1.4 The Origin and Use of Money
Money is necessary to the division of labor beyond a basic level. Direct barter requires mutual need - for the baker to obtain meat b offering bread requires him to find a butcher with an immediate need for bread. As such, it is inefficient and stifles trade (and production) even on a small scale.
Commodity money can be seen in even relatively primitive societies. In ancient Greece, Homer describes the cost of armor in terms of oxen; salt was a common currency in the classical age in Mediterranean states; dried cod serve as currency in Newfoundland; tobacco is used for exchange in Virginia; hides in "some other countries"; etc.
(EN: Trade in a commodity of creates a separation between the role of the buyer and the seller. One who offers commodity for a good is a buyer, one who accepts commodity for a good is the seller. Smith does not make this distinction, nor have I seen it in any other source, but I have the sense it is significant - and I note it here because those terms will be useful directly.)
Preference for Metal
In most countries in which trade flourishes, metals seem to become a common commodity of exchange. Metal has certain properties that are superior to many other commodities that might be chosen: it is not perishable, it has value in small quantities, its quality and purity can easily be assessed, it can be divided into small pieces and melted together again, etc. By virtue of these properties, metal has become "money," the universal instrument of commerce in all civilized nations.
Different metals have been used for this purpose: iron, copper, silver, and gold have all been used as currency in various societies, from the ancient age to the present one. They can be used as rude ingots or bars, valued for their weight and purity, or stamped into coinage of a standard weight and purity.
However, the use of metals has two "considerable inconveniences" of weighing them and assessing their purity. When trading in metal, a good is valued at a specific weight, which requires a standard system of measurement to a fine degree (not only pounds, but ounces, grains, and fractional grains) and an accurate apparatus of measurement. Assessing the purity of metal is still more difficult, as it must often be dissolved or melted to separate impurities, whether incidental or intentional, to be able to assess the value of "pure" silver or gold one is trading.
For limited trade in large quantities, bars and ingots of metal are used. Even at this point, a bar or ingot of metal is often imprinted with a stamp that signifies its weight and purity. Such a stamp is referred to as a "tale," as it conveys information about an ingot that is expected to be true, though scales remain employed in trade either for accuracy and conveniences (the weight of an ingot being variable, one still traded for a specific number of pounds and ounces and weighed them rather than reading their stamps and adding the values).
For common trade, in which individual buyers purchase in small quantities for their own consumption, the quantity of metal needed to trade is generally less than would be served by a bar or an ingot, and as such coinage became convenient.
Standardization of Money
To remedy this problem and stimulate trade, governments became involved in currency: to issue "official" coin whose weight and purity could be accepted at a glance so that commerce would be facilitated. This was not only done of money, but of many other goods - the example is given of cloth, which was inspected and certified by the market before it could be traded that the buyer might know its measure and quality. It should also be noted that this system has never been perfected to the point that fraud and forgery are altogether eliminated, but it is expected they have been significantly decreased.
(EN: My sense is that this is generally accurate, but overlooks the ability of non-governmental entities to provide public assurance of quality and value. A trade union or association can develop a scale for grading goods, and a given mint can stamp its own coin. There is some suggestion that government is more effective at establishing and enforcing such standards, itself being an objective third party and having recourse to inflict punishment, but this is arguable. However, I think it's fair to assert that, while independent guarantors exist and have existed, buyers and sellers do, in fact, place confidence in the state at most times to act as arbiter and guarantor of standards of exchange.)
Smith notes that "princes and sovereign states" have often considered the advantages to themselves of debasing their currency, but it is virtually unheard of for them fo consider the prospect of augmenting the value of their coins. As such, the currency of all nations has almost continually been debased - usually on a gradual basis, but sometimes quite suddenly.
Some attention is given to the difference in weights and measures among different countries. Some of the discrepancy was by happenstance, but much of it by an institutional fraud on the part of government, which devalued currency to repay debts with cheaper coin and this defraud their creditors (and which had an unintentional corresponding benefit to any debtor whose debt was incurred and repaid with state currency). Smith doesn't dwell on this at the moment, but acknowledges it was a problem that, at times, has become a "calamity."
However, at most times, the value of money is relatively stable, and continuity of trade relies upon stability. A buyer has a reasonable expectation that the price of something he needs regularly will be the same the next time he purchased it as it was the last, and a long-term contract of exchange, such as a landlord leasing a property, is based on the expectation that the value of money will remain stable for the duration of the lease. The fact that this does not bear out perfectly in reality constitutes market risk to buyer and seller alike. (EN: It's also worth noting that price fluctuations cause interruptions to the behavior of buyers and sellers - consumption of goods is fairly steady and buyers repurchase without much though unless and until prices shift.)
Value of Goods
The notion of "value" is significant to commercial exchange, and in that context it has taken a specific meaning that has departed from the notion of value outside of commerce.
There is a practical value of things, more accurately called their "usefulness" as it is derived from the way in which they are employed. Food is highly useful in that consuming it sustains life, and consumption of food is necessary on a daily basis. But compared to other goods, it has a relatively low exchange value - a loaf of bread, necessary for sustenance of life, has a much lower exchange value than a diamond, which from a practical perspective is little more than a shiny rock. Thus considered, it value is a critical factor in the prices demanded and given for goods.
In next three chapters, Smith will examine the notion of value in greater detail: First, what is the "real value" that determines the prices of commodities; second, what factors are considered in setting a price for goods' and lastly, what are the circumstances that cause the prices of goods to rise or fall from their "natural" (ordinary) rate of exchange.
Smith apologizes in advance to the reader, as he expects his detail will seem "unnecessarily tedious" in some places, and admits that some notions are still obscure in spite of his attempt to define clarity. (EN: A good disclaimer, but probably inherent to any work of examination such as this.)