previous: #10, The Federal Reserve and Accounting Money
In short, in 1930 the economic system unraveled because of the way it was built. The previous upward spiral of increasing economic activity was enabled by the ability of the banking system to expand both deposits and loans. Over time, however, many people had withdrawn deposits from banks to buy stocks, while others took loans from banks that were used to buy stocks. When stock prices started dropping (because enough people had realized it was a fool's game), people could no longer easily take money out of the market like they could take it out of a bank deposit. For loans to be repaid more stocks needed to be sold, and when stocks became relatively worthless, deposits had to be drained to make loan payments or for ordinary expenses. Loans and deposits, accounting money, disappeared rapidly, even when there was plenty of cash to facilitate cash transactions.
At the end stage banks could not collect on loans (because so many people had lost their jobs), and so had to use reserves to pay depositors who wanted to make withdrawals. When reserves were gone, the accounting rules said the banks had to close. There was no deposit insurance, so accounting money in the form of deposits, simply disappeared. Suddenly self-accounting with cash seemed like a better idea than bank accounting with numbers in ledgers.
We are largely trained to forget that there was one large, industrialized nation whose economy did not collapse in the 1930s. In the U.S.S.R. (essentially Russia) there was no stock market to collapse, and state banks and most of the economy were all government-owned. The government had total control of the accounting system. Despite the other defects (even atrocities) of the Communist system, there was a realization that money, the economy, and accounting were all human creations, and it was possible to run a command economy with some success (although command economies also have very high failure rates. It mostly depends on the commanders).
The New Deal can be fairly said to replace the free market economy of the United States by a command economy supervised by the government. In the end it took the increased demand created by World War II to get the American economy on its feet, and the legacy of the New Deal was not a command economy but a re-engineered free market economy. Some of the changes had little to do with the accounting system, but two made noteworthy changes.
While most of the bubble in stock market prices was simple human folly, there was also fraudulent accounting at some corporations that was used to jack up stock prices. The SEC (Securities and Exchange Commission) was created in 1934 to attempt to insure that investments traded in public markets were neither fraudulent or manipulated. Among other reforms, the accounting of individual listed corporations now had to be audited by a (hopefully) independent auditor, and reported to all investors at least quarterly in a standardized format. Their accountants and their auditors were giving accounting rules they had to follow, Generally Accepted Accounting Principles (GAAP). This standardization of the accounting system meant that any person, not just accountants, could learn to read and understand any American business accounting statement.
The creation of the Social Security system would have long-term repercussions far beyond what was originally envisioned. Because many Americans were alive who had the same name, each person who paid into or received money from the system was given a Social Security Number. Later this number would come to be used as a national, individual identity number, thus vastly enlarging the domain of The Accounting System.
Next: #12 Electronic Money Takes Over
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
Showing posts with label The Accounting System. Show all posts
Showing posts with label The Accounting System. Show all posts
Wednesday, June 5, 2013
Tuesday, May 28, 2013
The Accounting System #10: The Federal Reserve and Accounting Money
previous: Checking and Credit Cards as Virtualization
Before going on to the use of computer devices, in particular smartphones, to de-coin and virtualize the economy, it would be good to consider the accounting system from the point of view of the government and the Federal Reserve System.
As pointed out in Chapter 1, the economy of the 19th century changed so fast that the arts of banking and governance were inadequate to prevent a series of cyclical booms and depressions, cumulating in the Great Depression that kicked off at the end of 1929. The accounting system of the time was thought to be adequate to the task, but it was unable to give clear indications of coming financial disasters. In fact, the system and its interpretation by humans contributed to the boom-bust cycle. Nevertheless, The Accounting System can be said to have been born out of ordinary accounting and other developments that came in quick succession after 1929.
At the beginning of 1929 a number of past problems were considered solved by economists, politicians, business executives, capitalists, and even ordinary people.
Paper money had solved a lot of problems. It had become standardized. Banks could no longer issue circulating bank notes; only the U.S. Treasury could issue paper money. This was something of a revolution. While counterfeiting existed, for the most part American paper money was self-proving. Unlike a paper check, you did not have to worry if there was money in a deposit account to back it. The government backed it. Compared to coin it was much lighter and much more portable. You still needed coin in 1929 only because a one-dollar bill bought so much. With a briefcase full of $100 bills you could buy a mansion or a boat load of bootleg whiskey.
Critics of paper currency were suspicious of substituting paper and ink, which were almost valueless, for metal coins they thought had intrinsic value. They pointed to past trouble with governments printing so much money that it lost much of its value, including during the Revolutionary War. The hyper-inflation in Germany in the 1920s, which resulted from massive money printing not backed by economic activity, was also a fair caution.
But the U.S. did not print too much money. The asset inflation (high prices for stocks and real estate) of the 1920s resulted from money (not cash, but accounting money) being focused on those assets. People bought stocks and real estate because they thought they would keep going up. They spent money to make more money.
What is accounting money? Recall our late Middle Ages Italian city-state banker, and in 1929 the first thing you should note is that only a few things had changed. Reserves were now set by law, and were spread over the Federal Reserve System. But each bank had very little cash in its vaults compared to the amount of money it carried on its accounting books. The depositors' money was simply some numbers kept on a ledger, and the creditors' debt in money was kept on a ledger. In normal times that was fine. The creditors had used the loans they took to buy things of value, like houses and business assets (and, unfortunately, stocks they had bought at inflated prices). As they paid them back, accounting entries were made that gave the bank more money, which would then be available to pay out to depositors, to take as profit, and to cover the normal costs of running a bank.
This is a key point that most people don't get. Already, by 1929, almost all money, the count of what people held to be of material value, was in the accounting system. It was not paper money; it was ledger entries on paper. The Crash and Depression did not happen because there was too much or too little paper money or gold. It happened because of a combination of human folly (buying overpriced stocks, followed by panic) and the nature of the accounting system.
Next: #11, The Great Unraveling of 1930
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
Before going on to the use of computer devices, in particular smartphones, to de-coin and virtualize the economy, it would be good to consider the accounting system from the point of view of the government and the Federal Reserve System.
As pointed out in Chapter 1, the economy of the 19th century changed so fast that the arts of banking and governance were inadequate to prevent a series of cyclical booms and depressions, cumulating in the Great Depression that kicked off at the end of 1929. The accounting system of the time was thought to be adequate to the task, but it was unable to give clear indications of coming financial disasters. In fact, the system and its interpretation by humans contributed to the boom-bust cycle. Nevertheless, The Accounting System can be said to have been born out of ordinary accounting and other developments that came in quick succession after 1929.
At the beginning of 1929 a number of past problems were considered solved by economists, politicians, business executives, capitalists, and even ordinary people.
Paper money had solved a lot of problems. It had become standardized. Banks could no longer issue circulating bank notes; only the U.S. Treasury could issue paper money. This was something of a revolution. While counterfeiting existed, for the most part American paper money was self-proving. Unlike a paper check, you did not have to worry if there was money in a deposit account to back it. The government backed it. Compared to coin it was much lighter and much more portable. You still needed coin in 1929 only because a one-dollar bill bought so much. With a briefcase full of $100 bills you could buy a mansion or a boat load of bootleg whiskey.
Critics of paper currency were suspicious of substituting paper and ink, which were almost valueless, for metal coins they thought had intrinsic value. They pointed to past trouble with governments printing so much money that it lost much of its value, including during the Revolutionary War. The hyper-inflation in Germany in the 1920s, which resulted from massive money printing not backed by economic activity, was also a fair caution.
But the U.S. did not print too much money. The asset inflation (high prices for stocks and real estate) of the 1920s resulted from money (not cash, but accounting money) being focused on those assets. People bought stocks and real estate because they thought they would keep going up. They spent money to make more money.
What is accounting money? Recall our late Middle Ages Italian city-state banker, and in 1929 the first thing you should note is that only a few things had changed. Reserves were now set by law, and were spread over the Federal Reserve System. But each bank had very little cash in its vaults compared to the amount of money it carried on its accounting books. The depositors' money was simply some numbers kept on a ledger, and the creditors' debt in money was kept on a ledger. In normal times that was fine. The creditors had used the loans they took to buy things of value, like houses and business assets (and, unfortunately, stocks they had bought at inflated prices). As they paid them back, accounting entries were made that gave the bank more money, which would then be available to pay out to depositors, to take as profit, and to cover the normal costs of running a bank.
This is a key point that most people don't get. Already, by 1929, almost all money, the count of what people held to be of material value, was in the accounting system. It was not paper money; it was ledger entries on paper. The Crash and Depression did not happen because there was too much or too little paper money or gold. It happened because of a combination of human folly (buying overpriced stocks, followed by panic) and the nature of the accounting system.
Next: #11, The Great Unraveling of 1930
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
Tuesday, May 21, 2013
The Accounting System #9: Checking and Credit Card Virtualization
Previous: The Accounting System #8
It is really not much of a leap from letters of credit and a system of loans and deposits backed by a reserve of coin or cash to a checking system. Checking accounts did not become common until the 20th century, but they extended the accounting system in a very convenient way. Most people, most of the time, did not write checks for more money than they had on deposit. Merchants had ways of deciding whether or not to trust the check writer. Long before the advent of credit cards it was possible to make do with almost no cash or coin, if you were willing to use a check book for purchases.
This again added portability to the accounting system. Many people kept a careful record of the checks they wrote, the deposits they made, and their balances, thus manually doing their own accounting. That helped the banks and merchants by reducing the number of bad checks that had to be dealt with. At the same time, with checks being written all the time by millions of people, the number of transactions banks had to process became a major factor in the cost of banking. First adding machines, then tabulating machines, and finally computers were used to speed up the accounting process. At the national level the Federal Reserve System facilitated the transfer of checks so that you could send a check to anywhere in the nation and eventually it would be turned into your bank for collection.
With a systematic, universal checking system it would have been possible to eliminate coin and cash from the economy. The accounting system would have been universal, at least for monetary transactions. A dollar would have been whatever the central bankers at the Fed said it was, unrelated to the antiquated silver dollars of yesteryear. But many people did not have checking accounts. The banks did not want to deal with untrustworthy or unprofitable customers, so the cash system remained in use.
People who are used to modern credit cards, which are used to make transactions through point of sale terminals, personal computers, and smartphones, may not realize that for years credit cards were part of a system that still relied on paper. While a card could be checked for available credit by telephone, a credit card purchase was made on a receipt with a copy for the purchaser, one for the merchant, and one for the bank. The receiving bank then debited the card holders account and credited the merchants account. By the time credit cards were coming into general use, so were computers (mainframe computers). Again the accounting system extended its tentacles. A credit transaction was a small loan. If not paid off immediately it carried a high rate of interest. But it meant that the customer need do no bookkeeping: if there was no credit left, the merchant would decline the card. Shop 'till you drop took on a new meaning.
Again, with credit cards you did not need coins or cash, at least until your credit limit was reached.
Next: #10: The Federal Reserve and Accounting Money
It is really not much of a leap from letters of credit and a system of loans and deposits backed by a reserve of coin or cash to a checking system. Checking accounts did not become common until the 20th century, but they extended the accounting system in a very convenient way. Most people, most of the time, did not write checks for more money than they had on deposit. Merchants had ways of deciding whether or not to trust the check writer. Long before the advent of credit cards it was possible to make do with almost no cash or coin, if you were willing to use a check book for purchases.
This again added portability to the accounting system. Many people kept a careful record of the checks they wrote, the deposits they made, and their balances, thus manually doing their own accounting. That helped the banks and merchants by reducing the number of bad checks that had to be dealt with. At the same time, with checks being written all the time by millions of people, the number of transactions banks had to process became a major factor in the cost of banking. First adding machines, then tabulating machines, and finally computers were used to speed up the accounting process. At the national level the Federal Reserve System facilitated the transfer of checks so that you could send a check to anywhere in the nation and eventually it would be turned into your bank for collection.
With a systematic, universal checking system it would have been possible to eliminate coin and cash from the economy. The accounting system would have been universal, at least for monetary transactions. A dollar would have been whatever the central bankers at the Fed said it was, unrelated to the antiquated silver dollars of yesteryear. But many people did not have checking accounts. The banks did not want to deal with untrustworthy or unprofitable customers, so the cash system remained in use.
People who are used to modern credit cards, which are used to make transactions through point of sale terminals, personal computers, and smartphones, may not realize that for years credit cards were part of a system that still relied on paper. While a card could be checked for available credit by telephone, a credit card purchase was made on a receipt with a copy for the purchaser, one for the merchant, and one for the bank. The receiving bank then debited the card holders account and credited the merchants account. By the time credit cards were coming into general use, so were computers (mainframe computers). Again the accounting system extended its tentacles. A credit transaction was a small loan. If not paid off immediately it carried a high rate of interest. But it meant that the customer need do no bookkeeping: if there was no credit left, the merchant would decline the card. Shop 'till you drop took on a new meaning.
Again, with credit cards you did not need coins or cash, at least until your credit limit was reached.
Next: #10: The Federal Reserve and Accounting Money
Monday, May 6, 2013
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]
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]
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]
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]
Friday, April 26, 2013
The Accounting System #5: Physical Money As Portable Accounting
previous: #4: The Big Reversal
During the Age of Coin the normal relation of reality to symbols of reality was inverted for many people. This inversion permeates human culture even today, long after the Age of Coin (roughly 1400 to 1900) has faded into history.
Leaving aside human relations, possessions and their use are generally believed to hold value. Food, clothing, housing, tools, and land have obvious value. Coin, however, came to be the common denominator allowing people to think about the value of mixtures of types of possessions. A farmer could come up with a total numeric value of his land, cows, sheep, and money held in bank accounts and cash. An urban investor know how much his stocks were worth, and the shares of companies they represented in turn could be accounted for in terms of projected future profits and current assets that might include factories, inventories, and money in bank accounts, less what was owed on loans.
It was a convenient fiction that any citizen could turn all assets into a pile of coin or paper currency, stand naked beside the pile, and know his or her worth. Even more conveniently, one could come close to this by selling everything, putting the resulting money into a bank account, and looking at a single number on a bank statement.
In reality not everyone could convert all their assets to currency or even into bank accounts at once. There was not enough currency to meet the demand if too many people demanded cash at any given time. The history of the United States of America, from colonial times until the creation of the Federal Reserve, was punctuated by proofs of this. Metallic coin, preferably silver or gold coin, was always in short supply because at first it had to be imported. After about 1850, when large amounts of gold and silver were found and mined in the states, coin remained in short supply because the rest of the economy expanded at such a fast rate. The Free Silver (coinage) and Greenback political campaigns encapsulated the deadening effect on the economy of the mindset that only gold could be real money, or represent real value.
Going back to our naked ape sitting beside a pile of coin (perhaps have kept aside a knife or six-shooter to defend it with), pretty soon, except in cases of insanity, hunger or discomfort would lead to spending down the pile. If no one was willing to trade food for gold, the pile was useless, and without value. We know from history that in times of famine scraps of food came to be "worth their weight in gold."
Another problem would occur if everyone tried to liquidate their assets at once. In that hypothetical situation, there would be no buyers. The value of truly valuable things drops to nothing if buyers cannot be found. This can be true even when there is plenty of money (coin, cash, account balances, or credit) to buy the assets. Thus we have had a series of asset bubbles over the centuries, some of the most famous being the Tulip bubble, the South Seas bubble, the Florida land bubble, the Internet stock bubble, the housing bubble of 2005-2006, and (as of April 15, 2013) the Gold bubble. In a bubble money is traded for something believed to have real value, until only the most foolish citizens can't see that the money value exceeds the real value. Then, when buyers become scarce enough, bubbles burst. Tulips are just tulips again, not investments. (My favorite bubbles: tropical fish bubbles and the farmed mink bubble).
Next: #6: Counting, Coins, and Crashes
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
During the Age of Coin the normal relation of reality to symbols of reality was inverted for many people. This inversion permeates human culture even today, long after the Age of Coin (roughly 1400 to 1900) has faded into history.
Leaving aside human relations, possessions and their use are generally believed to hold value. Food, clothing, housing, tools, and land have obvious value. Coin, however, came to be the common denominator allowing people to think about the value of mixtures of types of possessions. A farmer could come up with a total numeric value of his land, cows, sheep, and money held in bank accounts and cash. An urban investor know how much his stocks were worth, and the shares of companies they represented in turn could be accounted for in terms of projected future profits and current assets that might include factories, inventories, and money in bank accounts, less what was owed on loans.
It was a convenient fiction that any citizen could turn all assets into a pile of coin or paper currency, stand naked beside the pile, and know his or her worth. Even more conveniently, one could come close to this by selling everything, putting the resulting money into a bank account, and looking at a single number on a bank statement.
In reality not everyone could convert all their assets to currency or even into bank accounts at once. There was not enough currency to meet the demand if too many people demanded cash at any given time. The history of the United States of America, from colonial times until the creation of the Federal Reserve, was punctuated by proofs of this. Metallic coin, preferably silver or gold coin, was always in short supply because at first it had to be imported. After about 1850, when large amounts of gold and silver were found and mined in the states, coin remained in short supply because the rest of the economy expanded at such a fast rate. The Free Silver (coinage) and Greenback political campaigns encapsulated the deadening effect on the economy of the mindset that only gold could be real money, or represent real value.
Going back to our naked ape sitting beside a pile of coin (perhaps have kept aside a knife or six-shooter to defend it with), pretty soon, except in cases of insanity, hunger or discomfort would lead to spending down the pile. If no one was willing to trade food for gold, the pile was useless, and without value. We know from history that in times of famine scraps of food came to be "worth their weight in gold."
Another problem would occur if everyone tried to liquidate their assets at once. In that hypothetical situation, there would be no buyers. The value of truly valuable things drops to nothing if buyers cannot be found. This can be true even when there is plenty of money (coin, cash, account balances, or credit) to buy the assets. Thus we have had a series of asset bubbles over the centuries, some of the most famous being the Tulip bubble, the South Seas bubble, the Florida land bubble, the Internet stock bubble, the housing bubble of 2005-2006, and (as of April 15, 2013) the Gold bubble. In a bubble money is traded for something believed to have real value, until only the most foolish citizens can't see that the money value exceeds the real value. Then, when buyers become scarce enough, bubbles burst. Tulips are just tulips again, not investments. (My favorite bubbles: tropical fish bubbles and the farmed mink bubble).
Next: #6: Counting, Coins, and Crashes
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
Sunday, April 21, 2013
The Accounting System #4: The Big Reversal
Previous: Banks, Credit Cycles, and Gold
Decade by decade, The Accounting System grew in size and importance. Since some of the accounting by corporations listed on the American stock markets was found to be fraudulent in the aftermath (pun intended) of the 1929 crash, the Securities and Exchange Commission (SEC) undertook to establish public accounting standards. Over time these came to be issued by the Financial Accounting Standards Board. The Generally Accepted Accounting Principles (GAAP) are used by all accountants in the United States. Similar systems are used in other nations.
When a statement about money is made that diverges from GAAP, accountants refer to those figures as non-GAAP. Non-GAAP figures issued by publically listed corporations during the Internet Stock Bubble led to the current era in which any non-GAAP figures released by traded companies are expected to be issued with an explanation of their relationship to GAAP figures.
The possession by individuals of gold coins and bullion (but not jewelry) was illegal in the U.S. from 1933 to 1974. Because there was inflation during this period, some economists claim the gold standard is necessary for a sound economy. Reasoning from ideology rather from fact, they refuse to look at the fact that using gold as money had been a historic disaster. Overall 1933 to 1974 for a great run for the American economy, showing that the gold standard had holding the nation back, rather than helping, back before 1929.
Credit cards as an idea go back at least as far as the novel Looking Backwards by Edward Bellamy, first published in 1887. Credit cards in their modern form first became common in the 1960s, when perhaps 100 million were mailed, often unsolicited, to bank customers. While there are many other forms of credit, including business loans, loans on property, and student loans, the credit card and its relative the debit card put The Accounting System in the pockets of most Americans (and their international equivalents).
This led to a paradoxical role reversal. We do our accounting in units of coin (the dollar in the U.S., originally silver coins issued by the Dutch and then Spanish governments). For portability these units are mainly represented by paper currency, mostly in the form of $20 bills accessed from ATMs. While banks count paper currency in their accounting systems, and businesses still account for such bills until they can be turned into real money (bank deposits), individuals seldom systematically account for the cash they carry or keep. Each note has a serial number, which the Federal government records, largely as a defense against counterfeiting.
In effect cash is now at the periphery of The Accounting System. Almost all money in the United States, and even globally, now consists of entries in the accounting system. These entries are not even hard copies on paper ledgers. They are held in computer databases. They are electronic representations of 1's and 0's. If something ate the banking aspect of the accounting system, they would disappear.
Thus units of value were once counted by coin, but now value is direct relation of numbers of virtual accounting dollars to whatever real goods and services they can buy at any given time.
The Internet itself led to another major expansion of The Accounting System, and a consolidation of its power over people. The Internet tied computers together, including the computers used by banks, government, corporations and individuals for accounting. This led to pressure on individuals and businesses to use electronic fund transfers rather than physical checks for all deposits and withdrawals. Physical checks are now photographed rather than returned to their writers after cancellation. We are rapidly moving in the direction of it being difficult to use cash or even paper checks to make payments for goods and services. Physical property is increasingly identified; even ordinary jewelry diamonds have small serial numbers burned into them.
All sorts of extensions of The Accounting System have come into existence. Medical records are being virtualized. Most forms of messaging via Internet go into permanent records. Almost every action made by any individual on the Internet is recorded, and those "personal profiles" are increasingly being exchanged by corporations and governments.
The Accounting System knows what your balance is, your debt level and credit worthiness, where you shop, what you like, what you own, and whether you can get permission to drive or fly on a commercial airline or cross an international border.
The Accounting System is not just counting and recording. It is an increasingly active system that determines the fates of individuals. It has traps for the unwary and free rides for the privileged. Parts of it are fair, but much of it is biased.
Next, the virtualization of money will be examined at a much higher level of detail.
Next: #5: Physical Money as Portable Accounting
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
Decade by decade, The Accounting System grew in size and importance. Since some of the accounting by corporations listed on the American stock markets was found to be fraudulent in the aftermath (pun intended) of the 1929 crash, the Securities and Exchange Commission (SEC) undertook to establish public accounting standards. Over time these came to be issued by the Financial Accounting Standards Board. The Generally Accepted Accounting Principles (GAAP) are used by all accountants in the United States. Similar systems are used in other nations.
When a statement about money is made that diverges from GAAP, accountants refer to those figures as non-GAAP. Non-GAAP figures issued by publically listed corporations during the Internet Stock Bubble led to the current era in which any non-GAAP figures released by traded companies are expected to be issued with an explanation of their relationship to GAAP figures.
The possession by individuals of gold coins and bullion (but not jewelry) was illegal in the U.S. from 1933 to 1974. Because there was inflation during this period, some economists claim the gold standard is necessary for a sound economy. Reasoning from ideology rather from fact, they refuse to look at the fact that using gold as money had been a historic disaster. Overall 1933 to 1974 for a great run for the American economy, showing that the gold standard had holding the nation back, rather than helping, back before 1929.
Credit cards as an idea go back at least as far as the novel Looking Backwards by Edward Bellamy, first published in 1887. Credit cards in their modern form first became common in the 1960s, when perhaps 100 million were mailed, often unsolicited, to bank customers. While there are many other forms of credit, including business loans, loans on property, and student loans, the credit card and its relative the debit card put The Accounting System in the pockets of most Americans (and their international equivalents).
This led to a paradoxical role reversal. We do our accounting in units of coin (the dollar in the U.S., originally silver coins issued by the Dutch and then Spanish governments). For portability these units are mainly represented by paper currency, mostly in the form of $20 bills accessed from ATMs. While banks count paper currency in their accounting systems, and businesses still account for such bills until they can be turned into real money (bank deposits), individuals seldom systematically account for the cash they carry or keep. Each note has a serial number, which the Federal government records, largely as a defense against counterfeiting.
In effect cash is now at the periphery of The Accounting System. Almost all money in the United States, and even globally, now consists of entries in the accounting system. These entries are not even hard copies on paper ledgers. They are held in computer databases. They are electronic representations of 1's and 0's. If something ate the banking aspect of the accounting system, they would disappear.
Thus units of value were once counted by coin, but now value is direct relation of numbers of virtual accounting dollars to whatever real goods and services they can buy at any given time.
The Internet itself led to another major expansion of The Accounting System, and a consolidation of its power over people. The Internet tied computers together, including the computers used by banks, government, corporations and individuals for accounting. This led to pressure on individuals and businesses to use electronic fund transfers rather than physical checks for all deposits and withdrawals. Physical checks are now photographed rather than returned to their writers after cancellation. We are rapidly moving in the direction of it being difficult to use cash or even paper checks to make payments for goods and services. Physical property is increasingly identified; even ordinary jewelry diamonds have small serial numbers burned into them.
All sorts of extensions of The Accounting System have come into existence. Medical records are being virtualized. Most forms of messaging via Internet go into permanent records. Almost every action made by any individual on the Internet is recorded, and those "personal profiles" are increasingly being exchanged by corporations and governments.
The Accounting System knows what your balance is, your debt level and credit worthiness, where you shop, what you like, what you own, and whether you can get permission to drive or fly on a commercial airline or cross an international border.
The Accounting System is not just counting and recording. It is an increasingly active system that determines the fates of individuals. It has traps for the unwary and free rides for the privileged. Parts of it are fair, but much of it is biased.
Next, the virtualization of money will be examined at a much higher level of detail.
Next: #5: Physical Money as Portable Accounting
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
Friday, April 19, 2013
The Accountings System #3: Bank Cycles of Credit and Gold
The banking system, which was at the heart of the accounting system, was also found to be wanting for a modern economy. This is because the banking system had three separate functions which did not go well together. It became the core of the social accounting system: a man might claim to be rich, but it his bank checks bounced, people knew the reality was otherwise. It allowed its depositors to keep their money safe and perhaps earn a bit of interest. To make a profit, bankers had to loan out the money of their depositors at an interest rate sufficient to keep their depositors happy, pay for the costs of operation, and still come out ahead. This was the credit system.
The credit system of the early 1800's in the United States is worth a close look because of the way it resembled and differed from our present system. Individuals were more likely to be sources of credits, which typically took the form of "IOUs." Andrew Jackson, before he became President, is a well documented example. Like most Americans of the era, he seldom could put his hands on much cash or coin, but he owned land, race horses, and slaves of considerable value. If he purchased goods he would write a personal note, an IOU, which he pledged to redeem at a later date, say when he received some cash to pay for his cotton crop.
A creditor holding the Jackson note might want to spend it before then, and would sign it over to another man, perhaps to buy a horse. If a man was considered to have good credit, as Jackson was, his notes might circulate for some time and be considered more sound than bank notes. If a note was collectable, and you took it to the Hermitage to demand payment, and Jackson still had no cash, he might try to pay you off with a slave, dog, horse, or perhaps some wine or whiskey. In effect Andrew would discount his own note, giving you, perhaps, a $250 race horse for a $300 note. As long as creditors were happy with the exchange his credit remained good. Similarly, if you were another local slaver and wanted to buy some possession of Jackson's and he was willing to sell, he would probably accept your IOU (which, along with the shortage of gold, was one reason most people had very little cash to play with).
The primitive banks of that era were in a strangely similar position to private individuals like Jackson. The bank might actually own nothing but a license from the state (usually obtained by bribing legislators), but usually began with a little bit of gold or silver coin. Banks would take deposits – hopefully coin, but also other bank's notes – and then would start making loans, which is to say, creating credit. They tried to avoid loaning their coins, instead issuing their own bank notes. If too many people came in demanding that the bank notes be redeemed in coin, the coin would run out, depositors would demand their deposits, and the bank would fail. The more clever bankers liked to loan to people a goodly distance from home, so that their notes would circulate afar and be unlikely to be redeemed.
This system led to credit cycles of boom and bust. When people were confident in the banknotes and IOUs a speculator could buy land and be confident of selling it in a year or two for more money. Sound familiar? During a boom farmers got good prices for their crops, and manufacturers had little problem selling their wares to the farmers. When credit contracted, as it invariably did, no one wanted to take an IOU or banknote. With little gold to go around, commerce collapsed and people returned to bartering until time healed the wounds and another upward cycle began.
Eventually Americans got tired of this ridiculous system, made banknotes illegal, and tried various banking reserve systems cumulating in the Federal Reserve System. Only the federal government could issue paper money, and that was backed by gold or silver. But that system did not work long either, as the Great Depression proved.
Next: The Big Reversal
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
The credit system of the early 1800's in the United States is worth a close look because of the way it resembled and differed from our present system. Individuals were more likely to be sources of credits, which typically took the form of "IOUs." Andrew Jackson, before he became President, is a well documented example. Like most Americans of the era, he seldom could put his hands on much cash or coin, but he owned land, race horses, and slaves of considerable value. If he purchased goods he would write a personal note, an IOU, which he pledged to redeem at a later date, say when he received some cash to pay for his cotton crop.
A creditor holding the Jackson note might want to spend it before then, and would sign it over to another man, perhaps to buy a horse. If a man was considered to have good credit, as Jackson was, his notes might circulate for some time and be considered more sound than bank notes. If a note was collectable, and you took it to the Hermitage to demand payment, and Jackson still had no cash, he might try to pay you off with a slave, dog, horse, or perhaps some wine or whiskey. In effect Andrew would discount his own note, giving you, perhaps, a $250 race horse for a $300 note. As long as creditors were happy with the exchange his credit remained good. Similarly, if you were another local slaver and wanted to buy some possession of Jackson's and he was willing to sell, he would probably accept your IOU (which, along with the shortage of gold, was one reason most people had very little cash to play with).
The primitive banks of that era were in a strangely similar position to private individuals like Jackson. The bank might actually own nothing but a license from the state (usually obtained by bribing legislators), but usually began with a little bit of gold or silver coin. Banks would take deposits – hopefully coin, but also other bank's notes – and then would start making loans, which is to say, creating credit. They tried to avoid loaning their coins, instead issuing their own bank notes. If too many people came in demanding that the bank notes be redeemed in coin, the coin would run out, depositors would demand their deposits, and the bank would fail. The more clever bankers liked to loan to people a goodly distance from home, so that their notes would circulate afar and be unlikely to be redeemed.
This system led to credit cycles of boom and bust. When people were confident in the banknotes and IOUs a speculator could buy land and be confident of selling it in a year or two for more money. Sound familiar? During a boom farmers got good prices for their crops, and manufacturers had little problem selling their wares to the farmers. When credit contracted, as it invariably did, no one wanted to take an IOU or banknote. With little gold to go around, commerce collapsed and people returned to bartering until time healed the wounds and another upward cycle began.
Eventually Americans got tired of this ridiculous system, made banknotes illegal, and tried various banking reserve systems cumulating in the Federal Reserve System. Only the federal government could issue paper money, and that was backed by gold or silver. But that system did not work long either, as the Great Depression proved.
Next: The Big Reversal
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
Thursday, April 18, 2013
The Accounting System #2: The Coin Age
Once upon a time there was no Accounting System except Nature itself.
We do not know exactly when in history humans began counting in earnest. We know that some animals have some ability to count, for instance to notice when a child has gone missing. We also know that most animals can see the difference between "more" and "less."
By the time of the early urban civilizations we know about (Egypt, Palestine and Mesopotamia, and China for example) counting and keeping records of counts was a well-established set of skills. Rulers wanted to know how many cows were in their herds, how many soldiers were available for battle, and whether subordinates had contributed their fair share of grain to the royal stores. Merchants needed to track their inventories, as did anyone who farmed on a large scale. This keeping of records of counts of things is the earliest manifestation of The Accounting System.
The ledger, or written record of counts, thus preceded what we now call cash and coin. Coin is generally treated as having inherent value, and for that reason tended over the millennia to standardize on three metals: gold, silver, and copper. Coin stands as a way station between bartering (directly trading one kind of good or service for another) and systemic accounting through modern record keeping.
People counted coins, and thus accounting and bookkeeping seemed to be the art of coin counting. This was the case with the improved accounting systems of early Renaissance Italy. This led to misconceptions, both popular and among the professional accountants, which persist to this day.
Counting things other than coin did not go away, but accountants and ordinary people came to start measuring all things by their value in coin. To keep his books straight, a farmer might count his cows, multiply by a set value per cow, and account for the total as an asset in units of currency.
During the Coin Age (roughly 1400 to 1900) other aspects of the accounting system evolved and expanded. People, from peasants to kings, still needed to count their things. The most important thing to count was land, but that was somewhat more complicated than counting cows or shillings. It required a title system (note the term likely evolved from titles such as duke, lord, sir, and mister) and surveys, and a legal system as well. People who lived on land but had no legal title to it lost it over the centuries. This was particularly obvious in the Americas, where the natives were dispossessed of almost all of their tribal land. Today the land title system extends to every part of the world except the Antarctic.
The human identity system also expanded during the Coin Age. We know that ancient kings took censuses of their subjects. Various forms of identity papers evolved, particularly in Europe. Passports and visas were required for travel. Birth certificates evolved from baptismal records into a pervasive system that came to account for most births. Place of birth was attached to nationality, and the various national identity systems, including Social Security numbers, drivers licenses, and death certificates in the United States, evolved into a system that accounts for each individual human living and dead.
The rapid rise of industrialism, including the rise of industrial methods of agriculture, and parallel expansion of the global human population, put strains on the economic systems of the Coin Age.
In a throwback to the Platonic (or medieval Scholastic) system of intellectual architectures that don't reflect reality, Gold was declared by many people to be the only "real" money. This proved to be impractical to the point of economic disaster. At times the supply of gold did not grow as fast as the economy, leading to recessions and depressions. At other times the supply of gold from new discoveries grew rapidly, leading to inflation (it took increasing amounts of gold to buy other goods like cows, houses, and services).
Next: Bank Cycles, Credit and Gold
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
We do not know exactly when in history humans began counting in earnest. We know that some animals have some ability to count, for instance to notice when a child has gone missing. We also know that most animals can see the difference between "more" and "less."
By the time of the early urban civilizations we know about (Egypt, Palestine and Mesopotamia, and China for example) counting and keeping records of counts was a well-established set of skills. Rulers wanted to know how many cows were in their herds, how many soldiers were available for battle, and whether subordinates had contributed their fair share of grain to the royal stores. Merchants needed to track their inventories, as did anyone who farmed on a large scale. This keeping of records of counts of things is the earliest manifestation of The Accounting System.
The ledger, or written record of counts, thus preceded what we now call cash and coin. Coin is generally treated as having inherent value, and for that reason tended over the millennia to standardize on three metals: gold, silver, and copper. Coin stands as a way station between bartering (directly trading one kind of good or service for another) and systemic accounting through modern record keeping.
People counted coins, and thus accounting and bookkeeping seemed to be the art of coin counting. This was the case with the improved accounting systems of early Renaissance Italy. This led to misconceptions, both popular and among the professional accountants, which persist to this day.
Counting things other than coin did not go away, but accountants and ordinary people came to start measuring all things by their value in coin. To keep his books straight, a farmer might count his cows, multiply by a set value per cow, and account for the total as an asset in units of currency.
During the Coin Age (roughly 1400 to 1900) other aspects of the accounting system evolved and expanded. People, from peasants to kings, still needed to count their things. The most important thing to count was land, but that was somewhat more complicated than counting cows or shillings. It required a title system (note the term likely evolved from titles such as duke, lord, sir, and mister) and surveys, and a legal system as well. People who lived on land but had no legal title to it lost it over the centuries. This was particularly obvious in the Americas, where the natives were dispossessed of almost all of their tribal land. Today the land title system extends to every part of the world except the Antarctic.
The human identity system also expanded during the Coin Age. We know that ancient kings took censuses of their subjects. Various forms of identity papers evolved, particularly in Europe. Passports and visas were required for travel. Birth certificates evolved from baptismal records into a pervasive system that came to account for most births. Place of birth was attached to nationality, and the various national identity systems, including Social Security numbers, drivers licenses, and death certificates in the United States, evolved into a system that accounts for each individual human living and dead.
The rapid rise of industrialism, including the rise of industrial methods of agriculture, and parallel expansion of the global human population, put strains on the economic systems of the Coin Age.
In a throwback to the Platonic (or medieval Scholastic) system of intellectual architectures that don't reflect reality, Gold was declared by many people to be the only "real" money. This proved to be impractical to the point of economic disaster. At times the supply of gold did not grow as fast as the economy, leading to recessions and depressions. At other times the supply of gold from new discoveries grew rapidly, leading to inflation (it took increasing amounts of gold to buy other goods like cows, houses, and services).
Next: Bank Cycles, Credit and Gold
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
Wednesday, April 17, 2013
The Accounting System. Introduction: why you should care
Forget the stars. The Accounting System determines your fate. The Accounting System determines whether you are born with or without money and with or without opportunity. It determines your level of childhood mortality, your schooling, your pay if you work, and the size of your estate when you die.
Fortune favors those who are favored by the accounting system. Not surprisingly, those who built the system are those most favored by it.
Within The Accounting System individual people have choices they can make, but as each decade passes those choices are narrowed for most individuals. Because The Accounting System is so complex and pervasive, the naïve may not even realize it exists. People mistake one or more parts for the whole. They may think it is neutral, a mere method certain people use to keep score, when in fact it increasingly determines your score. You score, in the simplest terms, is the money you have to spend, the things that The Accounting System lists as owned by you, and your reputation.
Unless you are lucky enough to be blessed by the System from birth, or to be selected as one of its favorites at some point in your life, it would be a good idea to learn all you can about The Accounting System. Your success or failure in life is highly dependent on how well you understand the System.
Learning is not just collecting facts. It requires assembling those facts into a mental picture that is an accurate reflection of reality. Because The Accounting System is large and complex, there are some steps that will help you learn about it. By stepping back from the system you should be able to see it in perspective. Then you should be able to see where you are in the system, and what paths are available to move to where you want to be in the system.
We will begin with the story of the development of accounting over history, a temporal perspective. That will bring up many subjects that will be developed in more detail in later chapters of this book.
next: The Coin Age
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
Fortune favors those who are favored by the accounting system. Not surprisingly, those who built the system are those most favored by it.
Within The Accounting System individual people have choices they can make, but as each decade passes those choices are narrowed for most individuals. Because The Accounting System is so complex and pervasive, the naïve may not even realize it exists. People mistake one or more parts for the whole. They may think it is neutral, a mere method certain people use to keep score, when in fact it increasingly determines your score. You score, in the simplest terms, is the money you have to spend, the things that The Accounting System lists as owned by you, and your reputation.
Unless you are lucky enough to be blessed by the System from birth, or to be selected as one of its favorites at some point in your life, it would be a good idea to learn all you can about The Accounting System. Your success or failure in life is highly dependent on how well you understand the System.
Learning is not just collecting facts. It requires assembling those facts into a mental picture that is an accurate reflection of reality. Because The Accounting System is large and complex, there are some steps that will help you learn about it. By stepping back from the system you should be able to see it in perspective. Then you should be able to see where you are in the system, and what paths are available to move to where you want to be in the system.
We will begin with the story of the development of accounting over history, a temporal perspective. That will bring up many subjects that will be developed in more detail in later chapters of this book.
next: The Coin Age
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
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