Book I, Chapter V, 2

Across widely separated periods, equal quantities of labor can be purchased more nearly with equal quantities of corn, the laborer’s subsistence, than with equal quantities of gold and silver, or perhaps of any other commodity. Thus equal quantities of corn will have more nearly the same real value across distant periods, enabling their possessor to buy or command more nearly the same amount of other people’s labor. I say more nearly than almost any other commodity, for equal quantities of corn will not do so exactly. As I shall try to show later, the laborer’s subsistence, or the real price of labor, differs greatly under different conditions: it is more generous in a society advancing toward prosperity than in one standing still, and more generous in one standing still than in one in decline. Yet at any given time every other commodity will purchase more or less labor in proportion to how much subsistence it can purchase at that time. A rent reserved in corn, therefore, is subject only to changes in the quantity of labor that a fixed amount of corn can buy. A rent reserved in any other commodity is subject both to those changes and to changes in the amount of corn that a fixed amount of that commodity can buy.

It should be noted, however, that although the real value of a corn rent changes much less from century to century than that of a money rent, it changes much more from year to year. As I shall try to show later, the money price of labor does not fluctuate from year to year with the money price of corn. Rather, everywhere it seems to adjust not to the temporary or occasional price of that necessary of life, but to its average or ordinary price. The average or ordinary price of corn, in turn, is governed, as I shall also try to show later, by the value of silver: by the richness or poverty of the mines that supply the market with that metal, or by the labor that must be employed, and therefore the corn that must be consumed, to bring a given amount of silver from mine to market. Although the value of silver sometimes changes greatly from century to century, it seldom changes much from year to year; often it remains the same, or very nearly so, for half a century or a century at a time. The ordinary or average money price of corn may therefore remain the same, or nearly so, for just as long, along with the money price of labor, provided at least that society remains in the same or nearly the same condition in other respects. Meanwhile the temporary, occasional price of corn may often be twice as high one year as the year before, fluctuating, for example, from five-and-twenty to fifty shillings the quarter. But when corn is at the higher price, not only the nominal but the real value of a corn rent will be twice what it is at the lower price. It will command twice as much labor, or twice as much of most other commodities, while the money price of labor and of most other things remains unchanged through these fluctuations.

It is evident, then, that labor is the only universal and the only accurate measure of value: the only standard by which we can compare the values of different commodities at every time and place. We cannot, admittedly, estimate their real value across centuries from the quantities of silver paid for them. We cannot estimate it from year to year from quantities of corn. By quantities of labor we can estimate it with the greatest accuracy both from century to century and from year to year. Across centuries corn is a better measure than silver, since equal quantities of corn will command more nearly the same amount of labor than equal quantities of silver. From year to year, by contrast, silver is a better measure than corn, since equal quantities of silver will more nearly command the same amount of labor.

But although the distinction between real and nominal price may be useful in establishing perpetual rents or even granting very long leases, it is of no use in buying and selling, the more common transactions of human life.

At the same time and place, the real and nominal prices of all commodities bear exactly the same proportion to each other. The more money you receive for a commodity in the London market, for example, the more labor that money will allow you to buy or command there and then; the less money, the less labor. At a given time and place, then, money measures the real exchangeable value of all commodities exactly. It does so, however, only at that time and place.

Although there is no regular proportion between the real and money prices of commodities in distant places, a merchant carrying goods from one to another need consider only the money price: the difference between the amount of silver for which he buys them and the amount for which he expects to sell them. Half an ounce of silver at Canton in China may command more labor and more of the necessities and comforts of life than an ounce at London. A commodity that sells at Canton for half an ounce of silver may thus be genuinely dearer there, of greater real importance to its owner there, than a commodity selling for an ounce at London is to its owner in London. If, however, a London merchant can buy at Canton for half an ounce of silver something he can then sell at London for an ounce, he gains a hundred per cent. on the deal, exactly as if an ounce of silver had the same value in London as in Canton. It makes no difference to him that half an ounce of silver at Canton would command more labor and more of the necessities and comforts of life than an ounce can command at London. An ounce at London will always command twice as much of all these things there as half an ounce would, and that is precisely what he wants.

Since it is the nominal or money price of goods that ultimately determines whether purchases and sales are prudent, and thus regulates almost all the business of everyday life that involves price, it is no wonder that it has received far more attention than the real price.

In a work such as this, however, it may sometimes be useful to compare the real values of a particular commodity at different times and places, or the varying degrees of power over other people’s labor it has given its possessors. In such a case we must compare not so much the different quantities of silver for which the commodity was usually sold as the quantities of labor those quantities of silver could buy. But prevailing prices of labor at distant times and places can hardly ever be known with any precision. Corn prices, though regularly recorded in few places, are generally better known and have more often been noted by historians and other writers. We must therefore usually make do with them, not because they are always in exactly the same proportion as prevailing labor prices, but because they are commonly the closest approximation available to that proportion. Later I shall have occasion to make several comparisons of this kind.

As industry has advanced, commercial nations have found it convenient to mint money from several different metals: gold for larger payments, silver for purchases of moderate value, and copper or another base metal for still smaller ones. They have always, however, regarded one of these metals as more particularly the measure of value than either of the other two. This preference seems generally to have gone to the metal they first happened to use as a medium of commerce. Once they began to use it as their standard, as they must have done when they had no other money, they generally continued to do so even when it was no longer necessary.

The Romans are said to have had only copper money until within five years before the first Punic war (Pliny, lib. xxxiii. cap. 3), when they first began to coin silver. Copper therefore seems always to have remained the measure of value in that republic. At Rome accounts appear to have been kept, and the values of estates reckoned, in either asses or sestertii. The as was always the name of a copper coin. The word sestertius means two asses and a half. Thus, although the sestertius was originally a silver coin, its value was reckoned in copper. At Rome a person who owed a great deal of money was said to owe a great deal of other people’s copper.

The northern nations that settled on the ruins of the Roman empire appear to have had silver money from the beginning of their settlements, and to have known neither gold nor copper coins for several centuries afterward. There were silver coins in England in Saxon times, but little gold was coined until the time of Edward III and no copper until that of James I. of Great Britain. In England, therefore, and for the same reason, I believe, in every other modern European nation, accounts are kept and the values of goods and estates usually reckoned in silver. When we state the size of a person’s fortune, we rarely give the number of guineas, but instead the number of pounds sterling we think it would fetch.

Originally, I believe, in every country a payment could be made as legal tender only in coins of the metal regarded particularly as the standard or measure of value. In England gold was not considered legal tender for a long time after it began to be coined. The ratio between the values of gold and silver money was not fixed by law or public proclamation, but left to the market. If a debtor offered to pay in gold, the creditor could reject it altogether or accept it at whatever valuation he and the debtor agreed upon. Copper is not now legal tender except as change for the smaller silver coins.

Under these conditions, the distinction between the metal that was the standard and the metal that was not amounted to more than a distinction in name.

As time passed and people grew more familiar with coins made of different metals, and so better understood the ratio between their respective values, most countries, I believe, found it convenient to fix that ratio. They declared by law, for example, that a guinea of a specified weight and fineness should exchange for one-and-twenty shillings, or be legal tender for a debt of that amount. Under these conditions, and for as long as any one regulated ratio remains in force, the distinction between the metal that is the standard and the metal that is not becomes little more than a distinction in name.

With any change in this regulated ratio, however, the distinction again becomes, or at least seems to become, more than nominal. Suppose, for example, that the regulated value of a guinea were reduced to twenty shillings or raised to two-and-twenty. Because all accounts are kept and nearly all debts are stated in silver money, most payments could still be made in either case with the same amount of silver money as before, but would require very different amounts of gold money—more in the first case, less in the second. Silver would appear to hold its value more steadily than gold. Silver would appear to measure gold’s value, while gold would not appear to measure silver’s. Gold’s value would seem to depend on the amount of silver for which it could be exchanged, while silver’s value would not seem to depend on the amount of gold it would bring. This difference, however, would arise entirely from the custom of keeping accounts and stating the amounts of both large and small sums in silver rather than gold money. After a change of this kind, one of Mr Drummond’s notes for five-and-twenty or fifty guineas would still be payable in five-and-twenty or fifty guineas, just as before. It would be payable with the same quantity of gold as before, but with very different quantities of silver. In paying such a note, gold would appear to hold its value more steadily than silver. Gold would appear to measure silver’s value, while silver would not appear to measure gold’s. If it ever became general practice to keep accounts and state promissory-notes and other monetary obligations in this way, gold rather than silver would be regarded as the metal that particularly served as the standard or measure of value.

At widely separated times, the same amount of corn, which feeds workers, will buy more nearly the same amount of labor than the same amount of gold and silver, or perhaps any other product. Equal amounts of corn at such times will therefore have more nearly the same real value. They will allow their owner to buy or command more nearly the same quantity of other people's labor. I say more nearly, because even equal amounts of corn do not do this exactly. As I will show later, workers' subsistence, or the real price of labor, differs greatly in different circumstances. It is more generous in a society becoming wealthy than in one that is standing still, and more generous in a society standing still than in one that is declining. Yet at any given time, any other product will buy more or less labor according to the amount of food it will buy then. A rent fixed in corn is therefore exposed only to changes in how much labor a given amount of corn will buy. A rent fixed in any other product is exposed both to those changes and to changes in how much corn that product will buy.

Still, the real value of a corn rent, though it changes much less than a money rent from century to century, changes much more from year to year. As I will show later, the money price of labor does not rise and fall from year to year with the money price of corn. Everywhere it seems to follow the average or usual price of this necessity, rather than its temporary price. As I will also show later, the average money price of corn depends in turn on the value of silver. It depends on how rich or poor the mines supplying silver to the market are, or on how much labor, and therefore how much corn consumed by workers, is needed to bring a given amount of silver from mine to market. Although silver's value sometimes changes greatly from century to century, it seldom changes much from year to year. It often remains the same or nearly the same for half a century or a whole century. Over such a period, therefore, corn's usual or average money price may also stay the same or nearly the same, along with the money price of labor, provided the society otherwise remains in roughly the same condition. Meanwhile, corn's temporary price may often be twice as high one year as it was the year before. It might move, for example, from five-and-twenty to fifty shillings the quarter. When it reaches the higher price, a corn rent's real as well as nominal value will be twice what it was at the lower price. It will command twice as much labor or twice as much of most other products, while the money price of labor and of most other things stays the same through these fluctuations.

Labor is thus clearly the only universal and accurate measure of value. It is the only standard for comparing the value of different products at every time and place. We cannot, admittedly, measure their real values across centuries by the amounts of silver paid for them. Nor can we measure those values across years by amounts of corn. But we can measure them most accurately, across both centuries and years, by amounts of labor. Corn is a better measure than silver across centuries, since equal amounts of corn will more nearly command the same labor than equal amounts of silver will. Across years, by contrast, silver is a better measure than corn, because equal amounts of silver will more nearly command the same labor.

Distinguishing real from nominal price may be useful when setting permanent rents or even very long leases. It is not useful when buying and selling in the ordinary transactions of life.

At the same time and place, the real and nominal prices of all products are in exact proportion. For example, the more money a product brings in the London market, the more labor that money lets you buy or command there and then. So at one time and place, money measures the real exchangeable value of all products exactly. But it does so only at that one time and place.

Across distant places, real prices and money prices do not follow any regular proportion. Yet a merchant transporting goods from one place to another need consider only their money prices: the difference between the silver he pays for them and the silver he expects to receive. Half an ounce of silver at Canton in China may command more labor and more necessities and comforts than an ounce at London. A product selling for half an ounce of silver at Canton may therefore be more expensive there in real terms, and matter more to its owner, than a product selling for an ounce at London matters to its owner there. But if a London merchant buys that product at Canton for half an ounce of silver and later sells it in London for an ounce, he gains a hundred per cent. on the deal. His gain is the same as it would be if silver had exactly the same value in both cities. It does not matter to him that half an ounce at Canton could have commanded more labor, necessities, and comforts than an ounce at London. An ounce at London will always give him command of twice as much of these things as half an ounce would have given him there, and that is exactly what he wants.

The nominal or money price of goods thus determines whether buying and selling them is sensible. It governs almost all the ordinary business of life that involves prices. No wonder people pay much more attention to it than to the real price.

Still, in a work like this it can sometimes help to compare a particular product's real values at different times and places. We may want to compare how much command over other people's labor it gave its owners on different occasions. Then we should compare not so much the different amounts of silver for which it usually sold, but the different amounts of labor those amounts of silver could buy. Yet we can almost never know wage rates at distant times and places precisely. Corn prices, though regularly recorded in few places, are generally better known. Historians and other writers have noted them more often. We must therefore usually make do with corn prices, not because they always follow wage rates exactly but because they are usually the closest available estimate. I will make several such comparisons later.

As industry developed, trading nations found it useful to coin several metals: gold for large payments, silver for purchases of moderate value, and copper or another less valuable metal for smaller ones. Yet they have always treated one metal in particular as the measure of value. Generally they seem to have chosen the metal they first used in trade. They had to make it their standard when they had no other money, and they usually kept it as their standard even after that necessity passed.

The Romans are said to have had only copper money until five years before the first Punic war (Pliny, lib. xxxiii. cap. 3), when they began to mint silver coins. Copper thus seems always to have remained the measure of value in the republic. At Rome, accounts were kept and estates valued in asses or sestertii. The as was always a copper coin. The word sestertius means two asses and a half. Though originally a silver coin, the sestertius was thus valued in copper. In Rome a person who owed a great deal was said to owe a great deal of other people's copper.

The northern peoples who settled on the ruins of the Roman empire seem to have used silver money from the start. For several centuries afterward they apparently knew neither gold nor copper coins. England had silver coins in Saxon times, but little gold was minted until the time of Edward III, and no copper until that of James I. of Great Britain. So in England, and I believe for the same reason in all other modern European nations, people keep accounts and generally value goods and estates in silver. When speaking of a person's fortune, we seldom give a number of guineas; we give the number of pounds sterling we suppose it would fetch.

Originally, I believe, every country allowed debts to be legally paid only in coins of the metal it treated as its standard of value. In England, gold was not legal tender for a long time after gold coins were introduced. No law or proclamation fixed the relative values of gold and silver coins; the market settled them. A creditor could reject a debtor's offer to pay in gold or accept it at a value they agreed on. Copper is not now legal tender except when giving change for smaller silver coins.

Under these conditions, the difference between the standard metal and the other metals was more than a difference in name.

As time passed, people grew used to coins made from different metals and learned their relative values. In most countries, I believe, it became convenient to fix that relationship by law. A law might declare, for example, that a guinea of a specified weight and purity could be exchanged for one-and-twenty shillings, or used to pay a debt of that amount. While such a fixed relationship remains in effect, the difference between the standard metal and the others becomes little more than a difference in name.

But when that legally fixed relationship changes, the distinction becomes, or at least seems to become, more than a matter of names again. Suppose the legal value of a guinea were lowered to twenty shillings or raised to two-and-twenty shillings. Since accounts and nearly all debts are stated in silver money, most debts could still be paid with the same amount of silver as before. Paying them in gold would require very different amounts: more gold in the first case and less in the second. Silver would appear more stable in value than gold. Silver would seem to measure gold's value, but gold would not seem to measure silver's. Gold's value would appear to depend on how much silver it bought, while silver's value would not appear to depend on how much gold it bought. Yet this difference would be due entirely to the custom of keeping accounts and stating both large and small amounts in silver rather than gold. One of Mr Drummond's notes for five-and-twenty or fifty guineas would still be payable in five-and-twenty or fifty guineas after such a change. The same amount of gold would pay the note, but a very different amount of silver would. For this payment, gold would appear more stable in value than silver. Gold would seem to measure silver's value, but silver would not seem to measure gold's. If it ever became common to keep accounts and state promissory notes and other debts this way, gold rather than silver would be considered the particular standard or measure of value.