Money as a store of value and a tool for tradeby Adam Smith
14 The machines and tools which make up the fixed capital of an individual or a society are not included in their gross or net revenue.
The money which circulates the society’s revenue among its members is also not included in that revenue.
- The great wheel of circulation is different from the goods which are circulated through it.
- The society’s revenue is in those goods, not in the wheel that circulates them.
In computing any society’s gross or net revenue, we must always deduct the entire value of money from the entire circulation of money and goods. The value of money can never make a part of the society’s gross or net revenue.
15 Only the ambiguity of language makes this proposition doubtful or paradoxical. It is obvious when properly understood.
16 When we talk of a sum of money, we sometimes only mean the metal pieces it is made of. Sometimes we include in our meaning some obscure reference to the purchasing power it conveys.
This power is the goods which can be bought with it.
When we say that England’s circulating money is £18 million, we only mean the amount of metal pieces which circulate in England. But when we say that a man is worth £50-100 a year, we mean=
- the amount of the metal pieces annually paid to him, and
- the value of the goods he can annually buy.
We mean to estimate his way of living. His way of living is the quantity and quality of the necessaries and conveniences that he can have.
17 We combine the two meanings ambiguously into the word ‘money’=
- the quantity of physical money, and
- the purchasing power of that money.
But the wealth or revenue is equal only to the purchasing power of money. It is equal to the money’s worth, not the money*.
- [Translator’s Note= The amount is money is objective, the money’s worth is subjective]
18 Thus, if a person’s weekly pension is 1 guinea, he can buy goods and services worth 1 guinea with his pension.
- His real weekly revenue is determined by the things that he can buy with 1 guinea.
- His weekly revenue is certainly not equal both to the guinea and to what can be bought with the guinea.
- His weekly revenue is equal to the guinea’s worth, not to the actual guinea.
19 If his pension were paid in a paper bill representing 1 guinea, his revenue would depend on what he could get for that paper and not the paper itself. The bill will then be considered by all businesses as worth 1 guinea of necessaries and conveniences.
The person’s revenue would not consist in paper guinea or gold guinea, but in what he can get for it. If it could be exchanged for nothing, the paper bill would be like a bill upon a bankrupt and be worthless.
20 The revenue of all a country’s inhabitants is paid in money.
- But their real riches is always proportional to the amount of consumable goods which they can buy with this money. Their entire revenue taken together is not equal to both the money and the consumable goods.
- It is only equal to the consumable goods.
21 We frequently express a person’s revenue by the money paid to him because the amount of those pieces regulates the value of the goods that he can buy. But we still consider his revenue as consisting in this power of purchasing or consuming, and not in the pieces which convey it.
22 An individual’s purchasing power is similar to the society’s purchasing power.
The amount of money paid to an individual, is often precisely equal to his revenue. It is thus the shortest and best expression of its value.
But the amount of money circulating in a society can never be equal to the revenue of all its members. The amount of the money circulating in any country must always be of much less value than the worth of that money.
For example, a single 1 guinea coin may pay the pension of=
- Person A today, which he gives back in exchange for goods,
- Person B next week receiving the very same coin, and
- Person C next month.
Their combined purchasing power or combined revenue is 3 guineas, whereas the actual money circulating was only 1 guinea. Their combined revenue therefore cannot consist in the amount of money circulating, which is of much smaller value than their revenue or purchasing power.
23 Physical money is the great wheel of circulation and the great instrument of commerce.
Like all instruments of trade, it makes no part of the revenue of its society. Physical money makes no part of the revenue, even though it distributes to every man the revenue which belongs to him.
24 Every reduction in the cost of collecting and supporting the circulating capital called money is an improvement exactly of the same kind as every saving and cost-reduction in the building and supporting of fixed capital like machines and tools, as long as the savings do not reduce productivity.
Both savings are an improvement of the society’s net revenue.
25 Reducing the cost of supporting the fixed capital improves the society’s net revenue.
The owner’s capital is divided between his fixed and circulating capital. The smaller the one part, the greater must be the other.
The circulating capital furnishes the materials and wages of labour and puts industry into motion.
Every reduction in the cost of maintaining the fixed capital, which does not reduce productivity, must increase the fund which mobilizes industry. The reduction in the cost increases the society’s real revenue.
26 The substitution of gold and silver money with paper, replaces a very expensive instrument of commerce with one much less costly. It is sometimes equally convenient.
Circulation is carried on by a new wheel. This new wheel costs less to build and maintain. But it is not obvious how this new wheel increases the gross or net revenue of society.