, for the same reasons, have been obliged to buy double or triple
the quantity, the value, to wit, of two or three oxen, or of two or three
sheep. If, on the contrary, instead of sheep or oxen, he had metals to
give in exchange for it, he could easily proportion the quantity of the
metal to the precise quantity of the commodity which he had immediate
occasion for.

Different metals have been made use of by different nations for this
purpose. Iron was the common instrument of commerce among the ancient
Spartans, copper among the ancient Romans, and gold and silver among all
rich and commercial nations.

Those metals seem originally to have been made use of for this purpose in
rude bars, without any stamp or coinage. Thus we are told by Pliny (Plin.
Hist Nat. lib. 33, cap. 3), upon the authority of Timaeus, an ancient
historian, that, till the time of Servius Tullius, the Romans had no
coined money, but made use of unstamped bars of copper, to purchase
whatever they had occasion for. These rude bars, therefore, performed at
this time the function of money.

The use of metals in this rude state was attended with two very
considerable inconveniences; first, with the trouble of weighing, and
secondly, with that of assaying them. In the precious metals, where a
small difference in the quantity makes a great difference in the value,
even the business of weighing, with proper exactness, requires at least
very accurate weights and scales. The weighing of gold, in particular, is
an operation of some nicety in the coarser metals, indeed, where a small
error would be of little consequence, less accuracy would, no doubt, be
necessary. Yet we should find it excessively troublesome if every time a
poor man had occasion either to buy or sell a farthing’s worth of goods,
he was obliged to weigh the farthing. The operation of assaying is still
more difficult, still more tedious; and, unless a part of the metal is
fairly melted in the crucible, with proper dissolvents, any conclusion
that can be drawn from it is extremely uncertain. Before the institution
of coined money, however, unless they went through this tedious and
difficult operation, people must always have been liable to the grossest
frauds and impositions; and instead of a pound weight of pure silver, or
pure copper, might receive, in exchange for their goods, an adulterated
composition of the coarsest and cheapest materials, which had, however, in
their outward appearance, been made to resemble those metals. To prevent
such abuses, to facilitate exchanges, and thereby to encourage all sorts
of industry and commerce, it has been found necessary, in all countries
that have made any considerable advances towards improvement, to affix a
public stamp upon certain quantities of such particular metals, as were in
those countries commonly made use of to purchase goods. Hence the origin
of coined money, and of those public offices called mints; institutions
exactly of the same nature with those of the aulnagers and stamp-masters
of woollen and linen cloth. All of them are equally meant to ascertain, by
means of a public stamp, the quantity and uniform goodness of those
different commodities when brought to market.

The first public stamps of this kind that were affixed to the current
metals, seem in many cases to have been intended to ascertain, what it was
both most difficult and most important to ascertain, the goodness or
fineness of the metal, and to have resembled the sterling mark which is at
present affixed to plate and bars of silver, or the Spanish mark which is
sometimes affixed to ingots of gold, and which, being struck only upon one
side of the piece, and not covering the whole surface, ascertains the
fineness, but not the weight of the metal. Abraham weighs to Ephron the
four hundred shekels of silver which he had agreed to pay for the field of
Machpelah. They are said, however, to be the current money of the
merchant, and yet are received by weight, and not by tale, in the same
manner as ingots of gold and bars of silver are at present. The revenues
of the ancient Saxon kings of England are said to have been paid, not in
money, but in kind, that is, in victuals and provisions of all sorts.
William the Conqueror introduced the custom of paying them in money. This
money, however, was for a long time, received at the exchequer, by weight,
and not by tale.

The inconveniency and difficulty of weighing those metals with exactness,
gave occasion to the institution of coins, of which the stamp, covering
entirely both sides of the piece, and sometimes the edges too, was
supposed to ascertain not only the fineness, but the weight of the metal.
Such coins, therefore, were received by tale, as at present, without the
trouble of weighing.

The denominations of those coins seem originally to have expressed the
weight or quantity of metal contained in them. In the time of Servius
Tullius, who first coined money at Rome, the Roman as or pondo contained a
Roman pound of good copper. It was divided, in the same manner as our
Troyes pound, into twelve ounces, each of which contained a real ounce of
good copper. The English pound sterling, in the time of Edward I.
contained a pound, Tower weight, of silver of a known fineness. The Tower
pound seems to have been something more than the Roman pound, and
something less than the Troyes pound. This last was not introduced into
the mint of England till the 18th of Henry the VIII. The French livre
contained, in the time of Charlemagne, a pound, Troyes weight, of silver
of a known fineness. The fair of Troyes in Champaign was at that time
frequented by all the nations of Europe, and the weights and measures of
so famous a market were generally known and esteemed. The Scots money
pound contained, from the time of Alexander the First to that of Robert
Bruce, a pound of silver of the same weight and fineness with the English
pound sterling. English, French, and Scots pennies, too, contained all of
them originally a real penny-weight of silver, the twentieth part of an
ounce, and the two hundred-and-fortieth part of a pound. The shilling,
too, seems originally to have been the denomination of a weight. “When
wheat is at twelve shillings the quarter,” says an ancient statute of
Henry III. “then wastel bread of a farthing shall weigh eleven shillings
and fourpence”. The proportion, however, between the shilling, and either
the penny on the one hand, or the pound on the other, seems not to have
been so constant and uniform as that between the penny and the pound.
During the first race of the kings of France, the French sou or shilling
appears upon different occasions to have contained five, twelve, twenty,
and forty pennies. Among the ancient Saxons, a shilling appears at one
time to have contained only five pennies, and it is not improbable that it
may have been as variable among them as among their neighbours, the
ancient Franks. From the time of Charlemagne among the French, and from
that of William the Conqueror among the English, the proportion between
the pound, the shilling, and the penny, seems to have been uniformly the
same as at present, though the value of each has been very different; for
in every country of the world, I believe, the avarice and injustice of
princes and sovereign states, abusing the confidence of their subjects,
have by degrees diminished the real quantity of metal, which had been
originally contained in their coins. The Roman as, in the latter ages of
the republic, was reduced to the twenty-fourth part of its original value,
and, instead of weighing a pound, came to weigh only half an ounce. The
English pound and penny contain at present about a third only; the Scots
pound and penny about a thirty-sixth; and the French pound and penny about
a sixty-sixth part of their original value. By means of those operations,
the princes and sovereign states which performed them were enabled, in
appearance, to pay their debts and fulfil their engagements with a smaller
quantity of silver than would otherwise have been requisite. It was indeed
in appearance only; for their creditors were really defrauded of a part of
what was due to them. All other debtors in the state were allowed the same
privilege, and might pay with the same nominal sum of the new and debased
coin whatever they had borrowed in the old. Such operations, therefore,
have always proved favourable to the debtor, and ruinous to the creditor,
and have sometimes produced a greater and more universal revolution in the
fortunes of private persons, than could have been occasioned by a very
great public calamity.

It is in this manner that money has become, in all civilized nations, the
universal instrument of commerce, by the intervention of which goods of
all kinds are bought and sold, or exchanged for one another.

What are the rules which men naturally observe, in exchanging them either
for money, or for one another, I shall now proceed to examine. These rules
determine what may be called the relative or exchangeable value of goods.

The word VALUE, it is to be observed, has two different meanings, and
sometimes expresses the utility of some particular object, and sometimes
the power of purchasing other goods which the possession of that object
conveys. The one may be called ‘value in use;’ the other, ‘value in
exchange.’ The things which have the greatest value in use have frequently
little or no value in exchange; and, on the contrary, those which have the
greatest value in exchange have frequently little or no value in use.
Nothing is more useful than water; but it will purchase scarce any thing;
scarce any thing can be had in exchange for it. A diamond, on the
contrary, has scarce any value in use; but a very great quantity of other
goods may frequently be had in exchange for it.

In order to investigate the principles which regulate the exchangeable
value of commodities, I shall endeavour to shew,

First, what is the real measure of this exchangeable value; or wherein
consists the real price of all commodities.

Secondly, what are the different parts of which this real price is
composed or made up.

And, lastly, what are the different circumstances which sometimes raise
some or all of these different parts of price above, and sometimes sink
them below, their natural or ordinary rate; or, what are the causes which
sometimes hinder the market price, that is, the actual price of
commodities, from coinciding exactly with what may be called their natural
price.

I shall endeavour to explain, as fully and distinctly as I can, those
three subjects in the three following chapters, for which I must very
earnestly entreat both the patience and attention of the reader: his
patience, in order to examine a detail which may, perhaps, in some places,
appear unnecessarily tedious; and his attention, in order to understand
what may perhaps, after the fullest explication which I am capable of
giving it, appear still in some degree obscure. I am always willing to run
some hazard of being tedious, in order to be sure that I am perspicuous;
and, after taking the utmost pains that I can to be perspicuous, some
obscurity may still appear to remain upon a subject, in its own nature
extremely abstracted.