Thoughts on The Wealth of Nations: Book 1, Chapter 4: "of the Origin and Use of Money"

Hello everyone! This is the next post in my summer series of reviews of "The Wealth of Nations" by Adam Smith. In this post, we will be discussing the history and use of money. If you have missed any of the previous posts in this series, there will be links at the bottom of this article. Let's get into the review:

Here is my review and commentary on Book 1, Chapter 4: "of the Origin and Use of Money":

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Text Source, The Wealth of Nations by Adam Smith

Book 1, Chapter 4: "of the Origin and Use of Money"

Smith starts by reminding us of the fact that a division of labor means that a man must live by exchange. Due to this division of labor, you will exchange what you do not need (that you produce) for what you do need (and cannot produce).

A division of labor may lead to a circumstances where a man wishes to trade his product for another, but the other party has no need for that product. In situations like this, it is necessary for both men to have something that the other wants equally. This lead to the creation of commodities such as money. This is embodied by the statement

“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 alltimes 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.” - Book 1, Chapter 4, Page 34

The way I learned about money is that it is a promise to buy any good you want. Because of the value, it can be used as something much like poker chips in trade. So, I was not super surprised to read Smith's explanations of the origins of money.

Instruments of Commerce

Smith then gives examples of instruments of commerce. Listing items such as cattle in ancient civilizations, salt in Abyssinia, shells and sugar in parts of India, dried cod in Newfoundland, tobacco in Virginia, hides or leather in other countries, and nails in Scotland. Smith forgot about political favors when listing forms of commerce (that is a joke).

Metal

Metal became a popular commodity because it is durable and easily divided or combined. Smith embodies the problems of old in the statement

“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.” - Book 1, Chapter 4, Page 35

I remember when we had this discussion in Chemistry class this year. We discussed how metal is valuable because it is pretty, but also durable. You will notice that if you look at the activity series, the metals which have largely been used for commerce or relatively low. This is because it is harder for these metals to enter a reaction, meaning they maintain their state very well. There is a reason why iron is not as valuable as gold. One reason is because it is easier to find. The other is because it rusts.

Public Coins

It eventually became necessary to create public coins in order to solve two problems (a) the problem that, in precious metals, even the slightest mistake in measurement becomes a huge liability, and (b) people can design something that mimics the fineness of a metal that isn’t actually the metal and holds no value. According to Smith, it was because of these problems that governments began to stamp their coins according to fineness and weight. In times of old, the name of a coin would actually reflect its weight.

I find this funny because coins were originally created in order to solve the problems of inaccuracies in trade. Now we are developing cryptocurrencies in order to solve these problems with computers as a third party rather than a government because of issues such as inflation.

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Disclaimer

I would just like to make the point here that Smith reviewed a lot of the historical currencies here. I am not including anything from that section because I am unfamiliar with (modern or previous) European currency, and know very little about the history which he is discussing. If you wish to read it, you can read it here

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Smith uses all of the history he reviewed to make the point that because of its universal commerce status, money has become a fundamental part of trade.

Rules Which Determine Value

Smith then discusses and examines the rules which determine the “relative or exchangeable value of goods.” He discusses the word value first, which he determines could mean “value in use” or “value in exchange.” He determines that what has a high value in use will have a relatively low value in exchange or vice versa. He gives water as an example of “value in use.” Which he explains is something of great use to anyone but has little value when exchanging. He then gives a diamond as an example of “value in exchange.” He explains that a diamond is extremely valuable in exchange but has no practical use. When I read these two examples, I thought of several flaws in these examples. If a man were in dire need of water, he would certainly trade anything for it. However, most of a market is not dehydrated so it is still a fair point. Also, diamonds are currently used in drills, so that example has passed. But I suppose that the point is still valid. But there are many things that have high use and high exchangeability. For example silk, which was in so much demand that they named a whole road after it (that's a joke). Anyway, let's move on.

3 Questions

Smith has three questions which he uses to determine the fairness of the value of something. (1) What is the practical value? (2) How is the price made up/determined? (3) Under what circumstances will the market price change? These three questions will be discussed in the three upcoming chapters.

These are some great questions to ask before investing in cryptocurrency as well. Especially the third question. You and I both know that he will be discussing supply and demand in regards to that question.

Previous Reviews

The Wealth of Nations

Book 1

• Chapter 1: "of the Division of Labor"
• Chapter 2: "of the Principle which gives Occasion to the Division of Labour"
• Chapter 3: "that the Division of Labour is Limited by the Extent of the Market"
• Chapter 4: "of the Origins and Use of Money"

The Confucian Analects

• Table of Contents and Statistics

The Art of War

• Table of Contents and Statistics

Schedule (hopefully)

Friday - Tuesday: "The Wealth of Nations" review
Wednesday: Break/Free write day
Thursday: Weekly7

Closing

Thanks for reading this! This section was fun to read. It is quite apparent that Smith did his research before writing this book. Anyway, please remember that feedback is always appreciated. Hopefully I will see you in the next article!

Also remember to check for: My weekly 7 post, As well as my composer birthday posts (Note) In order to encourage meaningful feedback on the platform, I will check comment trails of users who leave superficial comments (ie "Awesome post," or "Upvoted.") and will mute any users who exhibit a pattern of leaving "spammy" comments.