Which came first? Money or the division of labor? Chapter 4 of The Wealth of Nations is devoted to “The Origin and Use of Money,” and in the first part of this chapter (paragraphs 1 to 11, available here), Adam Smith not only surveys the origins of metal currencies — or how “money has become in all civilized nations the universal instrument of commerce” (WN, I.iv.11) — he also does two other things that are worth taking note of:

1. First off, he uses the term “commercial society” for the first time: “When the division of labour has been once thoroughly established …. [everyone] lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.” (WN, I.iv.1) Why is this such a big deal? (After all, this term only appears twice in his entire magnum opus.) Simply put, it’s a big deal because Smith was one of the first to recognize that we are living in a new type of world, one in which the pursuit of wealth and riches has replaced the ancient pursuit of martial honor or the medieval pursuit of Christian virtues.

2. Secondly, in a lengthy aside at the end of paragraph 10 of Chapter 4, Smith calls out “the avarice and injustice of princes and sovereign states” for “abusing the confidence of their subjects.” (WN, I.iv.10) How exactly do our rulers abuse us, according to Smith? By debasing the value of their currencies! (Sound familiar?) Smith writes:

“For in every country of the world, I believe, the avarice and injustice of princes and sovereign states, abusing the confidence of their subjects, have by degrees diminished the real quantity of metal, which had been originally contained in their coins. The Roman As, in the latter ages of the Republic, was reduced to the twenty-fourth part of its original value, and, instead of weighing a pound, came to weigh only half an ounce. The English pound and penny contain at present about a third only; the Scots pound and penny about a thirty-sixth; and the French pound and penny about a sixty-sixth part of their original value. By means of those operations the princes and sovereign states which performed them were enabled, in appearance, to pay their debts and to fulfil their engagements with a smaller quantity of silver than would otherwise have been requisite. It was indeed in appearance only; for their creditors were really defrauded of a part of what was due to them. All other debtors in the state were allowed the same privilege, and might pay with the same nominal sum of the new and debased coin whatever they had borrowed in the old. 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.” (ibid.)

Alas, what Smith doesn’t explain, however, is the causal relationship between the division of labor and the use of metals as a universal currency: is it the division of labor that leads to the use of money, or is it the use of metal currencies that leads to the division of labor? Nota bene: I will turn to the last part of Chapter 4 of Smith’s Wealth of Nations (paragraphs 12-18) in my next post.