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.

Once the division of labor is fully established, a person’s own work supplies only a small part of their needs. They meet most of their needs by exchanging what they produce beyond their own consumption for the products of other people’s work. In this way, everyone lives by exchanging and becomes, to some extent, a merchant. Society itself grows into what is properly called 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.

But when the division of labour first began, the ability to exchange goods must often have been greatly hindered. Suppose one man has more of a certain commodity than he needs, while another has less. The first man would be glad to sell some of his surplus, and the second would be glad to buy it. But if the second man has nothing the first man needs, they cannot make an exchange. The butcher has more meat in his shop than he can consume himself. The brewer and the baker would each be willing to buy some of it. But they have nothing to offer in exchange except the goods they produce in their own trades. The butcher already has all the bread and beer he immediately needs. In this case, they cannot make an exchange. He cannot sell to them, and they cannot be his customers. As a result, they are all less able to serve one another. To avoid such difficulties, every prudent man must naturally have tried to manage his affairs in a particular way. In every period of society after the division of labour began, he would have kept more than his own products on hand. He would also have kept some quantity of a commodity that few people would likely refuse in exchange for their own products. Many different commodities were probably considered and used for this purpose over time. In the early stages of society, cattle are said to have been the common means of trade. Though cattle must have been very inconvenient for this purpose, things were often valued by the number of cattle given in exchange for them. Homer says that Diomede’s armour cost only nine oxen, while Glaucus’s armour cost a hundred oxen. Salt is said to be the common means of trade and exchange in Abyssinia. A kind of shell serves this purpose in some parts of the coast of India, and dried cod in Newfoundland. Tobacco serves this purpose in Virginia, and sugar in some of our West India colonies. Hides or dressed leather serve it in some other countries. I am told that even today, in one Scottish village, a workman will often take 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.

In all countries, however, people seem to have been driven by compelling reasons to prefer metals to every other commodity for this use. Metals can be stored with as little loss as any other commodity, since hardly anything is less perishable. They can also be divided into any number of parts without loss, since those parts can easily be melted together again. No other equally durable commodities have this quality. More than any other quality, it makes metals suitable for trade and circulation. Suppose a man wanted to buy salt but had only cattle to offer in exchange. He would have had to buy a whole ox's or a whole sheep's worth of salt at a time. He could seldom buy less, because he could seldom divide what he offered without loss. If he wanted more, he would have had to buy twice or three times as much, for the same reason. That is, he would have had to buy two or three oxen's or sheep's worth. If he had metals rather than sheep or oxen to offer, however, he could easily measure out enough metal to buy exactly as much salt as he immediately needed.

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.

Different nations have used different metals for this purpose. Iron was commonly used in trade among the ancient Spartans, copper among the ancient Romans, and gold and silver among all rich trading 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.

These metals seem to have originally been used as money in rough bars, without any stamp or coinage. Pliny (Plin. Hist Nat. lib. 33, cap. 3) cites the ancient historian Timaeus on this point. According to Timaeus, the Romans had no coined money until the time of Servius Tullius. Instead, they used unstamped copper bars to buy whatever they needed. These rough bars therefore served as money at that time.

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.

Using metals in this crude form involved two serious difficulties. First, they had to be weighed. Second, their purity had to be tested. With precious metals, a small difference in quantity makes a great difference in value. Even weighing them accurately requires very precise weights and scales. Weighing gold, in particular, is a delicate operation. Less accuracy would certainly be needed for less precious metals, where a small error would matter little. Yet imagine how troublesome it would be if a poor man had to weigh a farthing whenever he bought or sold a farthing’s worth of goods. Testing a metal’s purity is even more difficult and tedious than weighing it. Unless some of the metal is properly melted in a crucible with the right dissolving agents, the results are extremely uncertain. Before coined money existed, however, people were always exposed to the worst frauds unless they went through this tedious and difficult process. In exchange for their goods, they might expect a pound of pure silver or copper. Instead, they might receive a mixture of the crudest and cheapest materials, made to look like those metals. To prevent such abuses, make exchange easier, and thereby encourage all kinds of industry and commerce, every country that has made considerable progress has found it necessary to stamp certain quantities of metal with an official mark. These were metals commonly used in those countries to buy goods. This was the origin of coined money and of the public offices called mints. Mints are institutions of exactly the same kind as those of the aulnagers and stamp masters who inspected woolen and linen cloth. All are equally intended to certify, by an official stamp, the quantity and consistent quality of these different goods 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 first official stamps placed on metals used as money seem often to have been intended to establish the metal’s quality or purity. This was both the hardest and the most important thing to establish. These stamps seem to have resembled the sterling mark now placed on silverware and silver bars. They also seem to have resembled the Spanish mark sometimes placed on gold ingots. The Spanish mark is struck on only one side of the piece and does not cover its whole surface. It establishes the metal’s purity, but not its weight. Abraham weighs out to Ephron the four hundred shekels of silver he agreed to pay for the field of Machpelah. The silver is said to be the merchant’s current money. Yet it is received by weight, not by counting the pieces, just as gold ingots and silver bars are today. The revenues of the ancient Saxon kings of England are said to have been paid in kind, not in money. They were paid in food and provisions of all sorts. William the Conqueror introduced the practice of paying these revenues in money. For a long time, however, the exchequer received this money by weight, not by counting the pieces.

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 inconvenience and difficulty of weighing these metals precisely led to the introduction of coins. A stamp covered both sides of each coin completely, and sometimes the edges too. The stamp was meant to guarantee both the purity and the weight of the metal. Coins were therefore accepted by count, as they are today, without the trouble of weighing them.

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.

The names of these coins seem originally to have expressed the weight or quantity of metal they contained. In the time of Servius Tullius, who first coined money at Rome, the Roman as or pondo contained a Roman pound of good copper. Like our Troyes pound, it was divided into twelve ounces. Each ounce contained an actual ounce of good copper. In the time of Edward I, the English pound sterling contained a Tower pound of silver of a known fineness. The Tower pound seems to have been somewhat heavier than the Roman pound and somewhat lighter than the Troyes pound. The Troyes pound was not introduced into the English mint until the 18th year of Henry VIII. In the time of Charlemagne, the French livre contained a Troyes pound of silver of a known fineness. At that time, people from all the nations of Europe attended the fair of Troyes in Champaign. The weights and measures of so famous a market were widely known and respected. From the time of Alexander the First to that of Robert Bruce, the Scots money pound contained a pound of silver. Its weight and fineness were the same as those of the English pound sterling. English, French, and Scots pennies all originally contained an actual pennyweight of silver. This was one twentieth of an ounce and one two hundred and fortieth of a pound. The shilling, too, seems originally to have been the name of a weight. An ancient statute of Henry III says, “When wheat is at twelve shillings the quarter, a farthing's worth of wastel bread shall weigh eleven shillings and fourpence.” But the relationship between the shilling and the penny, or between the shilling and the pound, seems to have been less constant and uniform than that between the penny and the pound. During the first dynasty of the kings of France, the French sou or shilling appears at different times 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. It is quite possible that it varied as much among them as among their neighbours, the ancient Franks. From the time of Charlemagne among the French and William the Conqueror among the English, the relationship between the pound, the shilling, and the penny seems to have remained the same as it is now. Yet the value of each has been very different. For in every country of the world, I believe, the greed and injustice of princes and sovereign states have gradually reduced the actual quantity of metal originally contained in their coins. In doing so, they have abused the trust of their subjects. In the later years of the republic, the Roman as was reduced to one twenty-fourth of its original value. Instead of weighing a pound, it came to weigh only half an ounce. The English pound and penny now contain only about a third of their original value. The Scots pound and penny contain about one thirty-sixth, and the French pound and penny about one sixty-sixth. By these changes, princes and sovereign states were able, in appearance, to pay their debts and fulfil their obligations with less silver than would otherwise have been required. But this was only an appearance. Their creditors were in fact cheated of part of what they were owed. All other debtors in the state were given the same privilege. They could repay whatever they had borrowed in the old coin with the same nominal sum in the new, debased coin. Such changes have therefore always benefited the debtor and ruined the creditor. They have sometimes caused a greater and more widespread upheaval in private fortunes than a very great public calamity could have caused.

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.

In this way, money has become the universal means of trade in all civilized nations. It is used to buy and sell goods of all kinds, or to exchange them 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.

I will now examine the rules people naturally follow when exchanging goods for money or for other goods. These rules determine what may be called the relative or exchange 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.

The word VALUE has two different meanings. It sometimes means the usefulness of an object. At other times, it means the power to buy other goods that comes from owning that object. The first may be called ‘value in use.’ The second may be called ‘value in exchange.’ Things with the greatest value in use often have little or no value in exchange. Conversely, things with the greatest value in exchange often have little or no value in use. Nothing is more useful than water. But it will buy hardly anything. Hardly anything can be obtained in exchange for it. A diamond, by contrast, has hardly any value in use. But it can often be exchanged for a very large quantity of other goods.

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

To examine the principles that govern the exchange value of goods, I will try to show,

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

First, what is the true measure of exchange value? In other words, what is the real price of all goods?

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

Secondly, what are the different parts that make up this real price?

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.

Lastly, what circumstances sometimes raise some or all of these parts of price above their natural or usual rate? What circumstances sometimes lower them below that rate? In other words, what sometimes prevents the market price, or the actual price of goods, from matching their natural price exactly?

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.

I will try to explain these three subjects as fully and clearly as I can in the next three chapters. I earnestly ask the reader for both patience and attention. Patience is needed to examine details that may sometimes seem unnecessarily tedious. Attention is needed to understand what may still seem somewhat obscure, even after the fullest explanation I can give. I am always willing to risk being tedious to make sure I am clear. Yet even after I have done my utmost to be clear, some obscurity may remain in a subject that is extremely abstract by nature.