Book I, Chapter IV

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. *60

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 an hundred oxen. *61 Salt is said to be the common instrument of commerce and exchanges in Abyssinia;*62 a species of shells in some parts of the coast of India; dried cod at Newfoundland; tobacco in Virginia;*63 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.
*64
Money is often described as a medium of exchange (meaning it is readily accepted), a store of value (meaning it can be used over time) and as a unit of account (such as the price per kilogram, etc).  Do these definitions help us make sense of Smith’s historic examples of “instruments of commerce”?

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.*65 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 reunited 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.
What challenge is Smith outlining that currency helps solve? 

Different metals have been made use of by different nations for this purpose. Iron was the common instrument of commerce among the antient Spartans; copper among the antient 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,*66 upon the authority of Timæus, an antient 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 inconveniencies; first with the trouble of weighing;*67 and, secondly, with that*68 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;*69 institutions exactly of the same nature with those of the aulnagers and stampmasters of woollen and linen cloth.*70 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.
Why did the stamping of coins by “public offices,” known as mints, encourage wider use of metal coins? How did this encourage trade?

The first publick 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.*71 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 antient 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.*72 This money, however, was, for a long time, received at the exchequer, by weight and not by tale.*73

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,*74 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 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 pennyweight 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 antient statute of Henry III. then wastel bread of a farthing shall weigh eleven shillings and four pence.*75 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.*76 Among the antient Saxons a shilling appears at one time to have contained only five pennies,
*77 and it is not improbable that it may have been as variable among them as among their neighbours, the antient Franks. From the time of Charlemagne among the French,*78 and from that of William the Conqueror among the English,*79 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.*80 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.*81 By means of those operations the princes and sovereign states which performed them were enabled, in appearance, to pay their debts and to 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.*82
How does debasement of metal coins favor debtors and harm creditors? 

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.*83

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.*84

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.
What is the difference between “actual price” and “natural price,” according to Smith?

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 of 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*85 in its own nature extremely abstracted.









60. [The paragraph has a close resemblance to Harris, Money and Coins, pt. i., §§ 19, 20.]

61.[Iliad, vi. 236; quoted with the same object in Pliny, Hist. Nat., lib. xxxiii., cap. i.; Pufendorf, De jure naturæ et gentium, lib. v., cap. v., § 1; Martin-Leake, Historical Account of English Money, 2nd ed., 1745 p. 4 and elsewhere.]

62. [Montesquieu, Esprit des lois, liv. xxii., chap i., note.]

63. [W. Douglass, A Summary Historical and Political of the First Planting, Progressive Improvements and Present State of the British Settlements in North America, 1760, vol. ii., p. 364. Certain law officers’ fees in Washington were still computed in tobacco in 1888.—J. J. Lalor, Cyclopædia of Political Science, 1888,
s.v. Money, p. 879.]

64. [Playfair, ed. of Wealth of Nations, 1805, vol. i., p. 36, says the explanation of this is that factors furnish the nailers with materials and during the time they are working give them a credit for bread, cheese and chandlery goods, which they pay for in nails when the iron is worked up. The fact that nails are metal is forgotten at the beginning of the next paragraph in the text above.]

65. [For earlier theories as to these reasons see Grotius, De jure belli et pacis, lib. ii., cap. xii., § 17; Pufendorf, De jure naturæ et gentium, lib. v., cap. i., § 13; Locke, Some Considerations 2nd ed., 1696, p. 31; Law, Money and Trade, 1705, ch. i.; Hutcheson, System of Moral Philosophy, 1755, vol. ii., pp. 55, 56; Montesquieu, Esprit des lois, liv. xxii., ch. ii.; Cantillon, Essai sur la Nature du Commerce en général, 1755, pp. 153, p. 355-357; Harris, Money and Coins, pt. i., §§ 22-27, and cp. Lectures, pp. 182-185.]

66. Plin. Hist. Nat. lib. 33. cap. 3. [‘Servius rex primus signavit aes. Antea rudi usos Romæ: Timæus tradit.’ Ed. 1 reads ‘authority of one Remeus, an ancient author,’ Remeus being the reading in the edition of Pliny in Smith’s library, cp. Bonar’s Catalogue of the Library of Adam Smith, 1894, p. 87. Ed. 1 does not contain the note.]

67. [Ed. 1 reads ‘ weighing them’.]

68. [Ed. 1 reads ‘ with the trouble’.]

69. [Aristotle, Politics, 1257a, 38-41; quoted by Pufendorf, de jure naturæ et gentium, lib. v. cap. 1., § 12.]

70. [The aulnager measured woollen cloth in England under 25 Ed. III., st. 4, c. 1. See John Smith, Chronicon Rusticum-Commerciale or Memoirs of Wool, 1747, vol. i., p. 37. The stampmasters of linen cloth in the linen districts of Scotland were appointed under 10 Ann., c. 21, to prevent ‘divers abuses and deceits’ which ‘have of late years been used in the manufactories of linen cloth. . . with respect to the lengths, breadths and unequal sorting of yarn, which leads to the great debasing and undervaluing of the said linen cloth both at home and in foreign parts.’—
Statutes of the Realm, vol. ix., p. 682.]

71. [Genesis xxiii 16.]

72. [‘King William the First, for the better pay of his warriors caused the firmes which till his time had for the most part been answered in victuals, to be converted in pecuniam numeratam.’—Lowndes, Report containing an Essay for the Amendment of the Silver Coins, 1695, p. 4. Hume, whom Adam Smith often follows, makes no such absurd statement, History, ed. of 1773, vol. i., pp. 225, 226.]

73. [Lowndes, Essay, p. 4.]

74. [Above, I.4.6.]

75. [The Assize of Bread and Ale, 51 Hen. III., contains an elaborate scale beginning, ‘When a quarter of wheat is sold for xii d. then wastel bread of a farthing shall weigh vi l. and xvi s.‘ and goes on to the figures quoted in the text above. The statute is quoted at second-hand from Martin Folkes’ Table of English Silver Coins with the same object by Harris, Essay upon Money and Coins, pt. i., § 29, but Harris does not go far enough in the scale to bring in the penny as a weight. As to this scale see below, I.11.100, 114-116.]

76. [Ed. 1 reads ‘twenty, forty and forty-eight pennies’. Gamier, Recherches sur la nature et les causes de la richesse des nations, par Adam Smith, 1802 tom. v., p. 55, in a note on this passage says that the sou was always twelve deniers.]

[Hume,
History of England, ed. of 1773, i. p. 226. Fleetwood,
Chronicon Preciosum, 1707, p. 30. These authorities say there were 48 shillings in the pound, so that 240 pence would still make £1.]

78. [Harris Money and Coins, pt. i., § 29.]

79. [‘It is thought that soon after the Conquest a pound sterling was divided into twenty shillings.’—Hume, History of England, ed. of 1773, vol. i., p. 227.]

80. [Pliny, Hist. Nat., lib. xxxiii., cap. iii.; see below, vol. ii., pp. 468, 469.]

81. [Harris, Money and Coins, pt. i., § 30, note, makes the French livre about one seventieth part of its original value.]

82. [The subject of debased and depreciated coinage occurs again below, I.5.11-13,I.11.143-144; vol. ii., IV.6.16-32,V.3.61-65. One of the reasons why gold and silver became the most usual forms of money is dealt with below, I.11.79-83. See Coin and Money in the index.]

83. [In Lectures, pp. 182-190, where much of this chapter is to be found, money is considered ‘first as the measure of value and then as the medium of permutation or exchange’. Money is said to have had its origin in the fact that men naturally fell upon one commodity with which to compare the value of all other commodities. When this commodity was once selected it became the medium of exchange. In this chapter money comes into use from the first as a medium of exchange, and its use as a measure of value is not mentioned. The next chapter explains that it is vulgarly used as a measure of value because it is used as an instrument of commerce or medium of exchange.]

84. [Lectures, p. 157. Law, Money and Trade, 1705, ch. i. (followed by Harris, Money and Coins, pt. i., § 3 ), contrasts the value of water with that of diamonds. The cheapness of water is referred to by Plato Euthydem. 304 B., quoted by Pufendorf, De jure naturæ et gentium, lib. v., cap. i., § 6; cp. Barbeyrac’s note on § 4.]

85. [Ed. 1 reads ‘subject which is’.]