Book: The Reckoning: Financial Accountability and the Rise and Fall of Nations

DUSTIN: This is a history of Capitalism as told through the history of financial crises. I read about 20% last night here is what I learned. He says it starts with the invention of "double entry accounting" which is the first system that can capture profit and loss across many assets.

The first successful capitalist societies developed systems of accounting and corresponding financial and political accountability. ... Accounting brought with it a fundamentally different way of thinking abou tpolitical legitimacy. Balanced books equaled not just good business but also good government. At any moment, the maritime republic knew the state of its finances and could even make plans for future difficulties.

stories. Seen through the lens of the history of financial accountability, then, the history of capitalism is neither simply a history of ascent nor a cycle of booms and busts.

Rather, capitalism and modern government have an inherent weakness:

At crucial moments, accounting and the mechanics of accountability break down, adding to financial and political crises, if not creating them. The success of a society, at least financially, is, in great part, the mastery of accounting, accountability, and the ensuing struggle to successfully manage them. Without double-entry accounting, neither modern capitalism nor the modern state could exist, for it is the essential tool in calculating profit and loss, the basis of financial management. Double entry emerged in Tuscany and northern Italy sometime around 1300. Until then, the great ancient and medieval societies persisted without it. Indeed, the advent of double-entry accounting marks the beginning of the history of capitalism and modern politics.

Over and over again, good accounting practices have produced the levels of trust necessary to found stable governments and vital capitalist societies, and poor accounting and its attendant lack of accountability have led to financial chaos, economic crimes, civil unrest, and worse.

Those societies that have succeeded are not only those rich in accounting and commercial culture but also the ones that have worked to build a sound moral and cultural framework to manage the fact that humans have a regular habit of ignoring, falsifying, and failing in accounting.

In medieval Italy, not only did balanced books mirror the divine aspect of God’s judgment and a tally of sins but also they came to represent sound business and good government. Of course, it is one thing to have a set of values; the challenge is to uphold them, and maintaining financial accountability was and is a constant struggle.

What this book shows is that financial accountability functioned better when accounting was seen not simply as part of a financial transaction but also as part of a moral and cultural framework.

DUSTIN: The erosion of morals would appear to be the problem
From the Middle Ages to the early twentieth century, those societies that managed to harness accounting and long-term traditions of financial accountability and trust did so by full cultural engagement: Republican Italian city-states like Florence and Genoa, Golden Age Holland, and eighteenth- and nineteenth-century Britain and America all integrated accounting into their educational curriculum, religious and moral thought, art, philosophy, and political theory. Accounting became the subject of theological and political works, great paintings, social and scientific theories, and novels, from Dante and the Dutch Masters to Auguste Comte, Thomas Malthus, Charles Dickens, Charles Darwin, Henry David Thoreau, Louisa May Alcott, and Max Weber.

In a virtuous circle, the elevation of practical, business-minded mathematics into the spheres of high and humane thinking allowed these societies not only to maximize their use of accounting but also to build complex cultures of accountability and awareness of the difficulties posed by such a culture.

With this culture of accountability came capitalism and representative government. The delicate interplay between accounting and accountability can decide the fate of a company or, indeed, a nation. Financial history, therefore, is not only about cyclical crises or trends in numbers. It is also a story about individuals and societies that become adept at mastering the interplay between accounting and cultural life, yet often lose this capacity and find themselves in unexpected, avoidable, and sometimes cataclysmic financial crises. In this long history, accounting and financial accountability emerge as both mundane and, at the same time, difficult to control. What is remarkable is that the basic lessons of medieval Italian accounting—that it is essential to wealth and political stability but incredibly difficult, frail, and even perilous—are still as pertinent today as they were seven hundred years ago.