The Accounting System #6: Coin, Counting, and Crashes

previous: Physical Money as Portable Accounting

If the money value bids for a particular set of assets can crash in a bubble, then if almost everyone decides to cling to their money, all asset classes can crash. That is what happened in the depressions of the 1800s and the Great Depression between 1930 and 1932, and came close to happening in the Great Recession of 2008-2010.

Cash and coin are not magical stores of idealized value. Nor is gold. The sense they created during the Coin Age was due to their countability and their portability. Coins are easy to count. You don't need any higher math to do it. Countability also equates to accountability. Is the bank's accounting right? Then the count of the coins in the safe should match the cash balance in the ledger.

Portability, however, was not exactly perfect. Gold is heavy. Paying for a chicken and some turnips in a local market is not a weight issue, but what if you want to buy a shipload of silk in China? The coin required would be heavy, but at least it went by ship. Overland transfers of large sums required pack animals and soldiers to guard them.

During the great expansion of global trade between 1400 and 1900 a lot of gold ended up at the bottom of the sea. Better systems were already available. They were extensions of the commercial accounting systems of that era, and they would evolve into The Accounting System.

Keep in mind that physical money, either coins or cash, amounted to a local, physical, and (except in cases of fraud, like gold-plated lead coins and counterfeit notes) undeniable accounting. If you had cash you could buy whatever was for sale despite your credit rating, criminal record, or cultural preferences.

During the Coin Age, the coins were the key physical part of accounting system.  People could forget that the ultimate basis of human economy is real goods and services. Accounting systems track who has rights to real goods and services. Coins were a primitive accounting system. Today they are disappearing along with paper money. They have lost their utility for accounting. But accounting has grown, evolved, and absorbed many new functions, to become The Accounting System.

next: Virtualization in early banking

[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]