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

I remember the day (or really the months), back in 2008 when the ‘Global Financial Crisis’ occurred. I was a nobody working at a leading ‘enterprise risk management’ software firm – where they produce the sophisticated software that was supposed to have prevented the financial crisis. One day I overheard a financial engineer quizzing one of the many mathematicians employed at the firm. Paraphrasing, the conversation went as such: ‘Where did we get the financial model?’ –‘From Joe.’ – ‘Where did Joe get it from?’ – And so on, further down the rat hole, leading to no particular firm ground. Who was held accountable for managing risk was not at all clear. The financial engineer's question tacitly acknowledged that the software designed to manage risk was a product of human construction, not the perfect mathematics that the advertising department sold. And worse still, the financial model, or the software in general, may have been partly to blame for the crisis. Jacob Soll's The Reckoning opens with a similar story: finishing his manuscript on the French King Louis XIV's finance minister, Jean-Baptiste Colbert, Soll realized that the French empire was built on careful financial accounting, and then destroyed by ignorance of the same. The very week that Soll completed his manuscript the Lehman Brothers Bank collapsed, and Soll could not help but see parallels.

But who exactly is to blame? Perhaps we can blame the financial engineers and the mathematicians, or maybe the unscrupulous banks and hedge funds that recklessly applied the financial models – or purposely did not apply them. Or maybe the system is simply too complex – too human – to be understood and manipulated by massive calculators. On his account, Soll exonerates the ‘supply’ side; the blame falls squarely on the shoulders of reckless capitalists too immoral or too ignorant to use the wonders of modern accounting. As Soll tells it, ‘no audits were ever made’ and even though America's economy was temporarily decimated, the ‘bankers, at least, had avoided a reckoning’. The double-entendre at play is that while the reckoning of financial mathematics helped build America's wealth, its failure at the hands of bankers was never met with the reckoning of justice.

The Reckoning tells the political history of double-entry bookkeeping. In its most basic sense the double-entry system is a method to record credit and debit, often two columns separated in a ledger by a horizontal line or as facing pages. As an ideal the columns of credit and debit are in balance, plainly showing the creditworthiness and virtue of the merchant (Poovey 1998). The Reckoning traces double-entry bookkeeping from its origins in the Republican city-states of Genoa and Florence – with these cities' meteoric rise due to careful accounting and their ruin because of careless accounting. And then again and again, the same rise and fall through Golden Age Holland, eighteenth- and nineteenth-century Britain and America, and up to the success of accounting's ‘golden age’ after the Second World War and the fall in the 2008 crisis. Through this long history Soll finds evidence of the role of double-entry bookkeeping in the rise and fall of wealth and political power.

Although there are multiple origins, Soll's particular story begins in the fourteenth century with the fabulous wealth and power accumulated by Francesco Datini's use of double-entry bookkeeping, ‘a giant leather, parchment, paper, and wood computing system’. Datini's system used multiple memoranda books to record all the transactions of his life, sometimes visible to third parties for audit, and with one secret libro segreto that bound them all together – reporting the true, often untaxed, transactions of his business. Datini's wealth was built by keeping careful records and by epitomizing the kind of careful, financially-sensible work ethic Max Weber would later lionize as the Protestant work ethic (Soll notes that Datini also enjoyed his fair share of ‘slave girls, partridges, and fine clothes'). Datini also made a considerable amount of money from ‘currency exchange’, simply by bending the rules around usury, holding his virtues and sins in careful balance as though his soul was just another company to keep out of the red.

The careful double-entry accounting of Datini was developed even further by Cosimo Medici, who in the fifteenth century required a way to track complex banking practices in ‘real-time’ as money moved through various accounts and was frequently ‘offset’ (a deposit guaranteeing the writing of a check). Cosimo developed an international banking system that made money transfer possible, alleviating the need to ship precious materials for payment (avoiding the risk of being stolen or pirated). And like Datini, Cosimo earned a little on each transaction for his services, technically avoiding usury (and with handsome amounts paid to the Church, intervention in Cosimo's profit was kept at bay). Telling a tale that gets repeated throughout The Reckoning, Cosimo's sons would fail to keep good books, and, preferring the risks and rewards of political power, their fiscal ignorance eventually eliminated the vast Medici wealth. In particular, while the son Lorenzo was intelligent and had a very good education, he was poor at accounting. Realizing this deficiency, Lorenzo employed Francesco Sassetti to manage the accounts. But unable to fully understand the complexities that Sassetti managed, Lorenzo let Sassetti overleverage the bank, and as one thing led to another, the Medici wealth vanished.

The French and Spanish learned from the Italians and used double-entry bookkeeping (along with considerable military power) to rule Europe until fading knowledge of accounting proved their undoing. When King Philip II took over from his father Charles V, the Holy Roman Emperor, he was in control of much of Europe, but despite vast wealth and a complex information network, refused to do the necessary accounting. His disdain did not prevent him from realizing its necessity, however, as he hired accountants to manage his finances. Much of this expertise came from the Dutch, who eventually escaped from Philip's dominion through the same shrewd accounting they provided the empire, raising funds to pay off the war-debted Spanish (ever-spendthrift in war and poor at accounting). The Dutch would go on to use their accounting prowess to develop a single federated company to represent all the regions of Holland – the United Dutch East India Company – the first publicly traded limited liability company in history. Around the mercantile spirit of the Dutch grew accounting schools that would become influential as they trained students in proper accounting, exporting their financial expertise across Europe and the Americas.

The Dutch expertise in accounting was (literally) captured by France's Louis XIV, but when the finance minister Jean-Baptiste Colbert died, proper accounting ceased, leading to the ‘endless failures of eighteenth-century French government’ (p. 99). By Louis XIV's death in 1715, France was bankrupt. At the end of the eighteenth century, Revolutionary France stumbled again with Jacques Necker's publication of the Compte rendu, an effort to render the King's accounts open for inspection in an attempt to neutralize critics. Rather than having the intended effect, the transparency exposed the King's extravagant expenditures and led to Louis XVI's downfall.

Necker's writings would also inspire the Founding Fathers in the United States, who at one point even duplicated the strategic approach of the Compte rendu with the publication of A General View of Receipts and Expenditures by Robert Morris. As the speed of trade and the transmission of information in the USA gathered steam through the development of an efficient and massive railroad infrastructure, American accounting had to develop to accommodate the new pace of business. The necessary accounting expertise came from Britain since America did not yet have sufficient mercantile and accounting experience. Seizing an opportunity to perform the audits necessary for J.P. Morgan's massive expansion in the 1890s, the British firm Price Waterhouse took a dominant position in America. Into the twentieth century Price Waterhouse and other British and American accounting firms amalgamated, eventually getting into a lucrative business offering consulting services in addition to auditing. Offering consulting services to the firms they were supposed to be auditing inevitably led to accusations of cooking the books for their own profit, most notably during the Enron scandal at the end of the 1990s and the 2008 crisis.

Soll's book covers a lot of ground, finding double-entry bookkeeping under every rock he turns over. And the book does so with considerable style and grace, written for an informed but lay audience (similar to other nonfiction best sellers such as Diamond's Guns, Germs, and Steel or Ferguson's The Ascent of Money: A Financial History of the World). At times the message becomes repetitive, and even a bit unbelievable, as though double-entry bookkeeping is the cause behind every historical change. The overall message is sound, however: accounting is an important tool for creating and maintaining political power. But despite recognizing the tangled web of capitalism and politics, Soll never really offers a critique of these tools of capitalism, even in the face of so much suffering caused by economic and political power.

Even though Soll's avowed focus is on the technique of double-entry bookkeeping (what Foucault would call a dispositif or ‘apparatus’), he assumes that it is a neutral technology, like the proverbial gun that does no harm unless in the hands of a bad person. Soll's version would go as such: ‘Accounting doesn't cause financial and political ruin, bad accounting does’, as though you can just train ethically righteous individuals and maintain enough regulatory oversight and everything will be fine. This view of technology – and here double-entry bookkeeping really is a technology – is flawed and now out of fashion. Donald MacKenzie used financial technologies as his example in An Engine, Not a Camera: How Financial Models Shape Markets (2006) to make the point that technology is not neutral but performative. According to MacKenzie's analysis of the financial technologies of the 1980s and 1990s, the calculations for developing trading ‘insurance’ and eliminating risk were, in the words of Friedman's deeply influential 1953 work, ‘an “engine” to analyze [the world], not a photographic reproduction of it’. In Friedman's view, and those of his followers at the University of Chicago, such a failure of economic models to faithfully represent reality was not a concern so long as it got results. MacKenzie's adaptation of the Friedmanian dictum, however, sees financial apparatuses not as engines of analysis, but as engines that actively alter the markets, or are performative. As MacKenzie describes it, the performativity of financial apparatuses is due to the growth of the twins of economics ‘in the broad sense’: financial methods – first through the neoclassical introduction of mathematics, and then the introduction of computational algorithms – and changes in market players and regulators willing to accept more abstract instruments (such as the ‘collateralized debt obligations’ that are often blamed for the 2008 crash).

With some imagination, we might take MacKenzie's conclusions back a few hundred years in our investigation of the history of double-entry bookkeeping. The process of ‘homogenous abstraction’ involved in MacKenzie's example of futures markets (where the bill of lading stood in for actual goods) is equally present in double-entry bookkeeping. In some cases the act of abstraction is taken to its limit, creating processes of concealment or systematic obfuscation. Today, financial systems engage in ‘spoofing’, ‘layering’, ‘strobing’, and ‘smoking’ in response to unknown inputs fed into the financial black box (Pasquale 2015), just as the ‘true’ value of transactions were inputted in the secret libro segreto back in the fourteenth century.

Even for the comparatively simple and slow-speed accounting of double-entry bookkeeping, these technologies are not neutral. Throughout The Reckoning there are many examples of financial and political ruin, but according to Soll they are all due to human error or ignorance, as if human agency could be neatly separated from the performativity of the financial apparatuses used to manage the complexities of economics. Over and over again Soll tells us that if we are to learn from history, we need only ensure good bookkeeping for financial and political prosperity. The one exception – the only example I could find where Soll critiques double-entry bookkeeping itself – is a remarkable one. The example is so striking it seems Soll cannot ignore it: the slave trade was made possible by the accounting technologies of double-entry bookkeeping, helping abstract and reduce humans to property by inputting them into the credit and debit columns of ledgers, alongside the sale of livestock and the purchase of good wine. Soll is, obviously, abhorred by these slave traders and recognizes that double-entry bookkeeping plays a large part in this awful history, but as quick as the example is introduced it is explained away. One wonders if the other examples of double-entry bookkeeping in The Reckoning are less the neutral technologies that Soll believes, and more like those performative technologies that MacKenzie describes, making the economic processes more like their depiction by the very models, materials, and mathematics used to describe them.

ORCID

Quinn DuPont http://orcid.org/0000-0002-9376-6755

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Quinn DuPont

Quinn DuPont (author to whom correspondence should be addressed), Faculty of Information, University of Toronto, Toronto, Canada.