The Wealth of Nations: Book I Chapter 4

Memorable Quotes:
"[W]hen the division of labor first began to take place, . . . , [o]ne man, we shall suppose, has more of a certain commodity than he himself has occasion for, while another has less. The former . . . would be glad to dispose of, and the latter to purchase, a part of this superfluity. But if this latter should chance to have nothing that the former stands in need of, no exchange can be made between them. . . . [E]very prudent man . . . must naturally have endeavored to manage his affairs in such a manner, as to have at all times by him . . . a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry."
"The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. . . . The things which have the greatest value in use have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value in use."

The Basic Idea:
Division of labor being established, every man lives by exchanging. Difficulties of barter lead to the selection of one commodity as money, for example, cattle, salt, shells, cod, tobacco, sugar, leather and nails. Metals were eventually preferred because durable and divisible. Iron, copper, gold and silver, were at first used in unstamped bars, and afterwards stamped to show quantity and fineness; stamps to show fineness being introduced first, and coinage to show weight later. The names of coins originally expressed their weight. The next inquiry is what rules determine exchangeable value. Value may mean either value in use or value in exchange. Three questions, 1) wherein consists the real price of commodities, 2) what are the different parts of this price, 3) why the market price sometimes diverges from this price, will be answered in the next three chapters.

Reflections:
While I disagree with the basic process of how the use of money became necessary, the purpose served by money is undoubtedly precisely that which Smith here expounds - the facilitation of exchange. My qualm with the process of how it became necessary arises from the thought that if exchanging is made difficult by the lack of money or other symbolic expression of value, then what would have been the incentive to specialize and produce an excessive amount of some commodity, thereby neglecting the production of others, in the first place? The need for money certainly arose from excessive production of some goods, but I don't believe that that excessive production first occurred because of specialization. Rather, it seems more likely that excessive production first occurred because of communal cooperation in some industries, i.e. agriculture, which then provided free time for people to specialize. Thus, the need to facilitate trade first arose within a fairly sedentary community for the purpose of achieving a more equitable distribution of wealth. Such a distribution of wealth is made necessary precisely for the reason enunciated by Smith - one person discovers or develops a particular skill, and the use of this skill in his own service quickly diminishes in value. Therefore, he begins to exchange his skill for the skill and produce of others. However, the discovery or development of that skill still depended upon a communal effort to provide all the bare necessities for life. The use of money as we understand it was therefore instituted by various governments so that people could more effectively exchange their skills and products, thereby enriching themselves and the rest of society. Thus, we see that the modern market arises 1st, out of society providing enough basic requirements for life so as to provide leisure time, and 2nd, out of the government "intervening," in this case by creating mints, for the purpose of spreading to others the benefits of anybody's particular skill. Some might argue that this means that we may not need money, and indeed we may not. The principle, by explaining the rule, supersedes it. However, I am currently unaware of any better method to achieve these ends which simultaneously maintains the positive features of the use of money. Of course, I don't mean to say that if I can't think of it then it must not be possible. I'm more than willing to hear creative ideas. Its just that, as a conservative, I will require more than creative ideas before I throw my support behind something.