Adam Smith on money as an instrument of commerce as well as a measure of value

Adam Smith

Found in An Inquiry Into the Nature and Causes of the Wealth of Nations (Cannan ed.), vol. 2

The Scottish moral philosopher Adam Smith (1723–1790) was the author of two books, The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776).

Smith opens his discussion of the mercantile system, which takes up most of Book IV of Wealth of Nations, with the following paragraph:

That wealth consists in money, or in gold and silver, is a popular notion which naturally arises from the double function of money, as the instrument of commerce, and as the measure of value. In consequence of its being the instrument of commerce, when we have money we can more readily obtain whatever else we have occasion for, than by means of any other commodity. The great affair, we always find, is to get money. When that is obtained, there is no difficulty in making any subsequent purchase. In consequence of its being the measure of value, we estimate that of all other commodities by the quantity of money which they will exchange for. We say of a rich man that he is worth a great deal, and of a poor man that he is worth very little money. A frugal man, or a man eager to be rich, is said to love money; and a careless, a generous, or a profuse man, is said to be indifferent about it. To grow rich is to get money; and wealth and money, in short, are, in common language, considered as in every respect synonymous. (IV.i.1) - Adam Smith

Smith targets this popular misconception because its application has—and had—far-reaching consequences. To confuse the amount of money (in Smith’s day, gold and silver) that a country has with the country’s wealth is to form a mistaken idea of the nature of the wealth of nations—one half of the subject of Smith’s thousand-page inquiry.

Earlier in Wealth of Nations, Smith makes his case for considering wealth as consisting in the ability to purchase the things people need. Money is merely a medium through which wealth is circulated. In Book II, chapter 2, paragraph 14, Smith refers to “the great wheel of circulation” (money) as distinct from “the goods that are circulated by means of it.”

The wealth of individuals is not the amount of money they have, but their ability to purchase the goods and services that they need to live or to improve their lives. The wealth of nations, Smith argues, is the combined ability of the people of each nation to meet their needs. Its source is human industry, not silver mine