Posted by: erichosemann | December 17, 2009

The Wealth of Nations, Chapter 4

Chapter 4:  Of the Origin and Use of Money

33, 1 The commercial society is based on the exchange of divided labor.

33, 2-34,1 Though more efficient than unspecialized labor in providing necessities, divided labor allows for only a crude from of exchange—barter—in which each party to the exchange must have exactly what the other party wants.  Through history the solution to this problem has been the accumulation of one commodity as a medium of exchange.  Cattle, shells, and skins are examples of early media of exchange.

35, 1 Because commodities are unwieldy, perishable, and for the most part indivisible, metals became the medium of choice.  Quantities of metal could be more closely matched to quantities of goods because metal can be divided and reunited.  Such accuracy was impossible in a system using cattle for currency.

36, 1 Both coarse metals such as iron and copper, and precious metals such as silver and gold have been used as currency.

36, 2 Two problems face the issuance of precious metal coinage: accurately weighing the coin and accurately identifying the quantity of precious metal it contains.  Mints came into being to deal with these problems, verifying purity of the metal in much the same way as “aulnagers” and stampmasters verified the quality of wool and cloth.

37, 1 The first stamps indicated purity, because transactions were carried out by weight of coins rather than number.  Accurate measurements of coin weight being difficult, stamps indicating the weight of the coins were adopted.

38, 2-40 The names of early coins reflected the weight of precious metal they contained—at first.  From the Roman pondo to the English pound and French livre, the ratio of nominal coin weight to the actual weight of precious metal contained in coins has decreased.

Smith believes currency debasement is in part a deliberate attempt by sovereigns to discharge their debts by sleight of hand; debased currency allows a debtor to pay debts in nominal value with currency of lesser actual value.

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.”

41, 241, 3 Next Smith will examine the rules that determine what is valuable.

There are two types of value: value in use and value in exchange.  Things such as water, that are valuable in use, are frequently of no value in exchange, while things such as diamonds are of relatively little value in use but immense value in exchange.

42, 1-4 To understand what comprises value in exchange, Smith will next attempt to determine 1) what is a commodities real value, or price, 2) what constitutes this price, and 3) why do market prices fluctuate above and below the real price.

Smith adds a caveat about his upcoming attempt to explain these phenomena:

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.”

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