Double Entry

Jane Gleeson-White “Double Entry: How The Merchants of Venice Created Modern Finance”  W.W. Norton, 2011, 254 pp.

Double Entry takes us from the ancient origins of accounting in Mesopotamia to the twenty-first century and the intricacies of modern finance. At the center of the story is double-entry bookkeeping: the first system that allowed merchants to actually measure the worth of their businesses. Luca Pacioli—monk, mathematician, alchemist, and friend of Leonardo da Vinci—codified and had printed the double-entry bookkeeping practices prevalent in Venice in 1494.  This codification in book form led to the widespread displacement of the use of Roman numerals to keep accounts.  Using Arabic numerals provided an accounting system that could work across all trades and nations. Jane Gleeson-White somewhat overstates here case by maintaining that double-entry accounting fueled the Renaissance, enabled capitalism to flourish, and created the global economy.  I would say that it is more accurate to say that printing and displacing Roman numerals in accounting played a more important role. 

Anyway, John Maynard Keynes would use the double-entry device to calculate GDP, the measure of a nation’s wealth. Yet double-entry accounting has had its failures. With the costs of sudden corporate collapses such as Enron and Lehman Brothers, and its disregard of environmental and human costs, the time may have come to re-create accounting from scratch for the future.

My Notes:

Pg. 8: The rise and metamorphosis of double-entry bookkeeping is one of history’s best-kept secrets and most important untold tales.  Why?  First, because it arguably made possible the wealth and cultural efflorescence that was the Renaissance.  Second, because it enabled capitalism to flourish, so changing the economies of the world forever.  Third because over several centuries it grew into a sophisticated system of numbers which in the twenty-first century governs the global economy.  This medieval artifact is still in daily use around the world.  Finally, and most significantly, bookkeeping now has the potential to make or bre3ak the planet.  Because accounting reduces everything to its monetary value, it has allowed us to value least that apparently free source of life itself: the planet.  Through its logic we have let the planet go to ruin—and through its logic we now have a chance to avert that ruin. 

Pg. 11:  Our urge to measure and record our wealth is one of the oldest human impulses. We were accounting before we could use abstract numbers; we were accounting before we could write.  In fact, it now appears that writing was invented by accountants 

Pg. 19:  The Arab merchants had learnt their number system in India by the ninth century and had been using it for centuries to calculate interest, convert currencies and solve other problems of trade.  Fibonacci brought these Hindu-Arabic numerals to Italy. The earliest known surviving Italian account is a fragment from the ledger of a Florentine bank dated 1211, nine years after the appearance of Fibonacci’s Liber abaci.  Most accounting historians agree that the first surviving accounts kept in double entry date to around 1300.  The appearance of these first double-entry accounts in Italy so soon after the arrival of Hindu-Arabic numerals is provocative.

Pg. 25:  Demanding interest on loans was not permitted anywhere in Europe until 1545, when Henry VIII legalized it in England. Condemnations of usury date back at least to Aristotle, who said that interest was the vilest form of wealth-making because it ‘makes a gain out of money itself and not from the natural object of it’.

Pg. 37:  The collected knowledge of ancient Greek mathematics, including the work of Pythagoras, was compiled by the Greek mathematician Euclid in around 300 BC in his book the Elements, which became a standard textbook and the basis of education in Europe until the twentieth century.  This was the most successful text book ever written, only second to the Bible as the best-ever-selling book.

Pg. 70:  Books rapidly became widely available and affordable to a new class of readers; in 1500 the price of a book in Venice was about a week’s salary for a teacher or a skilled artisan, equivalent to the price of a good desktop computer today.

Pg. 115:  The printing press ushered in a revolution in the presentation and distribution of knowledge on a scale not seen again until the invention of the computer.  It is worth noting just how radically the printing of multiple copies of reliable charts and figures influenced the cours of western civilization.  As Galileo understood, it made possible the triumph of science and the rise of mathematics as the universal language.  Simultaneously, it brought about the demise of the Bible and religion as the ultimate and uncontested source of truth.  Printing provided the most plausible point of departure for explaining how confidence shifted form divine revelation to mathematical reasoning. 

Pg. 123:  Despite the general theoretical consensus about how business books should be kept, double entry was not widely used until the rise of the corporation in the nineteenth century.  By the end of the nineteenth century, Pacioli’s double-entry bookkeeping morphed into a brand-new profession: accounting. 

Pg. 142:  When railway companies faltered in the late 1840s, struggling to return 10 percent on investments, many began to fiddle their books.  For example, they treated costs as capital investments rather than as expenses, thereby inflating their profits; and used fresh investments instead of profits to pay out dividends (a strategy now known as a Ponzi scheme). 

Pg. 157:  In 1896 the IABNY granted the title ‘Certified Public Accountant’ (CPS) to its members, and required a university education for anyone who wanted the title.

Pg. 178:  Keynes was the first economist to visualize the economy as an aggregate quantity of output resulting from an aggregate stream of expenditure. This new way of seeing the architecture of an economy is the General Theory’s most enduring legacy.

Pg. 194:  Dated April 2001, Enron’s annual report or the year 2000 exuded success.  Profits were booming.  Sales had soared from $2.3 billion to over $100 billion in just four years.  But Enron was not just about profit.  It trumpeted its risk management skills that ‘enable us to offer reliable prices as well as reliable delivery’.  Seven months later, Enron filed for bankruptcy.  Enron’s spectacular profits were dependent on massive debts not recorded on the company’s books.  Instead, the debt was recorded in (off-the-books) subsidiaries or ‘special purpose entity’ and partnerships.  Enron had understated its debt by $25 billion. 

Pg. 215:  It seems something is fundamentally wrong with our accounting system.  A century and a half of corporate accounting scandals say that financial reporting does not present a reliable picture of corporate wealth and progress, and that auditing does not protect shareholders from manipulative, self-interested managers charged with the care of their assets.  Financial statements have failed dismally to reveal the true state of companies whose collapse is a hair’s breadth away, such as Enron, WorldCom, HIH and One.Tel.  Despite the fact that accounting ‘inaccuracies’ go hand in hand with sudden corporate collapses and failures, accounting itself is never questioned.  Little has changed since 1933, despite rhetoric, legislation and litigation.  And what is true of accountants is also true of auditors.

Pg. 249:  Through the way double-entry values—or does not—the finite resources of our planet, it now has the potential to make or break life on the earth.  We can continue to ignore the free gifts of nature in the accounts of our nations and corporations, and thereby continue to ruin the planet.  If numbers and money are the only language spoken in the global capitalist economy, then this is the language we must use.