Chapter 5b: Grains vs Silver in terms of the temporal aspect of value
15At distant times, equal amounts of labour will be bought more nearly with equal amounts of wheat, the worker's subsistence, than with perhaps any other commodity.
Every other commodity, however, will buy a varying amount of labour depending on the amount of subsistence it can buy.
- At distant times, equal amounts of wheat will enable its possessor to buy or command nearly the same amount of the labour of other people.
- Although equal amounts of wheat will not do it exactly.
- The worker's subsistence & enjoyments depend on the advancing, stagnant, or reversing state of society.
- A rent measured in wheat will only vary depending on the amount of labour wheat can purchase.
- But a rent measured in other commodities will vary with depending on the amount of wheat and the amount labour the wheat can purchase.
The real value of a wheat is more stable from century to century than from year to year, compared to metal money.
- The money price of labour, however, fluctuates according to the price of ordinary subsistence.
- The ordinary price of this subsistence is regulated by the value of silver, which is then regulated by the price of wheat.
- The real value of silver is more stable year to year, than from century to century.
- The ordinary price of subsistence can be the same from century to century if the society remains in the same condition.
- When the ordinary price of subsistence naturally doubles in a year, then its real value must double with it, and therefore, wages must also double.
- In other words, although the nominal prices have increased, the ratio of the real prices of labour to the real price of wheat is the same.
17 Labour, therefore, is the only universal and accurate measure of value.
- It is the only standard by which we can compare the values of different commodities at all times and places.
- From century to century, wheat is a better measure than silver
- Because a unit of wheat will command more equally a unit of labour than a unit of silver commands labour.
- But from year to year silver is better, because each unit of silver will command more equally a unit of labour.
When To Use Real And Nominal Prices
18 Although it is useful to have real and nominal prices for long term leases, it is not useful in common and ordinary transactions.
19 "At the same time and place the real and the nominal price of all commodities are exactly in proportion to one another."
- Only at the same time and place is money the exact measure of the real exchangeable value of all commodities.
20 At distant places, differences in real and nominal prices exist.
- Yet, the merchant considers only the nominal or money price.
- This difference of arbitrage is exactly what merchants want.
- For example, 0.5 ounces of silver in China commands more labour and buys more Chinese commodities than 1 ounce at London buys British commodities.
- A commodity which sells for 0.5 ounces of silver in China is more important to a man there than a commodity which sells for 1 ounce of silver in London, to a man in London.
- However, if a merchant can buy a Chinese commodity in China worth 0.5 ounces of silver there and sell it in London for 1 ounce, he gains 100%.
- It is unimportant to him that his 0.5 ounce would have given him more command of labour in China, than 1 ounce would do in London.
- By getting 1 ounce in London, he now has double the command of labour, compared to if he had spent his original 0.5 ounces to buy Chinese commodities for consumption in China.
- [Modernized example: $100 will buy more Chinese-made shoes in China than $100 will buy American-made shoes in the US.]
- [Merchants therefore use their dollars to buy Chinese-made shoes and sell it in the US.]
- [They do not use their dollars to use those shoes themselves or sell them back to the Chinese.]
Nominal Prices and Arbitrage
21 Nominal price has become more of a concern than real price because all purchases and sales are transacted in nominal prices.
22 However, real prices are more useful in trades done between two different times and places.
- In such a case, wheat should be used for the transaction as it is the more accurate measure of labour.
The History Of Metals in Coinage23
Commercial nations have used gold coins for large payments, silver for moderate purchases, and copper for smaller ones.
- Each nation ended up with a single metal, usually the first metal to accept, to be used as its standard tool for trade.
The Romans used only copper money until five years before the first Punic war, when they first began to coin silver.
- Copper appears to have always been the measure of value there.
- All estates in Rome were computed in:
- As: a denomination of copper coin
- Sestertii: 2.5 Asses, equal to a silver coin
The Northern Europeans used silver.
- The Saxons used silver and little gold coin until Edward III and no copper until James I
- In all modern European nations, all value is generally measured in silver (pounds sterling)
Gold Versus Silver26
The values of gold and silver money were not fixed by any law.
- They were left to be settled by the market.
- In this case, there was more than a nominal distinction between the different metals.
In time, people established laws to set the values of gold and silver.
- In this case, the difference between the metals was just a little nominal distinction.
- A (gold) guinea was equal to 21 (silver) shillings
If the law changes, then the difference becomes more than nominal again.
29In reality, the value of the most precious metal regulates the value of all coins.
- If a guinea was changed to be equal to 20 or 22 shillings, then debts in silver will require different amounts of guinea.
- Silver appeared to be the measure of value of gold because of the custom of keeping accounts in silver.
- On the contrary, promissory notes are recorded in gold.
- Through notes, gold appeared as the measure of the value of silver.
- If the custom of using notes in gold instead of silver becomes general, then gold will be the standard measure of value.
- 12 copper pence contain half a pound, avoirdupois, of copper, seldom worth sevenpence in silver
- But by regulation, 12 copper pence equals a shilling
- The regulation makes worn coins of equal value to good coins of the same kind
Because the regulation disregards the physical degradation of coins, it raises the real value of silver.
Next: Chapter 5c: Coin Reformation