Chapter 4a

The Origin and Use of Money

by Adam Smith Icon

Money was invented to facilitate trade

1 When the division of labour is established, the labour of each man can only supply a very small part of his own needs.

  • He supplies the rest with the produce of the labour of others.
  • Everyone lives by exchanging and the society grows into a commercial society.

2 But when the division of labour first began, this power of exchanging was frequently very much clogged and embarrassed in its operations.

Person X has more goods than he himself needs while Person Y has less.

  • X would be glad to dispose of, and Y would be glad to buy some of this excess.
  • But if Y has nothing that X needs, no exchange can be made between them.

The butcher has more meat in his shop than he himself can consume.

  • The brewer and the baker would be willing to buy some of it.
  • But they only have beer and bread to offer and the butcher already has all the bread and beer which he needs.

In this case, no exchange can be made between them.

  • He cannot be their merchant, nor they his customers.
  • All of them are thus mutually less serviceable to one another.

To avoid this inconvenience after the first establishment of the division of labour, every prudent man must have tried to always have=

  • his own produce, and
  • some commodities that few people would refuse in exchange for their produce.

3 Probably many different commodities were thought of and successively used for this purpose.

  • In the rude ages of society, cattle was the common instrument of commerce.
  • In old times, things were frequently valued according to the number of cattle exchanged for them, even if it must have been very inconvenient.

Homer says that=

  • the armour of Diomede cost only 9 oxen, and
  • the armour of Glaucus cost 100 oxen.

The following were the common instrument of commerce=

  • salt in Abyssinia,
  • 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

I am told that to this day, workers in a village in Scotland can carry nails instead of money to the baker’s shop or the ale-house.

4 However, men in all countries were finally determined by irresistible reasons to prefer metals above every other commodity.

Metals can be kept with little loss.

  • They are not perishable.
  • They can be divided without any loss and reunited again.
    • No other equally durable commodity has this quality.
    • This makes them fit to be the instruments of commerce and circulation.

For example, the man who wanted to buy salt but could only give cattle must have had to buy salt to the value of a whole ox.

  • He could seldom buy less than this because his cattle could seldom be divided without loss.
  • If he wanted to buy salt more than the value of one ox, he must buy two or more oxen.
  • But if he had metals to give, he could easily give an amount of metal for the precise amount of the commodity that he wanted.

5 Different metals have been used by different nations for commerce.

  • Iron was used by the ancient Spartans.
  • Copper was used by the ancient Romans.
  • Gold and silver was used by all rich and commercial nations.

6 Those metals were originally in the form of rude bars, without any stamp or coinage.

Pliny says that according to Timæus, an ancient historian, the Romans had no coined money until the time of Servius Tullius.

  • They used unstamped bars of copper which was their money back then.

7 These rude bars had two major inconveniences=

  1. The trouble of weighing

In the precious metals, a small difference in their amount makes a great difference in the value. Very accurate weights and scales are needed, particularly in the weighing of gold. In the coarser metals, a small error in would be of little consequence. Less accuracy is needed. Yet it would be very troublesome, if a poor man had to weigh a farthing each time he bought or sold a farthing’s worth of goods.

  1. The trouble of assaying them

Assaying is still more difficult and tedious.

  • 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.
  • Unless they went through assaying, people before coined money was instituted were always liable to the grossest frauds and impositions.

Instead of a pound weight of pure silver or copper, they might receive an adulterated composition of the coarsest and cheapest materials which resembled those metals.

Improved countries found it necessary to affix a public stamp on particular metals for buying goods in order to=

  • prevent such abuses
  • facilitate exchanges, and
  • encourage all sorts of industry and commerce.

This is how coined money and public offices called mints began.

Mints are institutions exactly of the same nature as the aulnagers and stampmasters of woollen and linen cloth. Through a public stamp, they ascertain the amount and uniform goodness of those commodities when brought to market.

8 The first public stamps affixed to precious metals were intended to ascertain the goodness or fineness of the metal.

Their goodness and fineness was most difficult and most important to ascertain.

The stamps resembled:

  • the sterling mark currently affixed to silver plates and bars, or
  • the Spanish mark sometimes affixed to gold ingots.

It is only struck on one side

  • It does not cover the whole surface.
  • It ascertains the fineness, but not the metal’s weight.

Abraham weighed the 400 shekels of silver which he had agreed to pay to Ephron for the field of Machpelah.

  • However, they were said to be the current money of the merchant.

Yet they are received by weight and not by tale, in the same way as gold ingots and silver bars currently are. The revenues of the ancient Saxon kings of England were paid, not in money but in kind, as victuals and provisions of all sorts.

William the Conqueror introduced the custom of paying them in money.

However, this money was received at the exchequer, by weight and not by tale for a long time.


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