no other market for the greater part of their goods, than the country which lies round about them. . . . The extent of their market, therefore, must for a long time be in proportion to the riches and populousness of that country, and consequently their improvement must always be posterior to the improvement of that country. In our North American colonies the plantations have constantly followed either the sea-coast or the banks of the navigable rivers, and have scarce anywhere extended themselves to any considerable distance from both...

44. Beginnings in American railway development 1

Until the coming of

the railroad, the Amer

ican market

was a rela

It follows from the above selection that an extensive market for commodities is dependent primarily upon transportation. At the time that Adam Smith was studying the relation of the market to the division of labor, transportation by means of the railroad was unknown, and water transportation was not effective in reaching tively the interior parts of this country. As a result, the American market narrow one. for commodities was relatively a narrow one. It was not until after the first quarter of the nineteenth century that the American railway gave promise of greatly extending this market. The first important railway in the United States was the Baltimore and Ohio, which opened to traffic in 1830. This epoch-making event is described by Mr. Reizenstein in the following passage:

The

Baltimore and Ohio

traffic
in 1830.

Upon the twenty-second of May, 1830, the first division of the Baltimore and Ohio Railroad thirteen and three-quarters miles long, from Baltimore to Ellicott's Mills was opened for the trans- opens to portation of passengers. The cars needed for general traffic, however, were not ready until early in June, but after that time the travel on the road was constant. By the first of October, 1830, the receipts were $20,012.36, although the road had only a single track and was able to transport merchandise or produce during a few months only. The freight offered for transportation was about ten times the amount which the company was able to handle.

1 From Milton Reizenstein, The Economic History of the Baltimore and Ohio Railroad, 1827-1853. Johns Hopkins University Studies, Vol. xv, Baltimore, 1897; pp. 24-29.

This crude means of transportation

attracted a great deal

of attention.

The first steam locomotive was small, but fairly efficient.

The opening

of this railroad

greatly

stimulated trade and industry.

The sight presented on that May day in 1830, upon the occasion of the opening of the first railroad worthy of the name in America, was far less imposing than that presented upon a similar occasion to-day. There were merely a number of small open carriages, much resembling the old-style stage-coaches, with wheels so constructed as to enable them to run upon the tracks. Horses were used to furnish the motive power.

The railroad, being the first of its kind in the country, naturally attracted much attention, and people came from considerable distances to see and travel upon this new and strange road.

The trial of the first steam locomotive on the tracks of the Baltimore and Ohio Railroad took place on August 25, 1830. The locomotive, which was the first intended for railroad purposes ever built in America, was the invention of Peter Cooper. It was scarcely more than a model, weighing but a single ton, and was appropriately named the "Tom Thumb." . . . The boiler was a small upright one, about the size of a modern kitchen boiler; its cylinder measured but three and a half inches in diameter, and its speed was gotten up by gearing. In order to secure the necessary steam pressure, a sort of bellows was used, which was worked by a pulley and cord passing over a drum on one of the car wheels. This crude machine was able to pull an open car of small dimensions from Baltimore to Ellicott's Mills, thirteen miles, in an hour and twelve minutes, and the return trip was made in fifty-seven minutes. . .

...

The extension of the railroad to the Point of Rocks had an immediate effect upon that place. Several warehouses were erected; inns, dwellings and other improvements rapidly arose. The facilities for the transference of produce from the Potomac River to the railroad were ample, and the boatmen and farmers farther west resorted more and more to the Point of Rocks as the most convenient spot from which to reach the Baltimore market. It was stated also that every species of agricultural product, lime, timber of various kinds, and even paving-stones had been brought to Baltimore with profit to those making use of the road. In return, . . plaster of paris, coal, boards, bricks and scrap iron had been sent into the interior. The existence of the road had also brought into use articles, in the sparsely settled country through which the railroad passed, which

had before been valueless to their possessors. Forests and quarries hitherto useless became sources of new profit to the owners.

.. When

new and

more

efficient engine was

installed

company.

On January 4, 1831, the company published a notice offering In 1831 a $4,000 for the most approved engine which should be delivered for trial upon the road on or before June 1 of the same year. the time specified for the trial had arrived, three locomotives were submitted for competition. Only one . . . stood the test. It . . . by the weighed 3 tons. It was mounted on wheels such as those on the railroad common cars, thirty inches in diameter, and ordinarily made the trip between Baltimore and Ellicott's Mills, drawing four cars . . . in one hour. . . . The success of this engine and the satisfaction that it gave in its regular use after its trial led President Thomas to remark in his annual report in 1832 that the engine was but "as the commencement of a series of experiments which will even more fully than has yet been done, prove the adaptation of steam and railroads to every part of our country and for all purposes of trade and travel."

45. The nature and function of money 1

The development of adequate means of transportation and com- Importance of money munication has made possible the efficient transfer of commodities in exchange. from places in which they are not wanted, or are wanted relatively little, to places where they are in greater demand. But while transportation widens the market for the products of industry, it should be noted that the actual exchange of commodities is impracticable, and often even impossible, until there is some device for measuring the relative values of commodities, and otherwise facilitating their exchange. The need for such a device has given rise to money, the nature and function of which Adam Smith has described in the following passage:

tion the

result of

When the division of labor has been once thoroughly established, Specializait is but a very small part of a man's wants which the produce of his own labor can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labor,

1 From Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations. London, 1776. Book 1, Chapter IV,

the division

of labor.

Specialization implies an exchange of surplus products, but this may be difficult or impossible.

Example of the butcher, the brewer, and the baker.

In order to facilitate exchange, the idea of money has been developed.

Various commodities have served as money,

(which is over and above his own consumption), for such parts of the produce of other men's labor as he has occasion for. Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.

But when the division of labor first began to take place, this power of exchanging must frequently have been very much clogged and embarrassed in its operations. One man, we shall suppose, has more of a certain commodity than he himself has occasion for, while another has less. The former consequently 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.

The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each of them be willing to purchase a part of it. But they have nothing to offer in exchange, except the different productions of their respective trades, and the butcher is already provided with all the bread and beer which he has immediate occasion for. No exchange can, in this case, be made between them. He cannot be their merchant, nor they his customers; and they are all of them thus mutually less serviceable to one another. In order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labor, must naturally have endeavored to manage his affairs in such a manner, as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagines few people would be likely to refuse in exchange for the produce of their industry.

Many different commodities, it is probable, were successively both thought of and employed for this purpose. In the rude ages of society, cattle are said to have been the common instrument of commerce; and, though they must have been a most inconvenient one, yet in old times we find things were frequently valued according to the number of cattle which had been given in exchange for them. . . Salt is said to be the most common instrument of commerce and exchanges in Abyssinia; a species of shells in some parts of the coast of India; dried cod in Newfoundland; tobacco in Virginia. . . .

ferred

metals

In all countries, however, men seem at last to have been deter- but ultimined by irresistible reasons to give the preference, for this employ- mately all peoples ment, to metals above every other commodity. Metals cannot have preonly be kept with as little loss as any other commodity, scarce anything being less perishable than they are, but they can likewise, for this without any loss, be divided into any number of parts. By fusion purpose. those parts can easily be reunited again, a quality which no other equally durable commodities possess, and which, more than any other quality, renders them fit to be the instruments of commerce and circulation.

exchange.

The man who wanted to buy salt, for example, and had nothing How money facilitates but cattle to give in exchange for it, must have been obliged to buy salt to the value of a whole ox, or a whole sheep, at a time. He could seldom buy less than this, because what he was to give for it could seldom be divided without loss; and if he had a mind to buy more, he must, for the same reasons, have been obliged to buy double or triple the quantity, the value, to wit, of two or three oxen, or of two or three sheep. If, on the contrary, instead of sheep or oxen, he had metals to give in exchange for it, he could easily proportion the quantity of the metal to the precise quantity of the commodity which he had immediate occasion for..

46. Price as a measure of value 1

tion of value to

At the present time, therefore, a common method of exchanging The relagoods is through the medium of money. The power of one good to command another in exchange we call value. When the exchange price. of goods is effected through the medium of money, value is measured in terms of money. Thus when a man sells a horse for $500 and then buys a piano with this $500, he has exchanged the horse for the piano, through the medium of money. The value of both horse and piano is, in this instance, measured by the $500. This $500, i.e. the measure of the horse and the piano in terms of the medium of exchange, is the price of each commodity. Price may be defined as the measure of value in terms of money. The importance of a common measure of things is discussed by Professor Gide in the following extract:

1 From Charles Gide, Principles of Political Economy. D. C. Heath & Co., 1903; pp. 64-66.