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Accounted For: The Origins of Modern Finance

A HISTORY OF double-entry accounting? Not a sexy prospect. The very idea evokes rows of half-starved, bent-over Dickensian clerks, with visors and arthritic hands, scribbling in giant, unending registers. But maybe this is wrong—double-entry is, after all, the tool by which financiers calculate profit and loss. Profit can be very sexy, and as Lehman Brothers and Greece illustrate, there is great drama in massive loss. The story of accounting should, at this moment of economic crisis, give a sense of the passion, glory, and pitfalls of this seemingly banal practice.           

This drama is missing from Jane Gleeson-White’s primer, a well-written, short history of the origins of accounting. Rather than following the adrenaline filled booms and busts, Gleeson-White presents the life and work of the “father of accounting,” Luca Pacioli (1445–1517). A humanist Franciscan friar and mathematician, Pacioli did not invent accounting, but he published, in 1494, a wide-ranging work on mathematics, proportion and geometry, the Summa de arithmetica, geometria, proportioni, et proportionalita (Everything about Arithmetic, Geometry, Proportion, and Proportionality), which contained the first detailed manual on double-entry accounting, De computis, or On Accounting.           

Gleeson-White does an admirable job describing Pacioli’s origins and his fairly straightforward method of double-entry accounting. Using Pacioli’s own words, Gleeson-White explains the concept: “All entries made in the Ledger have to be double entries—that is, if you make one creditor, you must make someone debtor.” Thus, every sale includes the credit of payment and the debit of releasing a piece of merchandise. The sums of both these columns show something not-so-familiar in Pacioli’s world: profit.           

But was Pacioli’s treatise the “landmark” or “watershed” that Gleeson-White claims, or is this a simplistic view formed in hindsight? Gleeson-White rightly points out that the great Renaissance mathematicians Nicholas of Tartaglia and Girolamo Cardano were familiar with the Summa. Pacioli’s contemporary fame was not as a writer, but as a teacher. He helped Leonardo da Vinci create his theory of proportion and knew many of the great artists and humanists of his day. And as Pacioli himself admits in his introduction, there was little original in his work. De computis may have come, in fact, directly from a manuscript that freely circulated in Venice. In any case, a merchant could learn the basics of double-entry in any number of Italian—mostly Tuscan—banks and firms in the late 1300s. Every branch manager of the Medici bank, and indeed Cosimo de’ Medici himself, knew double-entry a half century before Pacioli’s book.

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So was Pacioli just a popularizer? Contrary to Gleeson-White’s claims, Pacioli’s work was not a resounding success in its own time. Pacioli did not, as Gleeson-White says, “go viral.” Pacioli’s De computis section on accounting was often translated, but the rest of his work was ignored. In an age in which the work of humanist superstars, such as Erasmus and Castiglione, went through dozens of editions, the Summa, to Pacioli’s probable chagrin, only went through two, in 1494 and 1523. The new noble and feudal lords of Italy who arrived after the French and Spanish invasions in the late fifteenth-century had little interest in learning the methods of merchants, preferring works on religion, chivalrous deeds, courtly virtue, and the dark political sciences.

Moreover, there was widespread suspicion of practical and merchant mathematics among even Italian elites. In his Oration on the Dignity of Man, in 1486, Pico della Mirandola noted that Plato admonished “not to confuse this divine arithmetic with the arithmetic of the merchants.” And for at least three hundred years, Europe listened to Pico, not Pacioli. Mathematics, Gleeson-White explains, became a pillar of university learning, but she omits to mention that accounting was excluded from of the official curriculum of universities and the Jesuit and Erasmian traditions of learning. Well-educated elites widely stigmatized accounting as a “merchant art,” and this stigma arguably continues to this day.

It was not until the eighteenth century that accounting became central to English merchant life—and thus widely accepted as the means to conduct business. In the three hundred years separating the merchant Renaissance of the Italian republics and the early English industrial revolution, double-entry failed to establish itself as a systematic tool for financial management. In Imperial Spain, Charles V and Philip II, who controlled much of Italy, both tried to implement double-entry accounting reforms, but their personal approbation was limited. “I cannot tell a good account book or financial report (memorial) on the subject from a bad one,” said Philip II “And I do not wish to break my brains trying to comprehend something which I do not understand.”        

More seriously, Gleeson-White’s primary claim—that the “merchants of Venice created modern finance”—is reductive and wrong. Venetians (along with the Genoese, Florentines, and even Livornese) certainly helped to create international trade, accounting, and early exchange banking in the late Middle Ages. The German merchant center and warehouse in Venice, the Fondaco dei Tedeschi (today a Benetton store), helped spread double entry to German-speaking lands. But one could easily argue that Florence was more fundamental in spreading accounting knowledge, due to the city’s international banking system, and most notably, the presence of the Medici.

In the end, though, it was unquestionably the Flemish who spread Pacioli’s work and the Dutch who used accounting to invent modern finance. From elite burgomasters to prostitutes, the Dutch embraced accounting as a part of their commercial, republican ethos. A famous sixteenth-century engraving that illustrated how to do double-entry was called “Allegory to Commerce: The Glory of Antwerp.” As eighteenth-century Europe looked to emulate the Dutch both financially and politically (Adam Smith extolled Dutch accounting prowess), the English, French, and Germans translated Dutch accounting manuals. (Admittedly, these manuals were based on Pacioli’s founding work.) Dutch thinkers also explained that accounting and political accountability were essential to commercial, republican states. Venice had long crumbled when early American Dutch settlers brought their accounting skills to places such as Manhattan. To Gleeson-White, this is just a side-story.          

In the end, Gleeson-White warns that reducing all measures of human values into financial numbers has exacted “social and environmental costs.” In this, her timing and her heart are in the right place. Using balance sheets to measure success or human virtue has potentially terrifying implications. But Gleeson-White does not sound the alarm energetically or competently enough. As Daniel Defoe warned in the eighteenth century, and as we know all too well today, the bottom line might not even be true. Accounting can be used for fraud just as it can for great achievement. Entire firms—like the once estimable and now defunct Arthur Anderson Co.—have hidden (and continue to hide) risk and valueless financial products. Not only do we need more accounting, or sustainable accounting to value of the “earth’s wilderness,” as Gleeson-White suggests. We also need to be wary of our own tendency to ignore its perils, as Europeans chose to do for three hundred years after Pacioli’s book. Only then will we better understand the hubris in the human calculations that often control the fate of nations.

Jacob Soll is the author, most recently, of The Information Master: Jean-Baptiste Colbert’s Secret State Intelligence System (University of Michigan Press).