Showing posts with label virtualization. Show all posts
Showing posts with label virtualization. Show all posts
Wednesday, June 26, 2013
The Accounting System #12: Electronic Money Takes Over
previous: Unraveling in 1930 and the New Deal
But in the 1930's ubiquitous accounting was being held back by the sheer amount of human effort needed to produce accurate accountings. In addition to adding machines (bulky, mechanical predecessors to today’s electronic calculators), there was some mechanized counting and data manipulation using punch-card machines. After World War II the accounting machines used by humans to do data entry and calculation started a cycle of major upgrades. The machines now known as computers were invented during the war. The new computers could do more than arithmetic: they could be programmed to manipulate numbers and information in almost limitless ways. Starting around 1950 they became available to the largest corporations for accounting and data processing.
With the computer revolution the accounting system itself began to be virtualized. Records and programs were first kept on punch cards or punched paper tapes, then as years passed on magnetic tape, on magnetic disks, and then on hard disk drives. The rules of accounting could be written in computer programming code. Humans still made the rules, and understood the rules, but the code itself had no material substance to it at all. Accounting programming code could be printed out, or viewed on a machine, but its essence was just an arrangement of electric charges or anything else that could represent numbers and symbols.
Money — abstract, virtual, accounting money — began to be transferred between banks using electronic means, tracked by the computerized accounting systems. Various methods were used, but the important thing was that such transfers were accounted for. Otherwise someone could create (or destroy) money in an account by making a phony transfer. More directly, if the accounting system did not catch such errors or cheats, money could be created or destroyed just by changing the balance numbers in accounts.
By 2010, an American could still write paper checks, but once they entered the banking system they would be virtualized. Cancelled paper checks were no longer returned to their writers. In 2002 Germany started phasing out paper checks altogether, and other nations followed suit. An increasing percentage of transactions are done using credit cards or electronic direct transfers to and from bank accounts.
Money is now electronic, and The Accounting System, with its myriad tentacles, must be totally trustworthy or the entire global economy would be at risk. While identity thieves and computer hackers continue to find chinks in the armor of the System, so far it has been reasonably reliable. Errors in accounts are eventually detected and dealt with. People generally trust that the electronic dollars they put in their accounts will be available to withdraw and use later. Creditors, including the banks themselves, trust that they can keep track of loans and, if necessary, courts will trust their electronic records proving indebtedness. [Contracts may be on paper, and signed by human hands, especially for larger deals like mortgages, but even contracts and signatures are moving to electronic formats.]
Next: to be continued
[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 #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]
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