Wealth of Nation Note (Ch.4)

 

Barter - Metal - Coins - Money

Without the power to exchange, a specialized market could never exist. Since people will not be able to exchange their surplus production into something that they need.

Barter

Smith started this chapter with the Barter system, where the ancient civilization used a variety of different items to exchange such as oxen in Ancient Greece. However, their system does have tons of disadvantages: People have different needs for items, because of that trade might not take place, even though they both have surplus. It is also hard to exchange the exact value as some items are not divisible and on top of that some items might be hard to carry around too. 

Thus for something to serve as a good exchange medium, it needs to satisfy 3 categories:

1. Universally wanted.
2. Divisible.
3. Easy to carry.

Metal

Slowly most civilizations started using metal as the medium of exchange. Since it is “universally wanted” (because of what it represents exchange value now.) Beside that metal was also divisible where you can break it down to smaller pieces. Finally compared to an ox or salt it is easy to carry and durable at the same time. However, there are still lots of areas of improvement for metal to be working as a medium of exchange; 1. For different metals they all have different values, thus it is important to make sure of the purity of the metal. 2. It is also difficult to break metal into the exact weight you want. 3. Lastly, it is still heavy.

Coins

As metal becomes the preferable way to exchange. The government started to step in to facilitate the exchange between their citizens. Such as creating multiple different coins with different metals to give traders different values to work with. This makes the coins divisible compared to just metals, at the same time the government could also guarantee the material in the coins so people could trade with trust. Although, coins proved to be a better exchange medium. There are still areas to improve with it.

Paper Money

As people are starting to trust in the government and some institutions. People started to deposit metal in exchange for a receipt, which is a piece of paper to represent the quantity of metal deposited. This slowly transitioned into money. Where people started only trading this paper that represents a certain amount of metal. Finally they made the exchange medium to be easy to carry.

Value of things

Smith also mentioned how each item has different types of value. Value of [ Exchange ] and value of [ Use ]. The two values are inversely proportional since as the value of exchange increases the value of use decreases, and vice versa. For example: a diamond has a high value of exchange but low value of use and water is completely the opposite.

Personal thoughts about Ch. 4

Although Adam Smith’s theory works on money before 1970. After Nixon broke the tie of dollars from gold. The dollar’s value became completely dependent on our trust.

Let me try to make sense of why this happened. After WW2, the US made everyone able to trade dollars with a guarantee that they could exchange dollars into gold. However, as the economy grew and countries started to exchange their dollar to gold from the US treasury. The US also found that they could not freely control their money. Since they tied it to gold which means if they overprint they run the risk of not having enough gold to exchange for the dollars in the market.

The US wanted the freedom to control their currency and also without the risk of running the gold out in the US treasury. Thus they made dollars into a fiat currency which relies only on trust. (This analysis lacks depth, for I lacked the understanding of monetary policy to figure out the consequence of having a fiat currency.)