Book I, Chapter IV

On the Origin and Use of Money.

Once the division of labor has been fully established, the product of a person’s own labor can supply only a very small part of what that person needs. Most needs are met by exchanging the part of one’s production that exceeds one’s own consumption for the products of other people’s labor. Everyone thus lives by exchange and becomes, in some degree, a merchant; society itself becomes what can properly be called a commercial society.

But when the division of labor first took hold, this power of exchange must often have been severely hampered. Suppose one person has more of a certain commodity than he needs, while another has less. The first would gladly sell part of his surplus, and the second would gladly buy it. But if the buyer happens to have nothing the seller needs, they cannot make an exchange. The butcher has more meat in his shop than he can consume, and the brewer and baker would each gladly buy some. Yet all they can offer are the products of their own trades, and the butcher already has all the bread and beer he needs at present. They cannot exchange with one another. He cannot serve as their merchant, nor they as his customers; each is consequently less useful to the others. To avoid this inconvenience, every prudent person, in every period of society after the division of labor was first established, must naturally have tried to keep on hand, besides the particular product of his own industry, a quantity of some commodity he thought few people would refuse in exchange for their products. Many commodities were probably considered and used in succession for this purpose. In the early ages of society, cattle are said to have been the common medium of commerce. Inconvenient as they must have been, we find that in ancient times things were often valued by the number of cattle exchanged for them. The armor of Diomede, Homer says, cost only nine oxen, but that of Glaucus cost a hundred oxen. Salt is said to be the common medium of commerce and exchange in Abyssinia; a kind of shell in 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 certain other countries. And I am told that, even today, in a village in Scotland, a workman will commonly take nails instead of money to the baker’s shop or the alehouse.

In every country, however, compelling reasons seem eventually to have led people to prefer metals to all other commodities for this purpose. Metals can be stored with as little loss as any commodity, since hardly anything is less perishable; and they can also be divided into any number of parts without loss, since melting can readily reunite the parts. No other commodity of equal durability has this quality, which, more than any other, makes metals fit to serve as instruments of commerce and circulation. A person wishing to buy salt, for example, who had nothing but cattle to exchange, would have to buy salt worth a whole ox or a whole sheep at once. He could seldom buy less, since what he had to give could seldom be divided without loss. If he wanted more, for the same reason he would have to buy double or triple the quantity: salt worth two or three oxen, or two or three sheep. If, instead, he had metal to exchange rather than sheep or oxen, he could easily match the amount of metal to the precise quantity of salt he needed at the time.

Different nations have employed different metals for this purpose. Iron was the common medium of commerce among the ancient Spartans, copper among the ancient Romans, and gold and silver among all wealthy commercial nations.

These metals appear originally to have been used as crude bars, without a stamp or coinage. Thus Pliny tells us (Plin. Hist Nat. lib. 33, cap. 3), on the authority of the ancient historian Timaeus, that until the time of Servius Tullius the Romans had no coined money: they used unstamped bars of copper to buy whatever they needed. At that time, then, these crude bars served as money.

Using metals in this raw form brought two serious inconveniences: first the trouble of weighing them, and second the trouble of assaying them. With precious metals, where a small difference in quantity produces a great difference in value, even weighing them accurately requires very precise weights and scales. Weighing gold in particular is a delicate operation. With coarser metals, to be sure, a small error matters little, and less precision would be required. Yet we would find it exceedingly troublesome if a poor person, each time he bought or sold a farthing’s worth of goods, had to weigh out the farthing. Assaying is still more difficult and time-consuming; unless some of the metal is properly melted in a crucible with suitable solvents, any conclusion is highly uncertain. Before coinage was established, however, people who did not perform this laborious and difficult test were always exposed to the crudest fraud. In exchange for their goods, instead of a pound weight of pure silver or copper, they might receive an adulterated mixture of the coarsest, cheapest materials made to look like those metals. To prevent these abuses, facilitate exchange, and thereby encourage every kind of industry and commerce, every country that has made considerable progress has found it necessary to place an official stamp on specified quantities of the metals commonly used there to purchase goods. This is the origin of coined money and of the public offices called mints, institutions of exactly the same kind as the offices of the aulnagers and stamp-masters of woolen and linen cloth. Each aims to certify, by a public stamp, the quantity and uniform quality of commodities brought to market.

In many cases the first public stamps placed on metals in circulation seem to have been intended to certify what was both hardest and most important to establish: the quality or fineness of the metal. They may have resembled the sterling mark now placed on silver plate and bars, or the Spanish mark sometimes placed on gold ingots. A mark struck on only one side, without covering the whole surface, certifies fineness but not weight. Abraham weighs out to Ephron the four hundred shekels of silver he agreed to pay for the field of Machpelah. They are called the merchant’s current money, yet are received by weight, not by counting, just as gold ingots and silver bars are today. The revenues of the ancient Saxon kings of England are said to have been paid not in money but in kind, that is, in food and provisions of all sorts. William the Conqueror introduced the practice of paying them in money. For a long time, however, this money was received at the exchequer by weight, not by counting.

The inconvenience and difficulty of weighing these metals accurately led to the introduction of coins. Their stamp covered both faces of a piece entirely, and sometimes its edges as well, and was supposed to certify not only the metal’s fineness but also its weight. These coins were therefore accepted by counting, as they are now, without the trouble of weighing them.

The names of these coins appear 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 containing an actual ounce of good copper. In the time of Edward I. the English pound sterling contained a pound, Tower weight, of silver of a known fineness. The Tower pound appears 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 of Henry the VIII. In the time of Charlemagne, the French livre contained a pound, Troyes weight, of silver of a known fineness. The fair of Troyes in Champaign then attracted all the nations of Europe, and the weights and measures of so celebrated 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 equal in weight and fineness to the English pound sterling. English, French, and Scots pennies, too, all originally contained an actual pennyweight of silver, the twentieth part of an ounce and the two hundred-and-fortieth part of a pound. The shilling also appears originally to have named 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 ratio of the shilling to either the penny or the pound, however, seems not to have been as constant and uniform as that of the penny to the pound. During the first dynasty of French kings, 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 may well have varied as much among them as among their neighbors, the ancient Franks. From the time of Charlemagne among the French, and of William the Conqueror among the English, the ratio between pound, shilling, and penny appears to have remained uniformly what it is today, though the value of each has changed greatly. In every country of the world, I believe, princes and sovereign states, through greed and injustice, have abused their subjects’ trust and gradually reduced the actual quantity of metal originally contained in their coins. In the later Roman republic, the as fell to the twenty-fourth part of its original value: instead of weighing a pound, it weighed only half an ounce. The English pound and penny now contain only about a third of their original value; the Scots pound and penny about a thirty-sixth; and the French pound and penny about a sixty-sixth part. By these measures, princes and sovereign states appeared able to pay their debts and fulfill their obligations with less silver than would otherwise have been needed. But this was only an appearance: their creditors were in fact defrauded of part of what they were owed. Every other debtor in the state received the same privilege, being allowed to repay with the same nominal sum in the new debased coin whatever he had borrowed in the old. Such measures have therefore always favored debtors and ruined creditors, and have sometimes brought about a greater and more widespread upheaval in private fortunes than even a great public calamity could have caused.

It is in this way that money has become, in every civilized nation, the universal medium of commerce, through which goods of all kinds are bought and sold or exchanged with one another.

I shall now examine the rules people naturally follow when exchanging goods for money or for one another. These rules determine what may be called the relative or exchangeable value of goods.

The word value, it should be observed, has two meanings. Sometimes it expresses the usefulness of a particular object; at other times, the power to purchase other goods that possession of that object confers. The first may be called “value in use,” the second “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, yet 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 can often be exchanged for a very great quantity of other goods.

To investigate the principles governing the exchangeable value of commodities, I shall try to show:

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

Second, the different parts of which this real price is composed.

And last, the different circumstances that sometimes raise some or all of these parts above, and sometimes lower them below, their natural or ordinary rate; in other words, the causes that sometimes prevent the market price, the actual price of commodities, from coinciding exactly with what may be called their natural price.

I shall try to explain these three subjects as fully and clearly as I can in the next three chapters. For this I must earnestly ask both the reader’s patience, to follow an account that may sometimes seem needlessly tedious, and the reader’s attention, 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; and even after I have taken the greatest pains to be clear, some obscurity may remain in a subject that is by its nature extremely abstract.

On the Origin and Use of Money.

Once the division of labor is fully established, a person's own work supplies only a small part of what that person needs. People meet most of their needs by exchanging what they produce beyond their own consumption for products of other people's work. Everyone thus lives by exchange and becomes, to some extent, a merchant. Society itself becomes what we can properly call a commercial society.

But when the division of labor first began, people often found it hard to exchange things. Suppose one person has more of a product than he needs and another has too little. The first would gladly sell some of his surplus, and the second would gladly buy it. But if the second person has nothing the first needs, they cannot make an exchange. A butcher has more meat in his shop than he can eat. A brewer and a baker would each like to buy some of it. But they can offer only beer and bread, and the butcher already has all the beer and bread he needs right now. So they cannot trade. The butcher cannot sell to them, and they cannot buy from him. They are consequently less useful to one another. To avoid this difficulty, every sensible person, in every period after the division of labor was first established, must naturally have tried to keep something on hand besides the product of his own work. He would keep a quantity of some product that he thought few people would refuse in exchange for their products. People probably considered and used many different products for this purpose over time. Cattle are said to have served as the usual means of trade in the early ages of society. They must have been very inconvenient, yet things in ancient times were often valued by the number of cattle given in exchange. Homer says Diomede's armor cost only nine oxen, while Glaucus's cost a hundred oxen. Salt is said to serve as the usual means of trade and exchange in Abyssinia; a kind of shell in parts of the Indian coast; dried cod in Newfoundland; tobacco in Virginia; sugar in some of our West India colonies; and hides or prepared leather in some other countries. I am told that even today, in one Scottish village, a worker quite often takes nails rather than money to the baker's shop or the alehouse.

In every country, though, people seem eventually to have had compelling reasons to choose metals over all other products for this purpose. Metals can be stored with as little loss as any product, since hardly anything lasts longer. They can also be divided into any number of pieces without loss, because the pieces can easily be fused back together. No other equally durable product has this quality. More than any other quality, it makes metals suitable for trade and circulation. Suppose a man wanted salt but had only cattle to trade. He would have to buy enough salt to be worth a whole ox or a whole sheep at once. He could seldom buy less, because he could seldom divide what he offered without losing value. If he wanted more, he would similarly have to buy twice or three times as much: salt worth two or three oxen, or two or three sheep. But if he had metal to trade instead of sheep or oxen, he could easily give just enough metal to match the precise amount of salt he needed immediately.

Different nations have used different metals in this way. The ancient Spartans commonly traded with iron, the ancient Romans with copper, and all rich, trading nations with gold and silver.

At first, people seem to have used these metals as rough bars without stamps or coinage. Pliny tells us (Plin. Hist Nat. lib. 33, cap. 3), citing the ancient historian Timaeus, that until the time of Servius Tullius the Romans had no coins. They used unstamped copper bars to buy whatever they needed. These rough bars therefore served as money at that time.

Using metals in that rough form brought two serious problems. First, people had to weigh them; second, they had to test their purity. With precious metals, even a small difference in quantity makes a large difference in value. Weighing them accurately requires very precise weights and scales. Weighing gold, especially, calls for care. With cheaper metals, a small error matters less, so less precision would be needed. Even so, we would find it extremely tiresome if every time a poor person bought or sold a farthing's worth of goods, he had to weigh the farthing. Testing purity is harder and takes still longer. Unless part of the metal is actually melted in a crucible with the right dissolving agents, any finding is very uncertain. Before coins were introduced, people who did not perform this long and difficult test were always exposed to serious fraud. In return for their goods, they might receive what appeared to be a pound of pure silver or copper but was really a mixture of the cheapest, poorest materials made to look like those metals. To prevent such abuses, make exchange easier, and encourage every kind of industry and commerce, every country that has made substantial progress has found it necessary to put an official stamp on fixed quantities of the metals it commonly uses to buy goods. This is how coins and the public offices called mints began. They are much like the officials who measure and stamp wool and linen cloth. Each institution uses an official stamp to certify the quantity and consistent quality of a product brought to market.

In many cases, the first official stamps on metals used as money seem to have certified what was hardest and most important to determine: the purity or fineness of the metal. They may have resembled the sterling mark now put on silver plate and bars, or the Spanish mark sometimes put on gold ingots. These marks, stamped on only one side rather than over the entire surface, certify purity but not weight. Abraham weighs out to Ephron the four hundred shekels of silver he agreed to pay for the field of Machpelah. Though called the merchant's current money, the shekels are accepted by weight, not by counting, just as gold ingots and silver bars are today. The revenues of England's ancient Saxon kings are said to have been paid not in money but in kind, with food and provisions of all sorts. William the Conqueror introduced payment in money. For a long time, however, the exchequer accepted this money by weight, not by counting pieces.

Because weighing metals exactly was difficult and inconvenient, coins were introduced. Their stamps covered both sides completely, and sometimes the edges as well. They were meant to certify the metal's weight as well as its purity. People could then accept the coins by counting them, as they do now, without weighing them.

The original names of these coins seem to have stated the weight or quantity of metal they contained. Under 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 containing a real ounce of good copper. In the time of Edward I., the English pound sterling contained a Tower pound in weight of silver of known purity. The Tower pound seems to have been a little heavier than the Roman pound and a little lighter than the Troyes pound. The Troyes pound was not introduced into the English mint until the 18th of Henry the VIII. Under Charlemagne, the French livre contained a Troyes pound in weight of silver of known purity. People from all over Europe attended the fair at Troyes in Champaign at that time, and the measures and weights of that famous market were widely known and respected. From Alexander the First to Robert Bruce, the Scots money pound contained a pound of silver with the same weight and purity as the English pound sterling. English, French, and Scots pennies each originally contained 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 named a weight. An old statute of Henry III. says, “When wheat is at twelve shillings the quarter, then wastel bread of a farthing shall weigh eleven shillings and fourpence.” Yet the relation of the shilling to either the penny or the pound seems to have varied more than the relation of the penny to the pound. Under the earliest line of French kings, a French sou or shilling appears on different occasions to have contained five, twelve, twenty, or forty pennies. Among the ancient Saxons, a shilling at one time seems to have contained only five pennies. Its value may well have varied among them as it did among their neighbors, the ancient Franks. Since Charlemagne's time in France and William the Conqueror's time in England, the relationship between pound, shilling, and penny seems to have remained what it is now. But each coin's value has changed greatly. In every country, I believe, rulers and sovereign states have abused their subjects' trust through greed and injustice, gradually reducing the actual metal in their coins. In the later Roman republic, the as fell to the twenty-fourth part of its original value: it weighed only half an ounce instead of a pound. The English pound and penny now contain only about a third of their original value; the Scots pound and penny about a thirty-sixth; and the French pound and penny about a sixty-sixth. By doing this, rulers and sovereign states appeared able to pay their debts and meet their obligations with less silver than would otherwise have been needed. But it was only an appearance: they cheated their creditors of part of what they owed. All other debtors in the state got the same advantage. They could repay what they had borrowed in the old coin with the same stated sum in the new, debased coin. These measures have therefore always helped debtors and harmed creditors. Sometimes they have changed private fortunes more widely and severely than a major public disaster could have done.

That is how money has become the universal means of trade in all civilized nations. Through it, goods of every kind are bought, sold, or exchanged for other goods.

I will now examine the rules people naturally follow when exchanging goods for money or for other goods. These rules determine what we may call the relative or exchangeable value of goods.

The word value has two meanings. It sometimes means how useful a particular thing is, and sometimes means how much other goods its owner can buy with it. We can call the first “value in use” and the second “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, yet it will buy almost nothing; almost nothing can be obtained in exchange for it. A diamond, by contrast, has almost no value in use, but it can often be exchanged for a great quantity of other goods.

To study the principles that determine the exchangeable value of products, I will try to show:

First, what actually measures this exchangeable value, or what the real price of all products consists of.

Second, what different parts make up this real price.

And finally, what circumstances sometimes raise some or all of these parts of price above their natural or usual level, and sometimes bring them below it. In other words, what sometimes keeps the market price—the price actually paid for products—from matching exactly what we may call their natural price.

I will try to explain these three subjects as fully and clearly as I can in the next three chapters. I earnestly ask readers for both patience and attention. They will need patience to work through details that may sometimes seem needlessly long, and attention to understand a subject that may remain somewhat unclear even after the fullest explanation I can give. I am always willing to risk being long-winded to make sure I am clear. Yet even after doing everything I can to be clear, something may still seem obscure in a subject that is, by its nature, extremely abstract.