The Modern Period
Intellectual Changes
It is no surprise that the change in the role of money caused by the explosion
of credit during the eighteenth century and the social changes brought about by
the Industrial Revolution combined to produce new ideas about money and
society and, of course, the relationship between them. This was the period that
saw the birth of the study of that combination -what we now call the science
of economics but in the eighteenth and early nineteenth centuries was called
'political economy'. The increasing volatility of money caused by its growing
intangibility prompted the realization that its manipulation could have
enormous consequences on the very structure and nature of human society. It is not
possible here to do more than touch on these issues, but the nature of the
debate, which continues today, can be characterized by a contrast between two
of its most important figures, Adam Smith and Karl Marx, whose radically
different views constituted the intellectual bases of the two most significant
economic and social systems of the modern world, capitalism and socialism.
Adam Smith (1723-90) published his Inquiry into the Nature and Causes of the
Wealth of Nations in 1776, at the very beginning of the Industrial Revolution,
and it is widely regarded as the first work of modern economics. It covered many
aspects of the nature of the economic system and the ways in which governments
might influence it. Most important is Smith's treatment of the concept of value. His
view, known as the Labor Theory of Value, held that the value of any object is measured by the
amount of labor for which it can be exchanged: 'labor therefore is the real measure of the
exchangeable value of all commodities'. According to Smith, the wealth of a nation was not
to be measured in terms of its stocks of gold and silver, but 'first, by the skill, dexterity, and judgment
with which its labor is generally applied; and, secondly, by the proportion between the number of
those who are employed in useful labor, and that
of those who are not so employed.' The maximization of wealth required that
labor should work in the most efficient way possible. This demanded the
abandonment of the restrictive trade practices of the past and the establishment
of a free international trade, since the larger the market the laborer could
reach, the greater the opportunity there was for him to work as productively as
possible. Smith's theories also had a moral dimension, in that he believed that
the furtherance of individual competition and 'natural liberty' in economic
affairs would, through the guidance of an 'invisible hand', lead to social
harmony more effectively than state action.
Smith's emphasis on the primacy of labor was to have far-reaching
consequences for the question of how the value of a commodity should be
distributed between the different parties who contributed to its production: the
workers, whose subsistence provided the labor with which it was made in return for
wages; the landlords, who provided the premises in return for rent; and the
employers, whose capital provided the equipment and raw materials necessary
for production in return for profit. The same questions arose for successive
economic writers, who took forward Smith's vision of the equilibrium between the
different parties in a way that assigned them differing rewards. Ricardo argued
that wages should represent what was 'necessary to enable the laborers, one
with another, to subsist and to perpetuate their race, without either increase or
diminution'. Subsistence wages were thus justified in the interests of profit and
capital. If profits from manufacturing fell, as they inevitably did as a
consequence of mass-production and fierce competition, wages had to fall as well.
During the late eighteenth and early nineteenth centuries there were critics of
the all-pervasive role of money in the new industrial order of society. One such
was the writer Thomas Carlyle (1795-1881), who in Chartism(1839) described
the socio-economic change caused by the Industrial Revolution as follows: 'In
one word, Cash Payment had not then grown to be the universal nexus of man
to man. ...With the supreme triumph of Cash, a changed time has entered.'
But such critics did not manage to effect any fundamental change in the
accepted vision of the classical theory of economics laid down by Smith and refined
by followers like Ricardo. A more radical challenge was eventually proposed by
the writings of Karl Marx (1818-83) and Friedrich Engels (1820-95).
Like Carlyle, Marx saw how the capitalists of the Industrial Revolution had
caused the restructuring of the previous social order, but he went much further in his critique. He
attacked the unequal distribution of wealth between worker, capitalist and landlord advocated
by economists like Ricardo, arguing that it arose out of the capitalist system of production itself,
which was the cause of an unjust distribution of political power between the various parties. The
socialist revolution would correct these injustices and undo the disastrous social effects of the
capitalists' obsession with money. The historical repercussions of Marx's political ideas are well known, but
their relevance for our purposes is to illustrate the rise of economic and
monetary theory in the eighteenth and nineteenth centuries, as people became
increasingly aware of the complex effects of money upon the structure of
society in the context of the changed conditions brought about by the Industrial Revolution.
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