The Wealth of Nations Chapter 4: Of the Origin and Use of Money

Let’s say you worked in Smith’s pin factor, and ended each day with the credit of production for 4,800 pins. How beneficial would it be if you got to take half of those home, and stop at the butcher and baker on the way to trade your pins for their meat and bread? What if they were not in need of 1,000 pins daily? What about paying your mortgage with pins?

The absurdity of trading our individual production units (pins, beef, bread, etc.) seems obvious to all of us who have lived our entire lives in a financial system where currency is nearly if not the only medium of exchange we’ve ever used. In Smith’s day, prior to electronic financial transactions, and prior to the departure from a gold standard, he found that throughout the world most peoples used precious metals to exchange. This is likely for a few reasons, chiefly the fact that they are rare and that one cannot simply create more. If there’s only a small amount of gold available, you can easily carry a few ounces in your pocket to represent a month’s worth of labor. Imagine carrying 96,000 pins, which would be about a month’s worth of production.

And though a scientist could not create more gold or silver, there were those who tried to fake these metals. This led governments or other authorities to stamp/imprint these metals once their potency and weight had been verified. Mimicking this imprint was much harder, and helped increase commerce so that you could accept a minted coin without needing to verify it yourself.

When people were their own butcher, baker, pin maker, house builder, etc., they had little need to exchange with others, and therefore did not have a system to make exchange very efficient. But when societies began dividing labor so that one person was the butcher, another the baker, another the pin maker, each respectively had more meat, bread, and pins than they personally had need for. “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.”

Smith turns next in the following chapters to explore the value of goods for which we exchange our own labor (through the medium of precious metals, and today fiat currency). “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.’” You cannot do much with gold except show it off or trade it for other goods or services. You can do a lot with a dairy farm, but you can’t take part of it to the jeweler and exchange that for a gold ring. A farm has lots of value in use, but little value in exchange (this is not to say you couldn’t exchange it for money - this is saying you will likely not find someone who wants to trade your farm for their own goods or service). Smith outlines the next three chapters in his own words:

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

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

3. 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.

Let us know

• Have you ever bartered your goods or services for those of someone else without the exchange of money?

• Does money serve any other purpose than to exchange it in the future for the goods or services of others?

Until next time, happy reading!