Monday, May 6, 2013

The Accounting System #7: Virtualization in early Banking

previous: #6, Coin, Counting and Crashes

We know that credit and debt are early historical phenomenon because they were recorded in ancient documents. The Bible requires the returning of borrowed land and goods, as well as the liberation of slaves, every 50th year [Leviticus chapter 25]: "ye shall return every man unto his possession, and shall return every man unto his family." Laws regulating loans may pre-date writing.

Credit requires a tracking system, which of course is an accounting. A written record had considerable merit over human memory.

Trade, as indicated earlier, is facilitated by an accounting system. The portable accounting system that used coins came to be supplemented at a very early date (certainly by the time of the Roman Republic) by systems based on the letter of credit.

It was a simple enough system. A wealthy Roman, wanting to send his son to receive an education in Athens, could go to a merchant banker who would write a letter of credit. This light, paper document would be taken to Athens and presented to an associate of the Roman banker, who would issue coin, up to the amount stated in the letter, to the travelling student. Because citizens of Athens often travelled to Rome carrying letters of credit, to a large extent the two-way flow of credit might cancel out. Each of the banking associates kept careful records. At intervals, if flows were lopsided, then could even up their mutual accounts by shipping coin or by sending desirable merchandise.

Letters of credit are an early example of the portability of accounting combined with its virtualization. A letter of credit, in the coin age, would be thought of as virtual coin. In fact, once we drop the coin blinders from our eyes, we see that it accounted for goods and services up to the point when coin was issued.

The most remarkable discovery that allowed accounting systems and trade in real goods and services) to escape the limitations of coin systems probably evolved among Italian city-state proto-bankers in the late middle ages. No, not double-entry bookkeeping (we'll get to that in Chapter 3). They discovered that they only needed a small reserve of coins to do business and make a profit through loans.

Next: To be continued

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

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