Financial Accounting Presentation

More Advance Praise for The Reckoning

“Packed with riveting stories of how em- pires can be so easily felled by poor ac- counting, whether through willful dis- regard (Louis XIV) or lack of training (Lorenzo de’ Medici), The Reckoning is a must read for anyone who hopes to avoid similar fates. But the book is more than a litany of woes. Every student, teacher and practitioner of finance should know this history of accounting, from its grounding in theology and philosophy to its central place in the rise of modern commerce, statecraft, and, in- deed, civilization itself.”

—Robert Bloomfield, Nicholas H. Noyes Professor of Management

and Accounting, Cornell University

“Accountability and the trust it breeds made possible business and government as we know them in the West, a history The Reckoning recounts engagingly. Yet every era’s Madoffs, magnates and mega-organizations—and, critically, their minions—subverted that relation- ship with catastrophic results of which 2008–09 is only the most recent. Jacob Soll has persuaded me that this time, it’s different: our traditions of accountability could be destroyed yielding a reckoning we cannot project.”

—Peter D. Kinder, co-author, Eth- ical Investing and Investing for

Good; co-founder, KLD Research & Analytics, Inc.

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THE RECKONING

THE RECKONING

FINANCIAL ACCOUNTABILITY and the RISE and FALL of NATIONS

JACOB SOLL

BASIC BOOKS A Member of the Perseus Books Group

New York

Copyright © 2014 Jacob Soll Published by Basic Books, A Member of the Perseus Books Group

All rights reserved. No part of this book may be re- produced in any manner whatsoever without written permission except in the case of brief quotations em- bodied in critical articles and reviews. For informa- tion, address Basic Books, 250 West 57th Street, New York, NY 10107.

Books published by Basic Books are available at spe- cial discounts for bulk purchases in the United States by corporations, institutions, and other organizations. For more information, please contact the Special Markets Department at the Perseus Books Group, 2300 Chestnut Street, Suite 200, Philadelphia, PA 19103, or call (800) 810-4145, ext. 5000, or e-mail [email protected].

Designed by Jack Lenzo

A CIP catalog record for this book is available from the Library of Congress. ISBN (e-book): 978-0-465-03663-9

10 9 8 7 6 5 4 3 2 1

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I credit this book to Margaret Jacob

CONTENTS

Introduction

CHAPTER 1: A Short History of Early Account- ing, Politics, and Accountability

CHAPTER 2: For God and Profit: The Books Ac- cording to Saint Matthew

CHAPTER 3: Medici Magnificence: A Caution- ary Tale

CHAPTER 4: The Mathematician, the Courtier, and the Emperor of the World

CHAPTER 5: The Dutch Audit

CHAPTER 6: The Accountant and the Sun King

CHAPTER 7: The First Bailout

CHAPTER 8: “Fame and Profit”: Counting on the Wedgwood Vase

CHAPTER 9: Big Debts, Big Numbers, and the French Revolution

CHAPTER 10: “The Price of Liberty”

CHAPTER 11: Railroaded

CHAPTER 12: The Dickens Dilemma

CHAPTER 13: Judgment Day

Conclusion Acknowledgments Notes Bibliography Index

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INTRODUCTION

In September 2008, just as I was finishing abook about the French King Louis XIV’sfamed finance minister, Jean-Baptiste Col- bert, I found something remarkable: Colbert commissioned miniature golden calligraphy ac- count books for the Sun King to carry in his coat pockets. Twice a year, starting in 1661, Louis XIV would receive these new accounts of his expenditures, his revenues, and his assets. It was the first time a monarch of his stature had taken such an interest in accounting. Here, then, it seemed, was a starting point of modern politics and accountability: a king who carried his ac- counts so that at all moments he might have some reckoning of his kingdom.

I was at least as startled to learn next just how short-lived this experiment was. For as soon as Colbert died, in 1683, Louis—consist- ently in the red due to his predilection for costly wars and palaces like Versailles—discontinued the account books. Rather than tools of adminis- trative success, Louis came to see his account books as illustrations of his failings as a king. He had created a system of accounting and ac- countability, and now he began breaking up the central administration of his kingdom. This made it impossible to unify the accounts of each ministry into one clear, central register, as Col- bert had done, and for any minister to effect- ively critique, let alone understand, the king’s financial management. If good accounting meant facing the truth when the news was bad, Louis, it seemed, now preferred ignorance. Speaking those famous words, “l’État c’est moi,” he apparently really meant it. No longer would a functioning state interfere with his per- sonal will. On his deathbed in 1715, Louis ad- mitted that he had in effect bankrupted France with his spending.

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Rather than some relic of a bygone age, the story of Louis’s rise and decline seemed to me all too familiar as I digested the parable of the Sun King’s golden notebooks. That very week in September, a startling parallel story was tak- ing place during the collapse of Lehman Broth- ers Bank. A monument of American and world capitalism, Lehman was suddenly exposed now as little more than a mirage. Just as Louis had held onto his power through snuffing out good accounting in his government, so U.S. invest- ment banks had made untold riches, even as they destroyed their own institutions by cooking their books through trading overvalued bundles of worthless subprime mortgages and credit de- fault swaps. A financial system, which had been deemed healthy by accountants and regulators alike, now revealed itself as dysfunctional by design.

If Louis preferred not to know, so, too, it seemed, Wall Street and its regulators had chosen to overlook the rot threatening the entire financial system. The chairman of the New York Federal Reserve, Timothy Geithner, was supposed to have at least an expert knowledge

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of the financial markets, yet he appeared not to know, or know fully, what was going on just blocks from his office. The Securities and Ex- change Commission (SEC)—whose responsibil- ity it is to enforce good corporate account- ing—was caught similarly unaware, as were the Big Four accounting firms—Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers. No one, it seemed, had effectively audited the bank’s books. They missed the barely hidden fact that Lehman Brothers used accounting fraud to manipulate its accounts and appear solvent.1

Soon after Lehman Brothers collapsed in September 2008, other American investment banks began failing, and the world financial sys- tem was threatened with collapse. In October, the Bush administration stepped in to bail out the banks and buoy the financial system. Thus came to pass the Troubled Asset Relief Program (TARP), which gave massive funds to troubled banks and put the American capitalist economy on a government life support system. By 2009, Barack Obama was president, promoting Geithner to Secretary of the Treasury. Yet, in

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spite of Obama’s claims of a new age of ac- countability, a sense of impunity pervaded Wall Street. The $350 billion recapitalization of American banks managed to stave off the finan- cial chaos that risked consuming the world eco- nomy. Yet, no strings were attached to the money. No audits were ever made to see how the banks spent it. America’s economy stumbled, but the bankers, at least, had avoided a reckoning.

Six years later, it is not just banks that are threatened by financial crisis brought on by bad bookkeeping. Leading nations—the United States, European countries, and China—find themselves facing their own larger potential crises of accounting and accountability. From opaque banks and the sovereign debts of Greece, Portugal, Spain, and Italy, to the finan- cing of municipalities worldwide, there seems little certainty in balance sheets and reports on debt levels and pension obligations. Confidence in private auditors and public regulators also lags. At the very moment we most need careful audits to assess balance sheets, the SEC remains woefully underfunded, and government

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regulation has limited the capacity of the Big Four accounting firms to aggressively audit corporations.

There has been little to no outcry over dan- gerously feeble financial accountability, private and public alike. One hears complaints about the impunity of banks, on one hand, or some ver- sion of indignation over perceived government interference with the freedom of Wall Street, on the other. Yet there has been no serious discus- sion about what exactly financial accountability is, how it works, where it comes from, and why modern societies find themselves mired in crises of not only financial but also political account- ability, as governments and citizens seem either unable or unwilling to hold corporations and themselves accountable.

The Reckoning steps into this breach, look- ing back seven hundred years into the history of financial accountability, to understand why it is so hard to achieve. Accounting is at the basis of building businesses, states, and empires. It has helped leaders craft their policies and measure their power. However, when practiced poorly or neglected, accounting has contributed to cycles

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of destruction, as we saw all too clearly in the 2008 financial crisis. From Renaissance Italy, the Spanish Empire, and Louis XIV’s France to the Dutch Republic, the British Empire, and the early United States, effective accounting and political accountability have made the differ- ence between a society’s rise and fall. Over and over again, good accounting practices have pro- duced the levels of trust necessary to found stable governments and vital capitalist societies, and poor accounting and its attendant lack of ac- countability have led to financial chaos, eco- nomic crimes, civil unrest, and worse. All this is every bit as true in our own day of multitrillion- dollar debts and massive financial scandals as it was in the Florence of the Medici, Holland’s Golden Age, the heyday of the British Empire, and, of course, 1929 on Wall Street. Capitalism and government, it seems, have flourished without massive crises only during distinct and even limited periods of time when financial ac- countability functions. People have known how to do good accounting for nearly a millennium, but many financial institutions and regimes have just chosen not to do it. Those societies that

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have succeeded are not only those rich in ac- counting and commercial culture but also the ones that have worked to build a sound moral and cultural framework to manage the fact that humans have a regular habit of ignoring, falsify- ing, and failing in accounting. This book exam- ines why a lesson so simple has so rarely been learned.

The first successful capitalist societies de- veloped systems of accounting and correspond- ing financial and political accountability. In 1340, the Republic of Genoa kept a large re- gister in the central government office. It recor- ded the city-state’s finances through double- entry bookkeeping. Accounting brought with it a fundamentally different way of thinking about political legitimacy: Balanced books equaled not just good business but also good govern- ment. At any moment, the maritime republic knew the state of its finances and could even make plans for future difficulties. The Genoese, Venetians, Florentines, and other merchant re- publics, or at least their ruling classes, could ex- pect a certain level of accountability. This was the beginning of modern government as we

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ideally imagine it: semirational, well ordered, and generally accountable.2

And yet, as successful as they were, ac- countable societies and governments proved to be difficult to maintain. In the sixteenth century, with the decline of the Italian republics and the rise of the great monarchies, the interest in ac- counting faded. Even as merchants became ever more familiar with the practice of double-entry accounting, it all but disappeared as a political administrative tool outside Switzerland and Hol- land, bastions of republicanism in a world of monarchies. At the height of the Renaissance and the scientific revolution that emerged from it, between 1480 and 1700, kings did take an in- terest in accounting. King Edward VII of Eng- land, King Philip II of Spain, Elizabeth I, the great Austrian emperors, Louis XIV, and the German, Swedish, and Portuguese kings ex- amined accounts and kept treasurers and ac- count books. Yet none managed or ultimately desired to create the kind of stable, centralized, double-entry state accounting system so care- fully controlled by the fourteenth-century Gen- oese and other northern Italian republics.

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Indeed, keeping good state ledgers implied that the king answered to the logic of balanced books. Much as they tried to reform their ad- ministrations, monarchs, in the end, saw them- selves as accountable to God, not to bookkeep- ers. This inherent conflict between monarchy and financial accountability helped cause cen- turies of European financial crisis.

Monarchs considered transparent accounting practices dangerous, and, indeed, they could be. In 1781, eight years before the French Revolu- tion, Louis XVI’s finance minister, the comte de Vergennes, found his country crippled by debt from the American War of Independence. These debts, he warned, could never be revealed, however, for publicly exposing royal accounts would surely undermine that most critical reli- gion of monarchy: secrecy. In the end, Ver- gennes knew little about finance—France was, in fact, nearly bankrupt by this point—but he was right about monarchy. Opening up the books opened the floodgates of accountability. When royal accounts and the depth of the crown’s financial difficulties were discussed publicly for the first time during political

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debates in the 1780s, Louis XVI lost part of his regal mystery. For this, and a host of related reasons, he would later lose his head.

Yet even with the emergence of nominally open, elected governments in the nineteenth century, accountability was still often unattain- able. During the nineteenth century, as England ruled its empire and was the center of world fin- ance, corruption and unaccountability plagued its financial administration. As nineteenth-cen- tury America carefully designed mechanisms of financial accountability, it, too, was mired in the massive financial accounting frauds, scandals, and crises of the robber barons of the Gilded Age. There has never been a perfect model of a constantly accountable state. Financial account- ability—both corporate and governmental—still remains elusive even in democratic societies.

Threatened by ongoing financial crisis, as we are just now, it seems altogether timely to examine the history of financial accountability. Oddly, few historians have elected do so. They have examined the financial history of nations while barely acknowledging the central role of accounting and accountability in the rise and fall

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of great nations. It would seem natural to place double-entry accounting—a true Western inven- tion—at the center of European and American economic history. The study of accounting and accountability allows us to understand how in- stitutions and societies succeed and fail at their most basic levels. We recognize that the Medici Bank, the Dutch dominance of commerce, and the British Empire were successes, yet, of course, they no longer exist. So if each one of these institutions knew massive success, it also knew great decline and fall, and accounting was central to each of these stories. Seen through the lens of the history of financial accountability, then, the history of capitalism is neither simply a history of ascent nor a cycle of booms and busts. Rather, capitalism and modern govern- ment have an inherent weakness: At crucial mo- ments, accounting and the mechanics of ac- countability break down, adding to financial and political crises, if not creating them. The success of a society, at least financially, is, in great part, the mastery of accounting, accountability, and the ensuing struggle to successfully manage them.

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Without double-entry accounting, neither modern capitalism nor the modern state could exist, for it is the essential tool in calculating profit and loss, the basis of financial manage- ment. Double entry emerged in Tuscany and northern Italy sometime around 1300. Until then, the great ancient and medieval societies persisted without it. Indeed, the advent of double-entry accounting marks the beginning of the history of capitalism and modern politics. So what exactly is double-entry accounting? Single-entry accounting, like balancing a check- book, tallies only what goes in and out of a single account. Double-entry accounting, by contrast, is a method of exacting control and ac- curately calculating profit, loss, and the value of assets. It separates credits from debits with a vertical line down the center of the page. For every credit that comes into an account, there must be a debit. One puts income and expendit- ures into each column and adds them up. Credits must equal debits. For example, each time a goat is sold, the profit goes on the left, and the merchandise sold goes on the right. Then a tally of profit or loss is calculated, or balanced on the

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spot. Once the balance has been tallied, the transaction is over, and both sides have a line drawn through them. Profit and loss are known at all times.3

Double-entry bookkeeping for capitalism can also be understood with what accountants call the fundamental accounting equation: The assets controlled by an organization are always exactly equal to the claims on those assets held by its creditors and owners. This allows busi- nesses and governments to track their assets and obligations, while preventing and deterring theft. These measures of performance—wealth and income and, above all, profit—make double-entry accounting a tool for financial planning, management, and accountability.4

The founders of modern economic thought—from Adam Smith to Karl Marx—saw double-entry accounting as essential to the de- velopment of successful economies and modern capitalism. In 1923, the pioneering German so- ciologist and theorist of capitalism Max Weber wrote that the modern firm is bound with ac- counting, “which determines its income yielding power by calculation according to the methods

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of modern bookkeeping and striking a balance.” Weber saw accounting as one of many cultural elements necessary to the growth of complex capitalism, placing it squarely among the funda- mental traits of the Protestant work ethic that he believed allowed early Americans to master capitalist culture.5

Even blunter was the influential German economist Werner Sombart: “One cannot ima- gine what capitalism would be without double- entry bookkeeping: the two phenomena are con- nected as intimately as form and contents.” The Austrian American economist, political scient- ist, and coiner of the term “creative destruc- tion,” Joseph Schumpeter, not only saw ac- counting as central to capitalism but also lamen- ted that economists had not devoted more atten- tion to it; it was only through a historical under- standing of accounting practices, he wrote, that effective economic theory could be formulated.6

These thinkers saw accounting as an ingredi- ent to economic success and a key to under- standing economic history. What they did not see, however, is how political stability is groun- ded in cultures of accountability, which rely on

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double-entry accounting systems. Double entry mattered not only for calculating profit but also because it brought with it a central concept of the balanced book, which could be used to judge and hold accountable a political administration. In medieval Italy, not only did balanced books mirror the divine aspect of God’s judgment and a tally of sins but also they came to represent sound business and good government. Of course, it is one thing to have a set of values; the challenge is to uphold them, and maintaining financial accountability was and is a constant struggle. What this book shows is that financial accountability functioned better when account- ing was seen not simply as part of a financial transaction but also as part of a moral and cul- tural framework. From the Middle Ages to the early twentieth century, those societies that managed to harness accounting and long-term traditions of financial accountability and trust did so by full cultural engagement: Republican Italian city-states like Florence and Genoa, Golden Age Holland, and eighteenth- and nineteenth-century Britain and America all in- tegrated accounting into their educational

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curriculum, religious and moral thought, art, philosophy, and political theory. Accounting be- came the subject of theological and political works, great paintings, social and scientific the- ories, and novels, from Dante and the Dutch Masters to Auguste Comte, Thomas Malthus, Charles Dickens, Charles Darwin, Henry David Thoreau, Louisa May Alcott, and Max Weber. In a virtuous circle, the elevation of practical, business-minded mathematics into the spheres of high and humane thinking allowed these soci- eties not only to maximize their use of account- ing but also to build complex cultures of ac- countability and awareness of the difficulties posed by such a culture. With this culture of ac- countability came capitalism and representative government.

The delicate interplay between accounting and accountability can decide the fate of a com- pany or, indeed, a nation. Financial history, therefore, is not only about cyclical crises or trends in numbers. It is also a story about indi- viduals and societies that become adept at mas- tering the interplay between accounting and cul- tural life, yet often lose this capacity and find

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themselves in unexpected, avoidable, and some- times cataclysmic financial crises. In this long history, accounting and financial accountability emerge as both mundane and, at the same time, difficult to control. What is remarkable is that the basic lessons of medieval Italian account- ing—that it is essential to wealth and political stability but incredibly difficult, frail, and even perilous—are still as pertinent today as they were seven hundred years ago.

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CHAPTER 1

A SHORT HISTORY OF EARLY ACCOUNTING, POLITICS, AND

ACCOUNTABILITY

[The Domesday Book’s] de- cisions, like those of the Last Judgment, are unalterable.

RICHARD FITZNIGEL, BISHOP OF ELY, 1179

The Emperor Augustus is famous todayfor his buildings and his statues and asthe rather overly modest and fatherly character found in ancient histories and Robert Graves’s novel I Claudius. He claimed to have

found Rome a city of bricks and left it a spark- ling city of marble. But the key to Augustus’s power can be found in his own account of his reign, the Res gestae divi Augusti, “The Great Deeds of the Divine Augustus” (circa CE 14). In it, he describes buildings, armies, and feats. He also includes a lot of numbers. Indeed, he meas- ured his own success by them, bragging that he had paid victorious Roman soldiers 170 million sesterces from his own coffers. Financial num- bers, the symbols of Augustus’s great achieve- ments, were taken from entries in rudimentary account books. The true founder of the Julio- Claudian dynasty and father of the Roman Em- pire linked accounting and the transparency of numbers with political legitimacy and achieve- ment.1

As is typical in the history of accounting, no one noticed. Augustus the imperial accountant is not a story anyone tells. And of all those princes and kings who followed and emulated the father of the Roman Empire, none ever copied the ex- act form of the Res gestae. Even had they known or understood the numbers from their

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accounts, few would have published them as measures of their royal potency.

Augustus came from a world in which ac- counts were accessible and even prevalent and in which a man with Augustus’s Roman educa- tion as a pater familias and patrician felt no shame in showing he knew how to use them. Yet in spite of Augustus’s use of accounting as a tool of management and legitimation, it would take around 1,700 years for leaders to legitimate their political power and actions through the publication of financial numbers from account books. What seemed good practice to Augustus and is now standard practice took more than a millennium to take hold. Accounting developed slowly in ancient Mesopotamia, Greece, and Rome until medieval Italians transformed it into double-entry bookkeeping, a powerful tool of profit for capitalist enterprise and government administration.

For thousands of years, the ancient world was steeped in accounts, but there was almost no in- novation, and few used the tools at their dispos- al as Augustus did. Single-entry accounting

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existed in ancient Mesopotamia, Israel, Egypt, China, Greece, and Rome. The Greeks, Ptole- maic Egyptians, and Arabs reached marvelous heights of civilization and mastered numbers for geometry and astronomy, but they did not man- age to create double-entry accounting, so essen- tial for the exact calculation of profit and loss.2

Ancient finance was limited to stores ac- counting, that is, basic inventorying. Max We- ber believed that this was due to a separation of business from the home and the lack of a concept of profit and of valuing the total assets of an enterprise over a period, for example, of a year. Yet despite the lack of a modern under- standing of capital and profit, a culture and mind-set of accounting did have a prominent place in ancient public life.3

In any place where records were kept, tal- lies, or rudimentary accounts, were made. In Mesopotamia, contracts and warehouse and trade records all made general tallies of ac- counts, often of the inventory of bakeries. Ac- counting was for inventorying but also for cal- culating surpluses of grain, the very dust of civilization that brought with it sedentary

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villages, farming, and markets. The Sumerians created clay tokens for accounting in 3500 BCE to represent goods shipped or received. Tokens soon gave way to flat clay tablets of written ba- sic inventory accounts, which are common among Assyrian and Sumerian artifacts. The Babylonian legal Code of Hammurabi (circa 1772 BCE) is famous not only for its “eye for an eye, tooth for a tooth” regulation (accounting in its most rudimentary form) but also for basic ac- counting rules and state auditing regulations for mercantile transactions. Law 105 stipulates that any agent who has not sealed and signed off on the reception of money may not record the transaction in his account book. The state kept an inventory of its currency holdings, which scribes wrote down in the House of Silver of the Treasury, and even kept track of grain and bread stores through basic accounts of inventory.4

Once the state became involved in account- ing and auditing, numbers and morals mixed with politics. In ancient Athens, accounting was seen as connected to political accountability. From the beginning, a complex system of book- keeping and public auditing was at the heart of

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democratic government. The Athenian treasury was considered sacred and kept at Delos under the watchful eyes of its treasurers. Humble cit- izens and slaves were educated and employed as bookkeepers. For the most part, Athenians pre- ferred public slaves as comptrollers and auditors because they could be tortured on the rack and freemen could not. There were higher officers and book checkers who oversaw public ac- counts. In contrast to oligarchies—in which the powerful few ruled and there were no systems of financial accountability—democratic Athens had systems of accountability. The accounts of all Athenian public officers were subject to audits in accordance with basic democratic political philosophy. Even members of the sen- atorial Areopagus (the high court of appeals), as well as priests and priestesses, had to make a full accounting of funds, not just of the accounts of their official business but also of gifts. No cit- izen of Athens could go abroad, consecrate property to a god, or make a will without a full public reckoning to the state before doing so. The logistae—the public accounting officers de- scribed by Aristotle in the last book of his study

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of the Athenian Constitution—audited the books of public officers and city magistrates. Before hearing any case of corruption, these accounting officers made a public audit of the books of the officer in question.5

Yet even with this system of account keep- ing and political accountability, corruption was rife, and Athenians struggled with the concept of accountability. The revered general and statesman Aristides (530–468 BCE) complained that it was considered bad form for logistae to make strict audits. A certain level of fraud was expected and tolerated, with aggressive audits seen as threatening the status quo. The historian Polybius noted that even if the state had ten aud- itors and as many official seals and public wit- nesses, it still could not ensure someone’s hon- esty. The clever, he implied, could always cook their books.6

Honest or not, accounting flourished as the basis of Roman home economics. Aristotle had a concept for the management of public fin- ances, a house or property, which he called Oikonomia, the root of the term “economics.” Oikonomia did not mean financial management

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with an eye to profit in the modern sense of eco- nomics, but rather good stewardship of govern- ment and households. The Romans adopted Aristotle’s concept, and there accounting began in private homes, where the pater familias was charged by the state to keep household books, which could be audited by tax collectors. The head of the household kept a waste book (a daily diary of all receipts), which he would, every month, enter into a register of income and expenditures, often recording future income as well as outstanding loans and debts. Bankers kept the same basic single-entry books. Bankers and sometimes citizens would have to balance their books for audits by a praetor, a city or pro- vincial magistrate.7

The Roman Republic and early Roman Em- pire were managed by a group of auditors called the quaestores oerarii, oversight officers of the public coffers. In his Natural History, Pliny states that in 49 BCE, the year Caesar crossed the Rubicon, the Roman treasury contained 17,410 pounds of gold, 22,070 pounds of silver, and in coin, 6,135,400 sesterces. Accountants in the treasury communicated with the accountants

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at the mint and their assistants to ensure that there was enough currency to pay state and most military expenditures.8

The quaestors of Rome kept the keys to the public treasury in the Temple of Saturn, now the oldest holy site in Rome, which also contained the tablets of Roman law. Scribes within the treasury also kept monthly registers of incoming and outgoing cash, with the names, dates, and types of each transaction. There were separate registers for debts and for current accounts of the military and provincial quaestors. The cent- ral accounting office—the tabularium—was overseen by a superintendent and staffed by overseers, scribes, accountants, and cashiers.9

As in Athens, state accounting in Rome was haphazard, and fraud was common. In his Phil- ippics (44–43 BCE), Cicero complained of bad accounts in his attacks on Mark Antony, known for his debts and shady financial dealings. He claimed Mark Antony had kept bad account books and, in doing so, had “squandered a countless sum of moneys” stolen from Caesar and even forged accounts and signatures. Al- though Cicero denounced bad books, Vice

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Consul Mark Antony did not go to jail. Return- ing to power later that year as part of a triumvir- ate with Lepidus and Octavius, the future Em- peror Augustus, Mark Antony hunted down Cicero and had his head and hands chopped off and displayed in the Forum. This grimly illus- trates a constant maxim: The powerful don’t re- spond well to those who call for their books to be opened.10

Yet bad accounting has a way of coming back to haunt those who practice it. Augustus in turn killed Marc Antony (whose military organ- izational skills matched his bookkeeping), took power, became emperor, and brought order to the chaotic empire and to what were now imper- ial account books. Unlike his rival, Augustus kept good account books—his rationarium. Indeed, the Roman historian Tacitus claims that Augustus kept them in his own hand, even once he was emperor (27 BCE–14 CE). They con- tained a summary of the financial condition of the empire, statistics about the military and building projects, and the amounts of cash in the provincial tax treasuries.11

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Augustus in turn used data from these per- sonal accounts to write his Res gestae divi Augusti, which was etched onto entire walls of public buildings and posted on slabs across the empire. Even with Rome’s annual revenues of 500 million sesterces, Augustus was careful to note that most of his achievements—buildings, armies, and most important, personal payments made to soldiers—were paid for out of his own coffers. He also revealed how he accounted for his personal fortune, paying towns for the goods used by his soldiers, and he revealed the sums to advertise his largesse. Thus Augustus thought actively about how to manage the empire, using his own account book as a tool for conceptualiz- ing and planning projects, as well as for propa- ganda.12

It became a tradition to publish data from the imperial account books. Although Emperor Tiberius did not continue the tradition, Caligula, of all people, published a general state of imper- ial accounts. Nero (37–68 CE), known for his particular interest in gold, named praetorian sen- ators to manage the treasury of the Temple of Saturn. There is ample evidence that Augustus’s

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office of the imperial financial secretary contin- ued working until at least the reign of Diocletian (244–311 CE).13

Although this accounting system served as a central tool of imperial management, and even legitimacy, it still had major faults. Books were kept and accounts audited, yet fraud was still expected (and systematically tolerated, espe- cially where leading figures were concerned). At the same time, the economic practices of the Roman Empire did not focus on profit and fu- ture earnings, the principal function of double- entry bookkeeping. The Mediterranean Sea sus- tained the Roman Empire by shipping and trade, yet there was no overarching concept or system by which all the practices of trade were theor- ized. Loans were instead made on a pawn- brokerage model, stunting the development of a culture of credit. Wealth in palaces and hoarded gold took precedence over the idea of wealth as investment capital for profit. In spite of a slew of practical and theoretical works, no concept of economics for business ever emerged.14

The central office of the quaestors changed over time, reflecting the interests of emperors.

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With the decline of the empire, public accounts came ever more under the personal purview of the emperor, so that, as Edward Gibbon noted, everyone would be inculcated with the notion that all “payment flowed from the bounty of the monarch” rather than from the state. Later em- perors considered the treasury sacred, and by the time of Constantine (325 CE) and his new Ro- man capital on the Bosporus, the chief of the treasury was an aristocratic count rather than a professional bureaucratic officer.15

With the fall of Rome in 476 CE, the state was shifting into the personal fiefdom of emperors, kings, and lords, which meant that it could not be audited, as these noble personages sup- planted the bureaucratic state and answered only to God. Yet even as the Western Empire crumbled, its heir, the Catholic Church and its massive monasteries, continued to administer land, goods, and payments through basic ac- counting and auditing. And with the invasion of Goths, Franks, and Vikings, new kings from Charlemagne (742–814 CE) and Emperor Otto (912–973 CE) to William the Conqueror

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(1028–1087 CE) sought again to establish a rule of law to better to extract wealth and manage their conquered lands. One of the great para- doxes of feudalism—the ever-shifting system of lords, vassals, and serfs that emerged out of the fusion of Germanic kingdoms, counties, and old Roman estate systems—is that the personal holding of public land brought about a slow but steady rise in paperwork and accounting. The backbone of the Middle Ages was not only the Christianity born of the Fathers of the Church and its monastic tradition but also the concept of taxes and property enshrined in Charlemagne’s Capitularies, his administrative records. Ac- counting remained a central tool of government, but for wealthy monasteries, Frankish kings, and lords, there would be no Augustan financial revelations.

At the turn of the millennium, as trade in- creased, so did writing, records, legal transac- tions, and the importance of accounting. When William the Conqueror invaded England in 1066, he was presented with a novel opportun- ity. Taking over the whole country in one fell swoop, he could write all feudal documents

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from scratch, giving himself dominion over the entire country without the inevitable complica- tions of the more conventional feudal model: the dynastic inheritances and marriages that broke up land holdings over time, leaving hodge- podges of disputable territories. The Norman Conquest of England, then, with its opportunity to centralize its own administrative system, brought a proliferation of new feudal land con- tracts, requiring both secular and ecclesiastical rulers to keep clearer financial records. The Domesday Book (1086), William’s personal re- cord or account of property rights, legal priv- ileges, obligations, and ecclesiastical rights, also laid out what taxes William could collect under previous royal agreements. Its title, meaning “doomsday,” very clearly equated royal audits with the final reckoning of God, claiming no one could escape it.16

In the 1200s, with a revival in trade and cur- rency flow, states and landowners began keep- ing better accounts, and handwritten records proliferated: charters and decrees, certificates, letters, writs, financial accounts, financial sur- veys and rental contracts, legal records, year-

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books, chronicles, cartularies (feudal and eccle- siastical deeds), registers (legal or administrat- ive, often held by courts and parliaments), and learned and literary works. All these bits of pa- perwork were related to the keeping of account books. Law, property, and taxes required ac- countings and records—the basis of any state in- formation network—to be recorded, collected, and stored. In England, the Exchequer, or royal treasurer for revenue, began keeping highly de- tailed accounts—called pipe rolls because of the rolled shape of parchment—that recorded in- come, spending, and fines. These were used primarily for collecting royal revenue rather than for extracting profit from investment or labor.17

State documents were kept not only in chan- celleries and town halls but also in legal and parliamentary charterhouses, where they were more open to consultation by lawyers, and in the private collections of magistrates, ministers, and princes. Manor houses, the central points of feudal lordship and the medieval economy, be- came centers of accounting. Although feudal lords had no concept of profit, they ran their

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fiefdoms to produce a surplus. It was a privilege to keep written accounts, for parchment was ex- pensive and, if done on any kind of scale, so was record keeping. Skilled scribes were few and expensive to train. Many accounts were made simply to manage the expenditures of each day and were not preserved as long-term records.18

In England, bailiffs, custodians, or legal land managers would learn basic, single-entry ac- counting, which involved tallying all quittance letters, writing the proper headings for transac- tions and property (such as horses), and making basic tallies. At the beginning, the bailiff would have to make a statement of past arrears; re- ceipts would have to be entered, as well as other forms of wealth. He would then list expendit- ures on materials not found on the estate and labor costs.19

Auditing was central to the work of notaries and sheriffs, who checked the accounts of gov- ernment officials, especially tax collectors and treasurers. The word “audit” comes from a time when rulers and lords listened to, rather than saw, their accounts. It derives from the word

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“audience,” auditio, a listening, in which a sov- ereign or lord would verify accounts as they were verbally presented. In the thirteenth cen- tury, auditing officials were called the Auditores comptorum scaccarii, the Auditors of the Ex- chequer Accounts. English state expenditures and tax receipts increasingly came under parlia- mentary scrutiny. One could go so far as to say that the constitutions of mixed government had practices of auditing built into them, as state fin- ances had to be verified by the different branches of government. However, the king’s expenditures and personal revenues, which could be enormous, often remained secret. Al- though he did present a rudimentary account of his expenditures to Parliament, this was a rare occurrence, and there was no effective auditing system. Edward III (ruled 1327–1377) stated what other kings in Europe would insist on until the nineteenth century: Kings do not render ac- counts except to God.20

All these account books and rolls beg the question: Did they at least work well? Surely a good diligent accountant, keeping daily records, should have been able to ascertain a certain

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level of mastery over accounts. This was the case in cash and inventory management, but even here, it could not be exact. Without Arab numerals and therefore fractions, there was in- ternal error built in the Roman numeral system. No matter how tenacious an account keeper was, the plethora of Xs, Ls, and Is made cumber- some numbers such as DCCCXCIII (893) and left no space for fractions. New numbers and a new method of financial accounting were needed if complex trade was to flourish and ad- vance.21

By the twelfth century, northern Italy had emerged as the richest and most populous place in Europe, dominated by merchant-run city re- publics such Florence, Genoa, and Venice. Without kings and with its nobles urbanized and recognizing the authority of city governments, northern Italy became something entirely new: a patchwork of rich city states, ruled by patrician merchants whose wealth came from trade. It was here that multipartner firms, banking, and long-distance trade developed, and with them

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the concepts of capitalistic profit and double- entry bookkeeping.

Northern Italy was influenced by its contact with Byzantium in the east. With its emperor, its court, its currency (the nomisma), and its often luxurious markets in everything from sugary currents and dates to almonds, silk, and scrolls of Greek ancient learning. The Greek vestige of the Roman Empire reminded Italians of their past and tempted them with luxury. Venice, Genoa, Florence, Milan, Lucca, Pisa, and other trading cities sent their ships of goods and built industries in a rich trade network in the eastern Mediterranean. The pope—father, Pontifex Maximus, high priest, and earthly ruler of Rome—from his court of cardinals and princes collected taxes, made law, and directed dip- lomacy from western Europe to the Byzantine Orthodox Church.

Although nominal subjects of the Holy Ro- man Emperor (a German or Austrian), Italian cities and communes were jealously independ- ent merchant republics, governed by guilds, councils, senates, and doges. Their officials, of- ten elected, acted like managers of a company

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and ruled for a fixed time and a salary.22 In this nexus of merchant cities, great strides in ac- counting and theories of state management and accountability emerged. Merchants ruled them- selves with mercantile methods. Ample evid- ence of single-entry bookkeeping abounds. In 1202, the Pisan merchant Leonardo Fibonacci (circa 1170–circa 1240) wrote his founding work on calculation, the Liber abaci. He had learned the art of the abacus and Arab numerals while trading in the Mediterranean port city of Bougie, Algeria, today Bgayet. A merchant and son of a government official, Fibonacci pro- duced a work that was more than a manual of how to calculate numbers quickly on paper. It was a set of practical instructions on financial problem solving that employed the Muslim in- vention of algebra to solve complex mathemat- ical problems, such as “How Many Rabbits Will Be Bred in One Year from One Pair (377).” It listed various problems—“Trading Pepper for Ginger,” “Three Men Form a Company,” or cal- culating exchange rates—and told how to ac- count for them.23

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Although Fibonacci was not the first Christi- an to use Arabic numerals, his work played a major role in introducing them to the merchant community of northern Italy. Only later would abacus come to mean a wooden board in which wooden counters could be moved around within slots or on beaded rods. As noted earlier, it was impossible to calculate fractions or do complex equations with Roman numerals. Arabic numer- als brought precision and speed, and the abacus method meant that mathematics could be ap- plied to practical affairs and immediate transac- tions.24

By the end of the thirteenth century, abacus schools were common in Tuscany, and a num- ber of well-known teachers, mostly from Florence, began to spread not only the ideas of Fibonacci’s book and Arabic numerals but also how to use the abacus. In 1277, an official Ver- onese document referred to the presence of a master of abacus accounting in the city, and in 1284 the government appointed a “Maestro Lotto,” a communal abacus teacher from Florence. Abacus schools became centers of practical, vernacular schooling for the merchant

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citizens of Italian republican city-states. They taught applied mathematics and other subjects, such as the alphabet, prose instruction, and the catechism.25

The medieval Italian merchants did what the ancient Greeks, Persians, and Romans, the great Asian kingdoms, and the feudal lords could not: Without fanfare or public recognition, they invented double-entry bookkeeping, making the revolutionary leap into the calculation of profit. The only explanation for this is that Italian mer- chants needed double entry to calculate multi- partner firms, equity and profits, and so, in a demand-response process, they developed it. Al- though we do not know for sure who first did it, Tuscan merchants began developing double- entry bookkeeping. The records are of some de- bate, but the earliest recognized use of double entry appears in the documents of the ledgers of either the Rinieri Fini brother firm (1296), which traded in fairs across Europe, or the Farolfi merchant house (1299–1300), which traded between Florence and Provence. Rather than a simple ledger, the Farolfi archive exposes something extraordinary and modern: a system

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of books designed to compute business transac- tions and holdings in real time. Cross-referen- cing debits and credits shows that they were in- deed offsetting each other. Not only that, the Farolfi ledger records prepaid rent as a deferred expense, thus conceptualizing it in the manner of double entry. Sixteen livres tournois were paid for a house four years in advance. At the end of the first year, £4 were written off to the current expense account, and the remaining bal- ance of £12 was left on the books as a deferred charge to be dealt with later.26

Aside from these ledgers, there is no single text or moment when double-entry accounting emerges. No single figure seems to have inven- ted it. There are, however, some basic theories as to why it did happen in Italy around 1300. The use of Arab numerals is one reason. Moreover, as trade grew, more capital was needed, and partnerships were formed. The me- dieval accountant began to see bookkeeping not as a measure of holdings, but as a way to calcu- late and distribute equity among investing part- ners. Merchants used accounting not only to keep tallies of income and expenditure but also

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to unite and calculate the accumulated profits that were claimed by investors. Without double entry, growing shares of profit could not be measured: Only complex accounting could cal- culate equity in parts over time. The need to both receive and give credit worked the same way: If a debt was paid back over time in in- stallments, double entry could show how much was due at any given moment.27

The expansion of trade meant that merchants could no longer always accompany their goods and so relied on agents. As goods left the store- house, double entry measured that as a loss while awaiting confirmation of income from their sale. Only through the balancing of debits and credits could the action of sending goods out and receiving income for them be tallied.28

The earliest double-entry accounts were in paragraph form, and the credit and debit para- graphs were corresponding. Later, these para- graphs became bilateral, meaning written in two side-by-side columns, with pure numbers repla- cing paragraphs and descriptions. One of the earliest examples of double entry is the 1340 ac- count of the Genovese merchant Jacobus De

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Bonicha, kept in the state’s central ledger for their transactions in the lucrative black pepper trade. This entry is from a ledger that is the earliest known extant major government ac- count book kept in double entry. That it ap- peared in Genoa should not be surprising, given that city’s merchant marine and rich trade with Byzantium. It gives a sense of what early double entries looked like with bilateral form and the matching totals.29

Although bankers were far ahead of states in bookkeeping practices, the Genoese figured out how to use double entry to manage and record the city’s rich financial transactions, from tax receipts and state expenditures to the loans and debts of the state, along with payments to sol- diers and the personal account of the doge. Like a business, Genoa lent money and held trade ac- counts for which it made investments and recor- ded not only expenses but, most significantly, a profit-and-loss account. The city’s ledgers con- tain detailed accounts for goods like Chinese silk and pepper, as well as customs receipts. Not only were accounts balanced according to the strict rules of double entry but also state

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accountants gave actual book references, com- plete with page numbers, to where each transac- tion was first recorded before being entered into the main ledger. Every year, the main ledger was closed, and continuing transactions trans- ferred to the new ledger.30

The ledgers of the stewards of Genoa were not just for financial calculation and record keeping: They were designed for internal ac- countability. Fraud in financial statements was a

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continuing problem. The stewards, therefore, ordered that all transactions had to be recorded with a notary as witness; they allowed no eras- ures, and all pages of ledgers had to be numbered and verified before any transactions could be put in them. Most important, this sys- tem of financial auditing was made official in 1327 by a law called “About Ledgers to Be Kept After the Manner of Banks,” which man- dated that all business of the commune be recor- ded by two official accountants and audited an- nually by the city government.31

Students of modern finance and government should marvel at these books. They are clear, their numbers balance, and they have internal checks for fraud. Here was a system of account- ing and accountability far beyond what the an- cients had developed. Yet, as innovative and ef- fective as this system was, it did not extend bey- ond Renaissance Italy. The great monarchies of the north would be very slow to adopt the ad- ministration of the old mercantile republics. It would take six hundred years before double entry would be used again as a management tool for central state ledgers and audits of combined

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state finances. Before European governments would effectively use accounting, medieval and Renaissance thinkers would have to strike a bal- ance between the necessity of financial order and the perceived Christian immorality of counting money.

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CHAPTER 2

FOR GOD AND PROFIT: THE BOOKS ACCORDING TO SAINT

MATTHEW

Deus immensus est (“God is bey- ond measure”).

FULGENTIUS OF RUSPE, 533

On January 10, 1383, Francesco Datinireturned from the papal city of Avignonto his home in Prato, north of Florence. Like many in the growing class of wealthy Tuscan merchants and bankers of his time, Dat- ini had grown rich by trading with the papal court. He dabbled in currency exchange, dealt

arms and armor during the Hundred Years’ War between the French and English monarchies, and invested in the wool trade, which made for- tunes for sharp-eyed merchants from England, Castile, Flanders, Champagne, and Florence. Overcoming the perils of international trade with returns of around 9 percent, Datini man- aged his affairs so well that, in spite of his mod- est demeanor, his neighbors knew to call him il ricco, “the rich,” though the local tax collectors could not find any of it. “We do not know [his wealth],” they said, puzzled, “but God does.” Datini was modest, pious, and disciplined. Most of all, he was a good accountant. And yet he was preoccupied by the thought that his very skill in making profit was a sin.1

Three years after returning to Florence, in 1386, he declared all his possessions in Prato to be worth 3,000 florins. The tax collectors wisely assumed that the bulk of his great wealth was invested elsewhere, but if they could not find it, they could not tax him. At that time, a pig cost 3 florins and a good riding horse between 16 and 20, a maid’s wages were 10 florins a year, a fe- male slave (one of which Datini owned and with

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whom he had his only recognized child) cost between 50 and 60 florins, and a crimson robe, like the one in which Datini was painted, cost 80. Datini built himself a house in Prato, mar- ried, and in 1389, moved to Florence to continue business. He dealt in art and was painted numer- ous times in his red robes, most notably as one of the “honorable men” in Fra Filippo Lippi’s masterpiece, the Madonna del Ceppo, which is still housed in Prato’s Civic Museum. When he died in 1410, he left a fortune of about 100,000 florins, a king’s ransom.2

In 1383, as today, it took particular skills to get rich. Less than forty years after the Black Death that carried off half the population of Europe (and both of Datini’s parents), and with trade routes plagued by brigands and pirates, there was nonetheless an economic boom, much of it centered in Northern Italy. By the 1340s, the Italians had invented double-entry book- keeping, the bill of exchange, and marine insur- ance, and they had perfected payments by book transfer, note, and oral agreement. It was here that money and wool passed, via England, Flanders, and Castile. Florence was the great

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center of banking, famous not just for literary figures, such as Dante, but also for the florin it- self, the city’s little “flower.” The size of a nick- el, with the lily of Florence on one side and John the Baptist on the other (no king’s or em- peror’s head adorned a coin of the republic), the florin was 3.93 ounces of twenty-four-carat gold and then, as today, a valuable coin. To protect it from theft via clipped or shaved edges, florins often circulated and were exchanged in offi- cially sealed leather bags. The florin was so highly valued that Florentine bankers made it the standard currency across Europe.3

Datini made his first fortune in Avignon, trading and banking for the papacy there. Much early bank activity took place around the papacy and its court, which received massive tithe and tax funds and needed the money transferred, ex- changed, and then deposited. The greatest for- tunes of the Middle Ages, those of the Florentine bankers Peruzzi and Alberti, had been made, in part, by catering to the needs of the papacy. The new tools of credit and ex- change allowed members of the papal court to make handsome profits through banking and

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interest and to transfer their wealth to their fam- ilies. In Avignon, Datini was a minor merchant, earning with his partner 10,000 florins on an ini- tial investment of 800. What made Datini rich was his capacity to engage not only in banking but also in all sorts of international trade, which flourished around the papal court. Datini sold armor, cloth, slaves, spices, wine, and olive oil. When his daughter Ginevra married in April 1399, the sumptuous wedding dinner included more than fifty dishes for each course of the meal, including pastas, veal, pies, ducks, and pi- geons. All were listed, accounted for, in his books.4

Datini’s archive still exists. At his death, he left 124,549 business letters and 573 account books and ledgers that are still preserved in the Prato Museum, the biggest personal financial archive of the Middle Ages. In minute detail, it reveals medieval Italian life, how complicated business was, and how keeping double-entry books required immense skill. It contains lists of expenditures on household goods such as food, clothing, slaves, dogs, marmosets, and pea- cocks. All his personal holdings were

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inventoried, from furniture to an extensive col- lection of jewelry, right down to the cost of wine (local red wine was one lira a bottle, or twenty silver pieces).5

Datini’s business sense is surprisingly famil- iar, considering that he died more than seven hundred years ago. His success came from ac- quiring investment capital through partnerships. He himself invested little of his own money but was able to attract partners and investors. Only through expert accounting could this be done, for each arm of the business required not only basic accounting but also the calculation at any moment of each partner’s and investor’s equity and share of profits. Each partner’s share and fi- nal dividend was proportional to his investment. Some investors received fixed interest rates of 7 or 8 percent.6

In Datini’s day, double-entry accounting re- quired discipline and mathematical skill, as well as the ability to handle numerous books and to record, analyze, and transfer information between them. To modern eyes, Datini’s system is like a giant leather, parchment, paper, and wood computing system. Datini’s method would

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be described by accounting manuals only a cen- tury after his death. Later Dutch painters would illustrate the practices described by Datini. Marinus van Reymerswaele’s Two Tax-Gather- ers (circa 1540) shows account books, scraps, rudimentary notebooks, and wooden boxes to hold papers. Many of Datini’s books were kept not only by his chief manager, Cambioni, but also by himself, in his own hand, and bore his trademark.7

The process of accounting began with writ- ing down the day’s transactions—intake and outlay, notes, receipts, and bills—in books called Qaudernacci di Ricordanze (memoranda books), which were a mix between scrapbooks and notebooks. Also recorded were the transac- tions of daily life, such as the purchase of a slave, a good dinner, a cymbal for Datini’s daughter, a dog, spectacles, and a mule. Datini would then enter this scrap information into a more orderly, chronological list in books called Memoriali. All transactions were then put into double-entry form in handsome leather-bound libri grandi, the main ledgers. These sets of books existed for each of his companies, and the

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first page of each ledger always contained a reli- gious formula: “In the name of the Holy Trinity and of all the Saints and Angels of Paradise” or, more fittingly, “In the Name of God and Profit.”8

For his companies’ daily transactions in petty cash, Datini kept books of debit and credit, as well as accounts for debts. Due to the com- plexity of all his companies, dealings, and trans- actions, the integration of all these books was central to managing “the great cash-box” of his company. Other books held his inventories from warehouse stocks, real estate holdings, salaries, and the accounts of his cloth-making industry in Prato. Finally, there were his personal house- hold books, which recorded the expenses of sheets, candles and coal, food and domestic salaries, and Datini’s staggering expenditures on fine clothing. The one book that bound them all was his secret book, the libro segreto. All medium-size and large-scale merchants kept these secret books, which were part account books, part diary—a safe place of open confes- sion about finance. It was here that Datini recor- ded the true (and often untaxed) transactions of

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the business. A libro segreto listed all deeds, shares and debits of each partner in a firm, and more personal, diary-like entries recording the birth of children, the lives of ancestors, and daily thoughts. There was no more personal text than this, encompassing the universe of profit and those things that connected one to God. One major set of entries listed Datini’s expensive, il- luminated prayer books, his very generous gifts to the church, and his alms to the poor. A por- tion of his profits went to the church, and any time he bought himself a luxury, like herrings, oranges, or wine, he gave a portion to an alms- house or a monastery. The libro segreto also contained the final tallies of a company, which might be different from the public tallies of the main ledger.9

The scope and number of Datini’s books are overwhelming. To keep them was a herculean task requiring personal and managerial discip- line. Datini enjoyed his wine, fine clothes, part- ridges, jewelry, and his slave girl, but he also worked methodically. He wrote to one of his business managers, warning him to think day and night about the work at hand and to

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constantly take notes and keep books as remind- ers.10

Datini had nightmares about his home fall- ing down and his business ventures collapsing. The pressure, he wrote, was “vexing.” To stay on top of his business, he needed good books, but he could not simply order his employees to keep the necessary records. He maintained dis- cipline by punishment. He fined clerks who failed to write the amount in the book before physically accepting money. For each entry er- ror, a clerk was fined one soldo. Datini was con- vinced that ten soldi in fines would provide a permanent cure to bookkeeping error. This pun- ishment had a religious, penitential aspect. It was, he wrote in his diary, “a blessed rule.” Indeed, such techniques seemed to have worked, for all evidence points to Datini’s fortune being made not in a single giant deal, but in small in- crements. The details mattered.11

To see all of Datini’s books together is to see the birth of modern finance and the information age. Datini’s books make him familiar: a busi- nessman of numbers, data, and paperwork. Max

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Weber is famous for claiming that capitalism grew out of the Protestant work ethic, based on self-discipline and what Sigmund Freud called delayed gratification, the control of the pleasure principle. But Datini shows that, in spite of his taste for slave girls, partridges, and fine clothes, the original capitalist work ethic of Western Europe grew from this disciplined, fearful, saint-loving, Catholic, Italian world of trade, with its connections to Byzantium and the Otto- man Empire. The Italians invented complex multipartner firms, banking, and double-entry bookkeeping, which required an iron work ethic. Datini described the work of one of his partners in Avignon, Boninsegna di Matteo, as doing nothing but read and write in his books, and, Datini assured, he would “not get up from his chair until all is done.” The model was simple. One had to enter everything faithfully into ac- count books and keep clear tallies. And one had to worry all the time and be vigilant. In 1395, Datini wrote to his wife that he was so over- whelmed by his business that he worried he was losing his mind. Worry drove Datini to work, and keeping good books kept things in order.

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One of Datini’s managers, complaining that he had not slept an entire night in two years, scoffed at those who told them to “take pleasure lying in a warm bed.”12

In spite of his own rigor, Datini was always surprised by how few merchants used double- entry accounting. One would assume that many who did business with him saw him keeping his books, for his memorandum book was open and used during transactions. On his return to Prato, Datini complained to his friend Stoldo di Lorenzo that other merchants in his hometown did not keep books, instead trying to remember their affairs. “God knows how they manage!”13

Although Datini knew that double entry was the primary tool for accuracy and control, many around him ignored the method. The pharmacist of Prato, Benedetto di Tacco, used a rudiment- ary bookkeeping system: a ledger and a supple- mentary book. In his main ledger, he posted re- ceivables and payables, recording debts owed to him by 106 persons. In a smaller book, his libri- ciuolo, he wrote out transactions in detail, such as the sale of sheepskins for one soldo and four denari. Di Tacco then transferred the sum of the

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transaction to his ledger. He closed accounts by crossing them out. He also mentioned tabulating accounts on an erasable blackboard or, as others did, on loose pieces of paper and in other books, long lost. Di Tacco used accounting, but without double-entry bookkeeping, he could not keep truly accurate tallies, and his calculations were not as accurate or complete as Datini’s. He used the method of basic accounting, but he used it haphazardly, as a system of recording. Many merchants did manage to run successful busi- nesses with single entry and accounting by memory. But Datini knew that a large-scale en- terprise such as his was impossible to run without the data management tools of his book- keeping system.14

Datini was constantly reminded that his pro- fession and the act of accounting were frowned on. Much of banking went against the canon laws of the church, which, although very flex- ible in enforcement, nonetheless condemned money lending. A good Tuscan, he was both pi- ous in his religion and hard-nosed in his quest for wealth. His motto “For God and Profit”

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attempted to marry two concepts—one old, one new—that did not go well together.

Although it is hard to imagine today, guilt weighed heavily on medieval bankers and mer- chants. Saint Ambrose (337–397) had warned that usury—lending at interest—and taking more than one was given was a sin. The third Lateran Council of 1179 denied Christian burial to usurers: usury was tied to the capital sin of greed and considered the same as robbery, ly- ing, violence, and harassment. Dante character- ized moneylenders as thieves who reduced hon- est folk to poverty. In the Inferno, he described usurers as obsessed with the money pouches hung around their necks. Jews were allowed to lend money at interest, but the Old Testament limited them to lending only to those outside their community. In any case, they were forced into a profitable yet hated role.15

As always, church moralists looked for ways around the ban. Thomas Aquinas had made ex- ceptions with the concept of the “just price,” which allowed merchants to charge for dam- ages, whatever those might be. Words could be defined in so many ways, which was and is the

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reason to have a good lawyer. A well-known preacher of Datini’s time, Fra Jacopo Passav- anti, complained that money lending was con- cealed by words like deposit, saving, purchase, and sale. Whatever the commerce of money was called, Passavanti warned, it was “abominable.”16

Merchants and often the church found ways of skirting the usury laws. Datini made money from currency exchange, the basis of medieval banking. A banker would give a note that could be exchanged for foreign currency in Paris, Lon- don, Geneva, or Bruges. The exchange rate was calculated to be favorable to the lender. In es- sence, it was lending for interest, which went against canon law. In any case, the church needed to borrow money, and rich prelates needed sure places to invest and store their wealth. Cardinals and indeed popes had no problem giving money to a banker for dis- crezione, which meant that the banker could give the depositor a discretionary return, or gift—in reality, interest. The sum was decided according to bank profits, and some years it was not paid, but there was little ambiguity. Bankers,

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like Datini and the Medici, had many busi- nesses, and lending for interest was one of them.

Profit was a problem for medieval mer- chants who sought both wealth and piety. Medi- eval Italians kept account books while never forgetting that, in the end, no mortal can make the final tally. That is God’s work. But one could try to do good works, and to have a sense of where one stood in God’s judgment, one could still make a tally of one’s sins and good works. Indeed, the church would help them do it. Guilt was intertwined with accounting, to the point where it became essential to its development.

Datini did not believe he was making money for God, and he stated as much in his letters. He tallied both his wealth and his sins, as well as the debt he believed he owed to God. Only at the end of his life did he connect them. Paying back moral debts was called penance, and it in- volved a kind of accounting. Before double entry emerged, accounting went hand in hand with a culture of keeping moral accounts. It was the very essence of spiritual life. Medieval Christian attitudes toward wealth help explain

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why, in spite of its force, some kept books, yet others questioned and even rejected doing so.

Religions are based on covenants. Humans must make offerings to the gods or God, and if they forget or neglect to do so, they will be pun- ished in a moment of cosmic reckoning. The prize is not profit, but mortal life and the eternal life of the soul. In polytheistic religions, a lack of offerings could bring down direct punish- ment, such as the flood of Gilgamesh. For the Hebrews, Abraham made a covenant with God, but so did Moses; in the tablets of the Ten Com- mandments that Moses brought down from Mount Sinai, God had set out his rules for hu- mankind, and if they did not follow them, they would be punished. The Torah and its complex legal code was a model for moral accounting. Believers would have to identify what God ex- pected of them through moral and spiritual ac- counting. Talmudic law has a moral debt coun- terpoint for every action.

Yet it was not clear if good Jews and Chris- tians should strive to keep good books. Could humans keep order in their affairs? Or is it pointless, when God is keeping books for them?

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In the end, it is God who keeps the book of life with the names of the righteous and a book of death with the adversaries of God.

With a fusion of Hebrew, Greek, and newly Christian traditions, Saint Matthew brought the culture of accounting into Christianity. Yet Mat- thew’s message is not entirely clear, either. He claimed that the righteous should keep good, honest books and not waste money, but he also advocated a rejection of Mammon and its earthly temptations. Matthew (also known as Levi) was a Jewish tax collector for King Herod and the Romans. Jesus invited Matthew to fol- low him from his tax booth to a feast and a con- version. Jesus defended the conversion, saying that he had come “not to call the righteous, but the sinners” (Mark 2:17). Jesus saw the useful- ness of Matthew’s training in mathematics and accounting and his knowledge of multiple lan- guages. Matthew had skills other apostles did not have. Matthew became one of the twelve apostles of Jesus, the first evangelist, and the patron saint—to this day—of bankers, tax col- lectors, accountants, and perfumers (he is

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supposed to have turned his wooden staff into a perfumed fruit tree).

Medieval and Renaissance artists represen- ted Matthew with the tools of his trade: either his Gospel book or at the counting table. His role was that of a tabulator of money or par- ables. The images were comparable. Caravag- gio’s The Inspiration of St. Matthew (1602, Church of San Luigi dei Francesi, Rome) shows Matthew writing the Gospel, which also re- sembles his activity at the counting table. Other artists portrayed him holding an account book or sitting at an accounting table.17

Matthew was a reminder that wealth had to be handled honestly, but that it was also earthly and potentially a sin. In his Parable of the Talents, he exhorted the faithful to make profit with money through hard work. Debts should not be forgiven if they are not reinvested well. A man going abroad gave his servants his goods to hold and manage during his trip. His most sloth- ful servant took the talents (gold coins) and bur- ied them. On his return, the man chastised him for not investing them to create more wealth: “Thou shouldst therefore have entrusted my

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money to the bankers, and on my return I should have got back my own with interest.”18

Matthew was not clear on whether it is man’s duty to create bounty on the earth. He warned, “You cannot serve God and Mammon.” Humans were supposed to work hard, make money, but recognize that in the end, it was only Mammon, or sinful greed. Over and over again, Matthew insisted on the separation between the earthly world of sinners and the true nourish- ment given only by God: “Not by bread alone does man live, but by every word that comes forth from the mouth of God.” Matthew set the dichotomy that Augustine would later develop into an antimaterialist spiritual vision: “Then saith he unto them, Render therefore unto Caesar the things that are Caesar’s; and unto God the things that are God’s.” The lesson is a confusing one. The medieval church may have coveted talents, but it preached against Mammon.

Perhaps Matthew, with his use of accounting parables and metaphors, inspired John of Pat- mos to write the apocalyptic and graphic Book of Revelation, which discussed in detail the

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books of life and death. God had account books. He decided who lived and died, and he made the final tally of those who went to heaven and those who were cast into hell:

And I saw the dead, small and great, stand before God; and the books were opened: and another book was opened, which is the book of life: and the dead were judged out of those things which were written in the books, according to their works. (Rev. 20:12)

And whosoever was not found writ- ten in the book of life was cast into the lake of fire. (Rev. 20:15)

The use of accounting metaphors in Christi- an thought persisted. In the early 400s, Augustine—the prime father of the medieval church—described Christ’s redemption of hu- manity in terms of a balanced account. For Augustine, Christ was a merchant who bought the rebirth and eternal life of humanity: “To pay

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the price of our ransom he stretched his arms on the Cross.”19

A former professor of rhetoric, a devotee of wine and brothels, Augustine came to preach a puritanical rejection of the fleshy world he once inhabited. With his Manichaean vision of flesh and earth as evil and only the spiritual as good, he demanded that believers turn away from earthly knowledge and the great science of Aris- totle. Instead, it was to the City of God that hu- manity should turn, and there they should invest themselves and begin paying their outstanding debts for sin and the blood Christ spilled to re- deem them.

In the period following the Black Death, in a world steeped in piety, the idea that God did the final reckoning was central, and the images of revelation were not so fantastical. In the De- cameron, Giovanni Boccaccio described how the plague had swept through Florence in 1348, shattering the well-managed and rich city and leaving its streets piled with the dead. Those who fled, he wrote, hoped that the dead had re- quited humanity’s debt to God. Life, Boccaccio

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reminded his readers, was fleeting, and death, above all, ever present.20

When Datini wrote to his wife about the ap- proaching plague from the east, there was a real sense of helplessness in the face of the wrath of God. Francesco Traini’s fresco the Triumph of Death (circa 1350) in the Cathedral of Pisa, painted during the period following the Black Death of 1348, illustrates the mind-set that as much as humans try, they cannot escape death. Images like this, along with regular sermons and the great literature of the time, show humans in a helpless state. Especially in Florence, where great writers like Dante and Boccaccio memori- alized fleeting life and the price to be paid for human imperfection and sin, all knew that they would have to leave the inferno and climb the mountain of purgatory, suffering for their sins before reaching paradise at the top. The trip had to be made, Dante wrote, for this was part of God’s reckoning:

But I would not have you, reader, be deflected from

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your good resolve by hearing from me now

how God would have us pay the debt we owe.

Don’t dwell upon the form of punishment:

consider what comes after that; at worst it cannot last beyond the final Judg-

ment.21

By the 1300s, faith, good works, and sin had been placed squarely in an accounting meta- phor. The debt “owed,” as Dante put it, could be paid, for the church began to devise ways to change the tallies in God’s books even before one had begun to climb the mountain of purgat- ory. True believers had to confess their sins and, once the tally was made, they would have to balance their moral books by penance, paying God’s debt either with good works or, paradox- ically, as Luther would later complain, with money. The church was everything—a font of spirituality, a diplomatic organization, and a money machine—but one always tightly inter- twined with spiritual, legal, and ethical

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concerns. Accountants filled the halls of the papal palaces, where numeracy became a meas- ure of holiness as true believers paid cash sums for indulgences for their sins.22

Datini paid, too, not only by doing penance but also by leaving much of his fortune to the poor. In this way, his profit and his system of tallies fit into this world of moral record keep- ing. With the plague, the Hundred Years’ War, and the schism of the papacy between Rome and Avignon, there was a sense among thinkers of the church that penance could provide solace to the unrelenting terror of death and an uncertain afterlife. Indulgences—remissiones, absolu- tiones, or relaxiones—translated into lessening the time a person had to spend in penitential acts or prayers in order to cut time spent in purgat- ory. The church could use its powers to inter- cede on behalf of individuals.23

The Christian concept of accounting was more profound than the simple payment of debts for sin. Christ’s blood was seen as a treasure spilled to save mankind, and as Saint Peter taught in his first epistle, Christ used this blood to ransom humanity from the evil one. The

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French Dominican Cardinal Hugh of St. Cher (1200–1263) believed that this blood was “stored in a cask in the treasury of the church, the keys of which belong to the church.” Only the church had the keys to open this treasury and to wash mankind of its sins. The “copious flow of Christ’s blood won for the Church” was an “inexhaustible fund of merit” on which hu- mans could draw for salvation.24

Most Christians came into contact with the concept of accounting through the idea that Christ’s account of blood, along with good works and penance, could balance out sins in exchange for an afterlife with limited time in purgatory. Moral credits, debits, and balances were all necessary for salvation. Praepostinius of Cremona, chancellor of the University of Par- is from 1206 to 1209, went further, claiming that those who paid money for absolution would receive remittance. The debt to the treasury of sin could now be paid in silver and gold. While Protestants would later complain that medieval tradition brought a foreign mercantile element into Christianity, the Old Testament, Matthew, and Augustine show that it was always present.

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It was based on the central idea of redemption by payment in Christ’s blood and the prayers of the faithful.25

As Datini’s case shows, the very idea of the debt to God and fears about the final reckoning inspired a consciousness about personal ac- countability. Indeed, Datini struggled with the conflict between God and profits to the very end. Every day Datini entered his profits into his books, and every day, he believed, they pushed him further from God. By the 1420s, Bernardino of Siena would preach that those who obeyed their parents would be rewarded by wealth from God and that those who didn’t would suffer poverty. Yet Datini did not feel that his good management brought him closer to God. His good management was, in part, money lending. Indeed, he admitted he engaged in usury, which he knew to be a sin, and he worried about it.26

The fact that his books were so balanced in his favor meant that his debt to God only grew larger. Thus Datini’s account books not only measured his profit but also that which he had to pay back to God for his sins. While Datini was not particularly pious, he looked for ways to

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repay his debt to God. After hearing a Lenten sermon in 1395, he wrote to his wife, “I have sinned in my life as much as a man can sin, for I have ruled myself ill and have not known how to moderate my desires . . . and I pay the penalty gladly.” Like others of his time, he feared the last judgment and—inspired by the horrors of the plague, which in 1400 was again approach- ing Florence and ravaging eastern Europe—he joined the penitential pilgrimages of the Bianchi for ten-day marches and processions, barefoot in white robes with hoods.27

Furthermore, monks had urged Datini to leave his fortune to the poor. Against the plead- ings of his friends, who warned that all he was doing was making the bishop of Pistoia rich, Datini left his money to the clergy of Prato to pay them to do good works, such as succor the sick, find husbands for poor women, and fight poverty. He insisted that his business friends ex- ecute his will so that the money would go only to help the poor. Following his orders, his massive fortune, 100,000 florins, was used to found a hospital for the poor, the Casa del Ceppo dei Poveri di Francesco di Marco. In the

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Museo Civico of Prato, Fra Filippo Lippi’s por- trait of Datini in his painting Madonna del Ceppo (1452–1453) is still vivid. More than six hundred years later, Datini’s children’s hospital also exists, and over its old door is an inscrip- tion calling Datini, “The Merchant of Christ’s Poor.” Today, the city of Prato still holds a mass in honor of his birthday. But in the end, in his dying moments, Datini found it strange that he should have to die. For all his piety and his rich offerings to God, Datini, the devoted account- ant, found God’s reckoning hard to accept.28

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CHAPTER 3

MEDICI MAGNIFICENCE: A CAUTIONARY TALE

It is a good sign if merchants have ink-stained fingers.

—LEON BATTISTA ALBERTI, 1437

Florence is an odd city. In the right light,with dry air in a late afternoon, there is nomore beautiful place on earth. The heavy stones give off a rosy hue, and its mixture of hu- midity and dryness can, on a hazy day, make the city seem like it is floating up to the glorious hills that surround it, to the earthly paradise of Fiesole. But there is another side to Florence, a

harder side. It comes in the unrelenting heat of summer, when Florence sits, without a wisp of wind, in the valley, which both cradles and im- prisons the city, leaving it fetid and humid. And then it comes for a brief, angry moment in winter, as winds and rains blow down from the hard hills of the Mugello in the northeast, with its dark forests full of wild boars, the birthplace of the Medici. When the weather blows from the Apennines, the stones of Florence turn black and seem to exude the harshness of coal. The cold is wet and unshakable, and the only escape is behind the foreboding stones, near raging fires, where succor is kale and bread stew and Chianti. This duality of beauty and brutality de- scribes the Medici.

To understand the dual nature of account- ing—a force for achievement and a possible trap—it is necessary to understand the Medici, their relationship to Florence, and their determ- ining influence on the history of finance and Western culture. It was in Florence that the Medici showed the power of good finance but fell prey to the temptations to ignore accounting. The great masters of the Medici bank used

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accounting to create a financial machine that al- lowed them to dominate their age, both cultur- ally and politically, like no family before them. Yet one generation later, they almost lost it all, not simply by bad accounting, but because they no longer considered accounting as an essential branch of knowledge for themselves and their heirs. The greatest irony is that, in the end, the Medici no longer depended on banking for their power. The change was not necessarily by choice. The fact is that the great Medici ran their bank into the ground.

Cosimo de’ Medici (1389–1464) was a hard- nosed banker. Known as il vecchio, the elder, and, after his death, as pater patriae, father of the nation, he was the son of a medieval banker. The Medici were a leading family of Florence, and Cosimo’s father, Giovanni di Bicci de’ Medici, had held the more-or-less honorary title of gonfaloniere, temporary standard-bearer and high magistrate of the republic. Though mem- bers of an ancient and important family, they were not Florence’s richest or most prestigious citizens. They earned their wealth through

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shrewdness and, like all successful bankers be- fore them, by doing business with the papacy. Cosimo’s father earned a great fortune, leaving more than 113,000 florins at his death, more than Datini’s legacy.1

If Cosimo’s father made the Medici rich, Cosimo made the bank into an international su- perpower and became the richest man of his age in all of Europe. The Medici’s carefully collec- ted riches would be used to pay for the artistic glory of the Florentine Renaissance and the political power of the Medici themselves. Thus the glories of the Renaissance would sit on the mundane foundation of good bookkeeping. Cosimo conceptualized, sponsored, and even in- spired the classical Renaissance as its chief de- fender and patron. But even as he built a new world around himself, he kept many of the habits of his father, the medieval merchant.

Cosimo, too, was born in a golden age, for in many ways Florence at the beginning of the 1400s was the center of Christendom, and in terms of trade, finance, and learning, it was the center of the world. Chancellor of the Republic Coluccio Salutati (1331–1406) was a recognized

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Renaissance scholar himself, who declared his age to be golden when he asked, “Ubi Dantes? Ubi Petrarcha? Ubi Boccaccius?” Where else Dante, Petrarch, and Boccaccio? These defining writers of their time not only established Tuscan as the dominant vernacular Italian dialect but also invented modern literature and humanist studies. It was thought that with the study of the past, the Florentines could bring back the glories and riches of ancient Greece and Rome. The classical Renaissance focus on practical know- ledge connected humanism to nascent capital- ism and industry.2

Florence was both a center of banking and commerce and Europe’s leading center of edu- cation. Tuscany was a highly literate region, and much of this reading and writing was related to mercantile record keeping. Around 8,000 to 10,000 of Florence’s 120,000 inhabitants atten- ded schools at any given time, and half of these were abacus schools. There are abundant re- cords showing that even workers and artisans knew how to read, write, and keep accounts. To be a humanist, umanista, literally meant to be a Latin scholar and teacher, and Florence was full

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of artists, poets, and philosophers. Bankers, merchants, artisans, and lawyers learned their trades, but they, too, learned philosophy and the teachings of ancient scholars such as Aristotle and Pythagoras. Although most learned the use of the abacus after 1300, there were also schools dedicated to practical arithmetic. For the elite, there were high schools and academies, and in 1321, the foundation of a university, or studio, in which the wisdom of the ancients could be learned. The members of great families, like Coluccio Salutati, formed academies based on the ideals of Plato, in which earthly learning and an understanding of the universe and ethics were seen to bring man closer to God. In negoti- ating with popes and other cities, Salutati emu- lated Petrarch and wrote letters in the style of Cicero. Politics, commerce, and learning mingled in the minds of the early humanists. Salutati even brought the Greek Byzantine scholar Manuel Chrysoloras from Con- stantinople to revive Greek, the language of the ancients that had been forgotten in the West, and to open the works of Plato and Aristotle to a world that had lost their wisdom.3

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Although Florence was a place where a shrewd merchant could become rich and politic- ally influential, it grew increasingly elitist in comparison with Datini’s more republican hey- day. Philosophers should be kings, Plato said, and Platonic thought played a central role among Florence’s educated elite, who, under- standably, increasingly associated their cultural achievements with the moral as well as social authority to lead. Between 1398 and 1406, Roberto de’ Rossi—tutor of Cosimo in his youth—opened a free academy for the children of the leading families of the city. With Chryso- loras, he taught Greek and Platonic philosophy to a group of young men who would grow up to lead Florence, among them Cosimo de’ Medici, banker and student of Platonic philosophy. It was a heady mix of money and ancient philo- sophy that, not surprisingly, gave elite Florentines a sense of empowerment.4

Thus was the difference between Datini, the self-made man and merchant, and Cosimo, the scion of a banking family, who was steeped not only in the new culture of Renaissance human- ism and its worship of Saint Francis and the

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Virgin Mary but also in the pagan learning of the ancient world. The Medici family was polit- ically tied to the poorer factions of Florence, but Cosimo—famously unostentatious, preferring a mule to a horse—was still a cultural elitist and one of the greatest patrons of culture in history. He often did not attend public gatherings, made way in the street for the old, and even hung back during public processions. Yet this humble cit- izen was the ruthless ruler of Florence. Ma- chiavelli rightly described Cosimo as prudent and astute in his climb to power. But his use of money would undermine the liberty of the Florentine Republic. This money, said Ma- chiavelli, “brought fear into the state.”5

The unassuming, quiet, and modestly dressed man, often willing to forgive a debt or an incompetent bank manager, who helped artists and scholars, was also accused of cruelty. At the time, there was no way to hold power in Italy without it. It was a violent place, even if Florence had laws prohibiting the public execu- tion of its citizens. Cosimo was known for tak- ing over the renovations of a church and kicking out other patrons to make the work in his own

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glory. He exiled disloyal families, split them up, censored their letters, and filled the courts and squares of Italy with paid informers. It was even said that he tortured his enemies.6

The master of Florence and of much of Italy, as well as of Europe’s finance, Cosimo made his desk the nerve center of a financial and political empire. Letters, packages, coded secret mes- sages, reports, and account books streamed through; he appointed bank managers in London and negotiated cash payments to branches, part- ners, depositors, and borrowers. He argued over silk quality and the gold content of Swiss coin- age. And he managed his personnel, their effi- ciency, language skills, and even their personal relationships: Some were too handsome, and others had a weakness for fine clothing. In mat- ters of money, personal stability was key, and Cosimo was a keen judge of character and signs of crisis. Realizing its value as an ally, he lent the Republic of Venice 150,000 florins for it to pay to avoid being excommunicated by the pope. The investment sealed a Venetian alliance with the Medici.7

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As banker to the Catholic Church and mas- ter of the exchange routes of foreign trade, Cosimo was the richest man in Europe, and his bank the most influential. Tithes and indul- gences needed to cross the difficult routes of Europe back to Rome. The Medici bank made it easy to transfer money by using exchange notes that could be bought in London or Bruges and redeemed in Florence at a rate beneficial to the Medici. In Rome, popes and prelates kept their gold with the Medici. When a cardinal, a states- man, or another merchant wanted to borrow money, say, five hundred florins, he could ap- proach a banker like Cosimo, who would write out a bill of foreign currency exchange. The purchaser of the note promised to pay the sum back to the Medici. The Medici would then draw up a bill of exchange for the same sum and send it to London or Bruges and exchange it at a profit. Dealing in such exchanges, the Medici earned annual profits between 13 and 26 per- cent. The purchaser paid back the original sum, and the Medici kept the other profits—all leg- ally in the eyes of the church. Along with ex- change, the Medici lent money to states and its

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own city government, often collecting state taxes in Florence and Tuscany as repayment. They also maintained deposit accounts for wealthy figures (popes and cardinals among them), invested in farms and cloth production, and traded in everything from almonds to uni- corn tusks.8

The Medici accumulated great wealth between 1380 and 1464. In 1427, two years be- fore Giovanni di Bicci de’ Medici, Cosimo’s father, died and left him in control, the full as- sets of the Medici bank or tavola (trading table) equaled 100,047 florins. In 1451, the profits of the bank alone exceeded 75,000 florins, al- though this amount had to be divided among partners. In 1460, the Milan branch of the bank had assets of 589,298 florins.9

Cosimo used his money to expand Florence’s power in Tuscany and even to buy peace for the warring city-states of northern Italy. He also caused a brutal and unpopular war to subjugate the neighboring city of Lucca. Ul- timately, however, he weakened the republic by replacing Florence’s army with mercenaries un- der his own hire. In 1433, his enemies had him

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imprisoned in the cell at the very top of the tower of the Palazzo della Signoria (called the Alberghetino, the “little hotel”) in the main square in Florence and condemned him to death. However, during the three weeks while his exe- cution was being deliberated and a parliament- ary session of the balia was called by the tocsin of the bells, he was busy writing promissory notes to, and forgiving the debts of, the leaders of the city government. A thousand florins here and there did the trick. Cosimo was surprised at how little it cost, later admitting he would have paid ten times more, if his captors had only known to ask. He also paid mercenaries to mass outside Florence. By the time he was done spreading around florins, the balia changed his sentence to exile. He was allowed to flee to Padua and then Venice, his well-paid ally, where, through his bank branches, he worked for one year in exile and became even richer, eventually buying out all his enemies and giving massive donations to the church and to his influ- ential humanist scholar and artist friends. In the end, he bought out and undermined his enemies

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and reentered Florence as its undisputed mas- ter.10

Cosimo’s own fortune, often synonymous with that of his family and bank, was enormous and can only be estimated. Following the law of 1427, every Florentine landholder or merchant had to keep double-entry books for the state tax audit, the catasto, the records of which still ex- ist. Every good merchant kept two sets of books, with a libro segreto, a secret book for their eyes only, and plausible public books for state audits. When Cosimo’s brother died in 1440, their joint fortune was audited by the catasto at 235,137 florins, but this was not the full measure of his wealth, which was ever growing. The catasto did not include his collections of gems, art, and books, nor did it include all his holdings. In his memoirs, Lorenzo the Magnificent—Cosimo’s grandson and later the leader of Florence—claims that between 1434 and 1471, 663,755 florins were spent on alms and taxes for public buildings, 400,000 of this during the time of Cosimo. At that time, a respectable city palace cost about 1,000 florins, and most of the population of the city was too poor to pay even

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a florin of tax. Cosimo could pay a king’s ransom, for he had more money than most kings and entire nations.11

Cosimo funded the great artistic projects of Florence. As a civic humanist, he used his money to erect buildings with artists like Brunelleschi, who built the Basilica of San Lorenzo, the most modern large-scale building project of its time, and to sponsor public art and scholarships. This brought him goodwill, power, and prestige. Artists and humanists loved him, as did many of the citizens of Florence, for Cosimo was not only a truly cultured man but also very generous, with a knack for forgiving loans. As humanist advisers and court artists be- came the envy of the princes of Europe, their approval of Cosimo brought him international hard power and more influence at home.

Money was power for Cosimo, he was good at earning it, and that was due in great part to his knowing how to manage it. Not only did Cosimo benefit from the finest humanist educa- tion of his time but also he trained in the Rome branch of his father’s bank, which handled papal

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accounts, and was familiar with all aspects of the business. The statutes of numerous artisan guilds required their members to keep double- entry books, which were also mandated by the state for the catasto tax. Ledgers were also seen as legal contracts in financial disputes. Florentine judges had the habit of scouring books to decide financial rights. Bad books did not help make a good case.12

A merchant’s education was rooted in book- keeping, and leaders like Cosimo learned to master it from an early age. In any family busi- ness, younger members apprenticed in their family’s shops or in branches abroad. Real bookkeeping could only be learned by experi- ence, which is why Florence, with its trade and bookkeeping laws, produced such a rich tradi- tion of accounting. It was ingrained in both cul- ture and law. Merchants learned by rote all the basics of the shop, from copying and writing out letters of exchange to keeping books.

Although later he delegated duties to his managers, Cosimo was a practical overseer, and central to this was his early mastery of account- ing. The Florentine archives show that Cosimo

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himself kept books and often managed his own farms. A 1448 notebook shows Cosimo doing the basic accounting to run his farm in the Mu- gello, using simple double-entry and bilinear (parallel) credit and debit columns on the same page. Accounting was an intimate tool for order- ing everything from Cosimo’s personal produc- tion of olive oil to running his massive machine of finance. Without it, the activities of a shop or branch could never be managed or understood. But Cosimo had to learn it in real time, in live business transactions and office management. Real business could be learned only on the shop floor, and double entry was a real-time record- keeping method.13

Double entry became a necessity of banking because no other practice could have guaranteed that so many complex transactions could be cal- culated for profit and recorded in real time. As the practice of offsetting (a deposit guaranteeing the writing of a check) became common, only double entry could keep track of money moving through various accounts. This was an alternat- ive to simple currency exchange but obviously harder to calculate and record. Many businesses

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held numerous debts, credits, and transfers, which meant that wealth was constantly in flux and had to be calculated daily. Printers, vintners, tailors, cloth merchants, silversmiths, cheese makers, butchers, stationers, hostelers, grocers, international traders and bankers, and finally the state and its own financial institutions were all bound in a web of transactions and account ledgers.14

Unlike Datini’s business, the Medici bank was not a centralized entity. Each branch was a firm unto itself, with a partner as manager, but the major partner was always a Medici. That meant that if one branch failed or was sued for a breach of contract, it did not necessarily affect the others. When Tommaso Portinari was sued over the defective packing of nine bales of wool, he argued successfully that the bales had been packed by the London branch and that the Bruges branch was therefore not responsible.15

Cosimo was the senior partner in eleven dif- ferent enterprises, from the main bank in Florence to wool and silk manufacturers and various Medici branches in Europe. What grounded his power was his role as chief

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investor and chief auditor. The 1455 Articles of Association forming the partnership of the Medici Bruges bank make this clear. The Medici gave their managing partners latitude in making business decisions, but they also exerted discipline. Article 7 forbade Agnolo Tani to play cards or dice and entertain women in his chambers. Article 8 stipulated that he could be summoned to Florence at any time to render ac- counts and that once a year, on March 24, or more often if requested, the manager was expec- ted to balance the books and send the accounts to Cosimo and his head bookkeeper, who would verify them in Florence.16

Giovanni di Amerigo Benci was Cosimo’s most trusted manager and accountant, beginning his training at age fifteen as an office boy for the Medici bank in Rome before moving on to a successful stint at the Geneva branch from 1424 to 1435. With this experience under his belt, Benci returned to Florence in 1435 as Cosimo’s principal collaborator, manager, and bookkeep- er. At twenty, he had mastered double-entry ac- counting, which made him a valuable employee and confidant. He wrote all of the bank’s bills of

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exchange, tallied the books, audited, and even kept the libro segreto: The third extant libro se- greto, spanning the years 1435–1455, is in Benci’s hand. This was the period of the bank’s greatest success. Although Benci made large be- quests to the church and had Leonardo da Vinci paint a portrait of his daughter, Ginevra, he was always disciplined: he kept all the books, no entries were missing, and Cosimo, the great overseer, knew this and rested easier. Two years after Benci’s death, the catasto revealed that his own family fortune was second only to that of the Medici.17

With Benci, Cosimo developed a system of audit and executive control. Every year, the senior partner of each branch would prepare its books and send them to Benci for audit. Al- though partners owned part of the firm, Cosimo maintained executive control. He often audited the books with Benci, and it is certain that he verified the final ledgers and accounts of the libro segreto. Many books in the Medici archives show verification marks of the final audit. If the year-end ledger showed losses or ir- regularities, the head of the branch was called to

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Florence for a personal audit. In the later years, figures like the Bruges branch director, Tom- maso Portinari, were called to the imposing Palazzo Medici Riccardi to stand in front of Cosimo and Benci while they conducted a line- by-line audit, questioning the partner on each transaction.

Cosimo was a man of two worlds, for he had one foot in the Middle Ages and the other in the Renaissance, which he helped invent. Although some Neo-Platonists saw all formal knowledge as an element of holiness, others believed that some learning was inferior and beneath the in- terest of the noble, Platonic elite. Merchant and noble values began to clash. Plato’s allegory of the cave, which described a lower cave people being ruled by an intellectual elite who through the wisdom of their souls sought the good of the republic, was a model not only for secular edu- cation and culture but also for political elit- ism.18

The Neo-Platonic ideal of human glory based on artistic, cultural, and political achieve- ment did not always leave a place for the gritty

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practical matters of business. Cosimo did not want his sons to share in the vulgar world of medieval business, and the noble blood sport of Renaissance politics would be their preserve. Accounting, the very tool that helped Cosimo fund the Renaissance, began to be seen as a lower and even immoral discipline.19

The Renaissance was in direct opposition to the teachings of the medieval church, in which Augustine had expressly demanded that the faithful turn away from earthly learning and the hope of perfecting themselves. Faith alone was to succor humanity. Yet under Cosimo’s patron- age, humanists studied Plato and Aristotle and other previously forgotten Greek texts brought by the Byzantine scholar Manuel Chrysolor- as—who first translated Plato’s Republic from Greek into Latin—and others who came to Florence in the early 1400s. Plato’s works ap- pealed to these Florentine men of the world in that they connected human learning and cultural achievement with perfection and godliness. If God was the creator, then Platonic man became closer to God by imitating or searching for his wisdom.

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In his quest for power and prestige, Cosimo turned not only to banking and politics; he also used artistic and religious patronage to cement his power. He funded the Council of Florence in 1439, in which the Eastern and Western churches sought to unite. Cosimo hosted Pope Eugenius IV and the delegation from Byzanti- um, which included not just churchmen but also Greek scholars eager to reintroduce the lost lan- guage of Aristotle and Plato and their unknown texts. Georgius Gemistus Pletho and Manuel Chrysoloras came to Florence bearing works by Plato previously unknown in the West, and with Cosimo’s help, they taught Greek. For the first time, Plato’s works could be read in their origin- al by humanist scholars. Pletho and Chrysolor- as’s leading Florentine student was a member of Cosimo’s household: Marsilio Ficino was the son of Cosimo’s physician, and when he died, Cosimo took in Ficino. Now the leading Greek scholar of Italy, Ficino set up a Platonic Academy in Careggi, Cosimo’s favorite country house.

And so began the most influential philo- sophical movement of the Renaissance, one that

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would transform Christianity by bringing to it an ideal of human, earthly achievement. Ficino called for spiritual contemplation, but he be- lieved that this contemplation, mixed with learn- ing, could bring both human perfection and hap- piness on earth, as well as in the afterlife. Un- like Augustine, he called for a truce between pa- gan learning and Christian piety. If the Romans felt that life was guided by the winds of fortune, those with intellect could try to guide life on earth. Ficino wrote that things foreseen by prudence could be controlled by humans. Augustine had commanded the faithful to do away with their books of Aristotle, but here Fi- cino referenced his Nichomachean Ethics: To control nature, God’s creation, it was necessary to reduce it to “an intellectual foundation.” Quoting John 19:11, Ficino linked Greek philo- sophy to Christianity, claiming that man’s intel- lectual power over fortune could only be God- given and was, therefore, a virtue.20

Neo-Platonism meant not simply a contem- plative quest for wisdom to become closer to God but also a quest to mimic creation itself through art. Donatello and Botticelli painted

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classical themes and earthly portraits. The more realistic and beautiful their works, the more godly they were. And Cosimo supported and ad- mired them for this very reason. These material- ist patricians were still pious like Datini, but an- cient philosophy opened avenues for the rich and brilliant to become closer to God, an ap- pealing idea to those who enjoyed the fruits of Florentine commerce and the pleasures of its high culture. This was a new vision of man’s re- lationship to God that put them on an equal stage, sharing the spark of creation.

But there was a conflict. Ficino’s follower Pico della Mirandola (1463–1494) was from a noble family from the Emilia-Romagna near Modena and had no sympathies for mercantile ethics. He was of Lorenzo’s generation and nev- er knew the period when the great bankers brought glory to Florence through their practical skills. Pico was influenced both by his own sense of nobility and by Ficino’s Platonic writ- ings. He met both Lorenzo and Ficino in 1484, and both became protectors of the brilliant young scholar. Pico’s Oration on the Dignity of Man (1486) is in many ways the manifesto of

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the high Renaissance, for it defined man as a noble creation of God who could, in his own right, create. “Oh great and wonderful happiness of man! It is given to him to have that which he chooses and to be that which he wills.” Pico lauded human intellect and held up mathematics as a divine science of understanding nature. However, for Pico, numbers had to remain pure, beyond the impure earthly interests of business. One should not confuse “divine arithmetic,” he warned, “with the arithmetic of merchants.” This antimercantile view was a cultural shift. The aristocratic philosophy of Neo-Platonism began to eclipse merchant values.21

Cosimo always kept his books, but they were not part of the noble world of philosophy and artistic creation that now permeated his spiritual Christian world. If Datini’s dilemma was God and profit, Cosimo had inadvertently set up a tension between merchant and divine knowledge, between the base activity of finan- cial management and the higher pursuits of the Platonic elite. It was a dilemma that would have serious ramifications for Cosimo’s family, his associates, and the bank.

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Understandably, Cosimo had high ambitions for his sons. He saw the Medici as rulers of Florence. Perhaps because of his immersion in Neo-Platonic philosophy, perhaps simply as a sign of his ambition to found a princely family, or maybe as a moment of hubris, Cosimo did not teach accounting to all of his sons. This choice would not only undermine the Medici bank but also helped destabilize Florence itself.

Cosimo had two legitimate sons. The eldest, Piero, had a sense of business but no hard train- ing. He followed the humanist curriculum of teachers like Angelo Poliziano, who focused training on Latin and Greek oratory. Piero would rule the republic. Cosimo’s second son, Giovanni, did receive rigorous business training. His role was to rule the bank, and for that he learned like his father did and knew how to keep books and make audits. The problem was that Giovanni enjoyed the pleasures of the good life. He knew how to keep books, but he lacked the discipline to keep them well. He died in 1463 at the age of thirty-four. Piero, known as “the Gouty,” was competent but sickly. He ruled from Cosimo’s death in 1464 to 1469, and

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during this period, he attempted to continue the prudent banking strategies of his father. The Medici bank had a head in Piero, but no man- ager. There was no ultimate auditor, and without one, the bank could not function.22

For modern tourists, one of the emblematic faces of Renaissance Florence is that of Cosimo’s grandson—the eldest son of Piero—Lorenzo de’ Medici (1449–1492), the leader of Florence during its golden age of art. He was considered remarkably ugly in his own time (Machiavelli compared him to a deformed prostitute), but his portrait and busts are unmis- takable symbols of the golden age of Florentine art and its fascination with sensuality and force. Botticelli, Bronzino, Verrocchio, and Vasari im- mortalized Lorenzo’s long jointed nose, auburn mane, and fierce expression. He was a poet, a student of Neo-Platonic philosophy, and a friend and patron to Botticelli, Leonardo da Vinci, Michelangelo, and Ghirlandaio. He was also an autocrat, an arbiter of power in Europe and traded with the Ottoman Turks, the new masters of Constantinople. He was also a bad account- ant. He trampled Florentine republican liberty,

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emptied the coffers of the city, and, with this wealth, bought the power of the papacy for his family. The Medici helped build Florence, but now, under Lorenzo, they sapped it of its finan- cial stability and republican freedoms.

Lorenzo is known as the Magnificent, and indeed he represented Florence at its zenith and most dramatic. He comes as close as most polit- ical figures ever do to having achieved a level of immortality through fame and art. Historically, magnifico is an odd word in Italian, for it has several meanings. Today it is associated with Lorenzo’s defiant face, power, and artistic pat- ronage, but in the 1400s the term was actually a technical title of respect for the head of a bank- ing firm: magnifico major mio, “my magnificent boss.” Rather than a princely title, it was an ad- ministrative title within the firm. But following the Medici family, it evolved into a de facto princely status. Lorenzo’s title was stretched to la Magnificenza Vostra, a more formal title, that, as its holder became princely, it did, too. It should have been a reminder that Lorenzo was still the head of the Medici bank, but quite the opposite happened.23

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By the time Lorenzo took over the bank at the age of twenty, the managerial transformation was complete. Lorenzo was only the nominal head, not the true manager. He was a master of politics—he survived the early tough challenges to his control of the city, rose through his own skill to rule it, and took over the papacy for his family. But he had neither training in accounting to manage the bank nor the rigorous standards necessary to oversee balancing the books of the city. Although he still had to pose as a citizen of the Florentine Republic, he was educated as a modern prince. It was for this reason that the re- publican Machiavelli watched him closely.24

Lorenzo’s capacities and fine education were recognized by his contemporaries. The hu- manist Alamanno Rinuccini denounced Lorenzo as a tyrant but admitted that he had a “versatile mind” and was able to dance, shoot arrows, sing, ride, play games and musical instruments, and write poetry. To foreign princes, he was a model, and he even sent out his own teachers to train kings and rulers. And he was still head of the Medici bank. But he didn’t have the skills or, indeed, the will to run it—Machiavelli said

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of him that he was an able prince but a poor banker. As a result, Lorenzo resorted to plunder- ing Florentine state coffers to keep the bank afloat. Adam Smith drew the conclusion from this reflection that princes and the state should leave finance to professional financiers.25

And so he needed a good and trusted ac- countant to take not only the role of Benci but also that of his grandfather Cosimo, who had been the ultimate auditor. With the death of fin- ancially competent family members, the Medici turned to Francesco Sassetti (1421–1490), the most successful and trustworthy of the great branch managers, who now made all essential decisions for the bank. He oversaw the firm’s account books and did all the final audits. It was Sassetti who managed the bank, not as a partner, but in Lorenzo’s words, as “our minister.” The language was no longer of a firm, but of the court of a prince. Sassetti had not profited from Cosimo’s elite education; he had grown up more in the mold of Datini—a competent bookkeeper, bank manager, and merchant who grew rich by disciplined service to the Medici financial sys- tem. Sassetti had earned the Medici family’s

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trust by his able handling of the Geneva branch of the firm. An accountant by training, he began to take an interest in Neo-Platonism and the pa- trician patronage that supported the arts of Renaissance Florence. Unlike Cosimo, who could mix business and culture, Sassetti’s cul- tural interests distracted him from his books.

When Sassetti returned to Florence from Geneva in 1458, he came back to a new life. He was no longer a branch partner but the senior (and rich) manager of the entire Medici bank. He was trusted implicitly. However, being a leading member of the Medici entourage in the 1470s, long after the death of Cosimo, was far different from the life Benci led. Sassetti in- creasingly spent time not pouring over his ac- counts, but rather studying with the leading hu- manist teacher of his day, Angelo Poliziano, and was close friends with Ficino.

Sassetti became involved with civic life and was soon embroiled in a fight with the Church of Santa Maria di Novella, which, for reasons of family prestige and precedence, wanted to deny Sassetti the right to a crypt. Forced to give up this place of honor in one of Florence’s most

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important churches, Sassetti decided to build his own chapel in an area where he owned numer- ous houses. Here he could showcase his influ- ence, wealth, piety, and sophistication; he worked closely with the great painter Ghir- landaio and became his principal patron.

Conceiving the Sassetti Chapel became Francesco’s consuming passion, and it is one for which posterity is grateful. The chapel is one of Ghirlandaio’s masterpieces. Its famous frescoes include Zacharias in the Temple (1486–1490), which contains portraits of not only the painter himself but also the Neo-Platonists Ficino, Christoforo Landino, Poliziano, and Demetrios Chalkondyles (Demetrius the Greek). The con- ception of the Sassetti Chapel was a collabora- tion between the painter and the accountant. Their goals were to make a pious, Christian painting but one that honored Neo-Platonic val- ues and Sassetti’s place in the civic hierarchy of Florence. In his Lives of the Artists, Vasari says that Ghirlandaio painted the Neo-Platonists in the most lifelike form possible, to show the greatness and central importance of the most learned men in Florence. In one scene,

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Ghirlandaio painted Sassetti, Lorenzo, Poliz- iano, and Saint Francis receiving the stigmata. In another, Ghirlandaio drew kneeling portraits of Francesco Sassetti and his wife. Along with these are the Tiburtine Sibyl Moving the Emper- or Octavius to Adore Christ and a Nativity scene. Ficino complimented Sassetti on his chapel as the very embodiment of the Neo- Platonist ideal.26

Ficino, however, knew more about philo- sophy than he did about business. By the time Sassetti’s chapel was finished in 1485, its patron was facing financial difficulties. In his 1488 Testament to His Sons, he was frank that the “grievous and dangerous consequences” of poor branch management in Lyon threatened the Sas- setti family’s fortune and their famous Palazzo de Montui, which he recommended donating to trusted friends in the church so that it would not be confiscated or lost to the family. In spite of his motto, “My fate be kind to me” (Mitta Fata Mihi), and his good works and culture, fate had turned on Sassetti, and he worried if he would survive at all.27

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He blamed the Lyon branch manager, Lion- etto de’ Rossi, for “bad and neglectful govern- ment” of the branch. But Sassetti was technic- ally the managing partner in the branch and therefore responsible. He was the final auditor, and he had let things go. Sassetti had not only allowed branch managers to take risks; he had also stopped keeping rigorous accounts, which was the very essence of his job. Remarkably, one of his personal secret account books sur- vives, his libro segreto from the key years 1462 to 1472, and it shows Sassetti’s failure. He kept the accounts of the bank in double entry, and in the first years, he kept them assiduously, as he was supposed to. He kept records of the great wealth of his own estate (52,047 florins in 1466) and of the bank’s branches, such as that in Avignon. All were in good double-entry form. But beginning in 1472, Sassetti’s entries became sporadic. Whole entries went missing. Sassetti, who had trained in the old school of accounting discipline, no longer maintained it. Furthermore, he was not keeping strict control of the branches. He gave more leeway to the branch managers to audit themselves, which effectively

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meant giving up the reins of management. Branch managers began lending money to for- eign princes, a practice Cosimo had forbidden in his day. In 1469, disaster first struck the London branch, when Edward IV did not pay back his debts incurred during the War of the Roses. But it was in 1479 that the Medici bank was brought to its knees.28

Already Lorenzo had allowed the ill-fated Bruges branch manager, Tommaso Portinari, to make enormous loans to Charles the Bold, Duke of Burgundy, a man famous for not honoring his debts. Cosimo had thought little of Portinari but nonetheless allowed him to move into a higher partnership level. Portinari owned only about a 13.5 percent stake in the branch, and the Medici owned more than 60 percent. Yet Sassetti gave him free rein. And Portinari enjoyed his place in the court of the duke, where he was received on a footing of royal familiarity. It was not that Portinari was a poor manager himself. The branch’s bookkeeper, Carlo Cavalcanti, spent his days bending over the huge ledgers and working the abacus. It was the loan to the Duke of Burgundy, which both Sassetti and Lorenzo

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surely approved because of political considera- tions. The great French historian and statesman Philippe de Commines (who had a long conflict with the bank over interest not paid) was stunned at how much cash Portinari apparently had on hand. Portinari extended the duke more than 6,000 Flemish groats of credit, twice the capital of the entire partnership. If the duke did not repay, the loss would be enormous. But Lorenzo’s interest may have been securing the duke’s support for Medici alum mine interests in Burgundian territory.29

Whatever the reason, it went against bank policy, as the loan unbalanced the books. Charles of Burgundy did not repay the loan. When he died in 1477, he owed the bank more than 9,500 groats, three times the capital of the Bruges bank. Further loans were made, but the court could not even meet interest payments. Al- though the exchange rate fluctuated, the result- ing losses for the branch were a staggering 70,000 florins (consider that Cosimo’s fortune was assessed at more than 120,000 florins at his death).

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In 1478, Lorenzo sent an emissary to make Portinari an offer he could not refuse: He had to liquidate the Medici share and pay back the family. From being a master of finance and politics in Europe, Portinari became destitute. In another example of artistic irony, Portinari had been involved in a long lawsuit to recover a Hans Memling painting of the Last Judgment, commissioned by the Bruges branch between 1467 and 1471, which had been hijacked off a boat by Polish pirates. He now had to give up his claim on the picture. In it, Saint Michael the Archangel holds a scale on which he weighs souls and decides which go to hell. It was a final reckoning in which the life of an accountant had imitated art, for the man depicted on the scale was none other than Tommaso Portinari.

Lyon was not simply another debacle for the Medici bank. This time Sassetti himself was a partner and risked losing all his wealth. As a long-experienced manager and accountant, he must have recognized the danger so evident in his account books. Between 1462 and 1468, re- turns at the Lyon branch ranged from 70 to 105 percent. Average bank returns were 8 to 10

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percent, and a good Medici branch could hope for 15 to 30 percent, based on favorable rela- tionships and high-interest loans to the wealthy and powerful. But returns of 105 percent showed that there were anomalies. Clearly, doubtful credits were allowed to stand on the books for long periods of time, giving a false impression of profit. The auditor’s job was to identify these bad credits and revalue them. Sas- setti never called the manager to an audit, and he instituted no system of traveling auditors. Be- cause of what Sassetti called the “wicked and negligent mismanagement” of the once incred- ibly wealthy Lyon branch, and of Sassetti him- self, at the age of sixty-eight he was now, in 1488, forced to travel to France to make an audit.30

Ghirlandaio, who had once painted master- pieces to celebrate Sassetti’s leading place in the Medici bank and Florentine cultural life, now painted the farewell portrait of the failed ac- countant. A masterpiece by Ghirlandaio, the portrait Francesco Sassetti and His Son Teodoro (circa 1488) hangs in the New York Metropolit- an Museum of Art, a peaceful portrait of a man

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and his young son with a rural Tuscan backdrop. The museum’s description of the painting notes that Sassetti, “general manager of the Medici banking empire,” appears younger in the paint- ing than his late sixties. All evidence suggests that Ghirlandaio painted this work in Sassetti’s absence. Indeed, by 1488, Sassetti had left Florence to deal with a crisis at the Lyon branch of the firm. He was so concerned that he would never return that he left this painting as a last legacy, along with a will.

When he returned from Lyon in 1488, Sas- setti had lost his fortune and his family’s leading place in Florentine affairs. The Medici bank was no longer a power. As Adam Smith noted, princes make poor bankers, for the temptation to put personal glory over sound business sense is ever present. Lorenzo lost much of his banking fortune, but he could still use public funds to finance his family’s projects. After the Medici were expelled from Florence in 1494 and the re- public was restored under the chancellorship of Machiavelli (who knew how to keep double- entry books), the Medici used their wealth to hire mercenaries and take back the city.

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Lorenzo’s grandson, Lorenzo di Piero de’ Medici, would come back to topple the republic and rule from 1513 to 1519. He imprisoned and tortured Machiavelli. Lorenzo’s second son, Giovanni de’ Medici, would be named Pope Leo X in 1513; one great-grandson would come back to rule a considerably less influential Florence as the grand duke Cosimo I of Tuscany; and another would become Pope Leo XI in 1605 (albeit for twenty-six days until his death). But Lorenzo’s poor management had re- duced the bank to almost nothing, and his polit- ics had hobbled the once-powerful republic. The only trace of how much Medici hubris cost Florence is in the account books now in the archives of the defunct republic.

Cosimo de’ Medici spent part of his fortune sponsoring the philosophy of Neo-Platonism and his own quest for earthly glory. To the ex- tent his family remained powerful, he suc- ceeded. Medici became popes, grand dukes of Tuscany, and progenitors of the kings of France. The story of the Medici and their hapless ac- countant, Sassetti, shows that a tradition as old and ingrained as Florentine bookkeeping could

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quickly evaporate. Cosimo, the greatest banker of his age, could never have imagined that his fascination with the philosophy of Plato would help undermine the culture of accounting and accountability for hundreds of years. Indeed, it was one of his most potent and lasting legacies.

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CHAPTER 4

THE MATHEMATICIAN, THE COURTIER, AND THE EMPEROR

OF THE WORLD

I do not wish to break my brains trying to comprehend something which I do not understand now, nor have I ever understood in all my days.

—PHILIP II, KING OF SPAIN, 1574

It is ironic that the first printed manual ondouble-entry bookkeeping appeared at themoment Italian power in Europe began to

collapse. The Dominican friar, humanist, and mathematician Luca Pacioli (1445–1517) pub- lished his Summa de Arithmetica, Geometria, Proportioni, et Proportionalita (Treatise on Arithmetic, Geometry and Proportion) in 1494, the same year that the first invasions of Italy brought down republican regimes and installed French and Spanish royal power on the peninsula. Double-entry accounting had existed for around 200 years, yet only now, as the rule of the Renaissance merchants waned, were its methods printed in an accessible manual. Paci- oli’s story is, at least at its beginning, the story of the first published manual on accounting. It is also the story of how this manual languished for almost a hundred years, ignored by merchants and thinkers alike. In the great monarchies of the sixteenth century, ruled by sometimes chiv- alrous and Neo-Platonic princes, accounting be- came scorned as a low merchant art, even as kings and princes struggled to find good ac- countants to administer their finances. This pre- judice against accounting would have grave ramifications for the continually bankrupt Span- ish Empire.

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Pacioli is considered the father of account- ing, and his manual is its founding work. All major manuals on accounting, from the Renais- sance to the modern age, are based in part on Pacioli’s publication, making him the central author in the history of accounting. Yet as Francesco Datini’s use of double-entry book- keeping shows, Pacioli’s treatise came late in the game, when accounting and its culture were losing prestige. It did not become one of the great books of the Renaissance, with a hallowed place in humanism. Few great scholars and thinkers, and fewer still political leaders of the 1500s, even knew the book, and fewer still used it for government administration.

A Tuscan Franciscan friar, an expert in geo- metry and algebra, and a student of Neo-Platon- ism, Pacioli came from the same world as Cosimo de’ Medici, in which business was the basis of political power. He believed that ac- counting was tightly linked to civic humanism: the mix of business, classical learning, and urb- an cultural patronage that made cities such as Florence wealthy showcases of commerce, learning, art, and architecture. As a churchman

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and a mathematician, Pacioli believed that this great chain of being was held together by God’s language: mathematics. Double-entry bookkeep- ing was a very earthly but necessary mathemat- ical method and philosophy for regulating daily financial life.1

Pacioli’s life followed a remarkable profes- sional trajectory. Skilled in mathematics, he had trained to be a merchant in an abacus school in his Tuscan hometown of Borgo Sansepolcro, near Arezzo. He found a place in the workshop of the great painter and famed mathematician Piero della Francesca, who had helped revive Euclid’s works on geometry and whose paint- ings, such as The Flagellation of Christ (circa 1455), are brilliant but imperfect studies in per- spective and proportion. Despite never being an original thinker but rather a good explainer, Pa- cioli had a knack for making friends with great artists of the time. Della Francesca took a great interest in Pacioli and brought him to Milan, where he introduced him to one of the leading humanists of his time, the famed engineer, ar- chitect, and philosopher Leon Battista Alberti, who, like earlier humanists, liked to combine

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practical, artisanal knowledge with formal philosophy. Indeed, in his On the Family (1434), a treatise on the philosophy of the household and family life in Florence, Alberti stressed the importance of accounting and home economics. Alberti brought Pacioli to Rome, where he become a churchman and a famous university teacher, interacting with such artists as Gentile Bellini and Giovanni Bellini, Botti- celli, Ghirlandaio, Pietro Perugino, Luca Signorelli, and perhaps even Dürer.2

The most famous painting of an accountant is that of Pacioli attributed to Jacopo di Barbari (1495). It shows the master of algebra and pro- portion with his student, Guidobaldo da Monte- feltro (1472–1508), the Duke of Urbino. In this work, Pacioli is shown working on a problem of algebra, but at the lower right-hand corner of the work there appears a ledger. In 1474, Pacioli be- came tutor to the Duke of Urbino’s son, an em- inent post in one of the great humanist centers in Italy. Here was the height of Italian humanism: a Franciscan monk, with a prince, calculating the way to understand and represent human pro- portion through mathematics. Urbino was the

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most refined court in Italy, yet it still had a foot in the medieval merchant past that linked guild masters and city patricians to nobles. Indeed, the duke himself encouraged Pacioli’s teaching of accounting, for Urbino, like all small Italian city-states, depended on trade for its wealth.

Most notably, Pacioli was a close friend to Leonardo da Vinci. Leonardo sketched a do- decahedron, which was earlier seen in di Bar- bari’s portrait of Pacioli, a study for proportion- al painting and geometry. Leonardo also made drawings of Plato’s five regular bodies (earth, water, air, fire, and sky), both solid and hollow. Pacioli described his friend as a “prince among mortals.” Leonardo had long conversations with Pacioli about three-dimensional painting and, indeed, painted The Last Supper (1495–1498) in close consultation with Pacioli on the use of per- spective and proportion.3

Pacioli lived in a world in which classical hu- manists and political leaders valued double- entry bookkeeping as an essential form of knowledge. Quoting Virgil, Saint Paul, Saint Matthew, and Dante, Pacioli assured the reader

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that God will take care of the vigilant, charitable hard worker who knows how to count. The bal- ance of account books represented the moral equilibrium of God. Where Datini gave advice to his employees, Pacioli sketched a worldview. Hard work, accounting, and profits were holy virtues. The Summa’s chapter on accounting, “On Computing” (De computis in Latin), was a founding work for later political economy, for it spelled out the fundaments of finance and ex- plained why they were essential in the mainten- ance of republics. Commerce, industry, and profit, implied Pacioli, were the basis of healthy states and public financial administration. Here, conceived with the tools of the Italian Middle Ages and Renaissance, was a book for the mod- ern age.4

The basics of accounting have changed little since Pacioli printed his Summa more than 500 years ago. The Tuscan monk did not claim to do anything new. But he recognized that there was no systematic guide to “accounts and their keep- ing” in an “orderly way.” Pacioli felt that ac- counting would help the duke’s subjects be good merchants, and in doing such, he promised

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the duke in his dedication of the book, credit and business would flourish in his realm. If transactions were kept faithfully, that would not only help merchants but also put them in good stead with God, for they would be “trustworthy” and “upright.” The road to trust and goodness was through the clarity of mathematics and how data were recorded in books. The Venetian sys- tem, as Pacioli called it, provided measures of profit and loss based on the balance of credits and debits, and this helped bring godly order to the human world.5

Pacioli’s accounting manual offered the merchant the basic and essential tool of capital- ism: the capacity to calculate at all times his as- sets and liabilities. The first step in good ac- counting was to make an inventory of as- sets—from houses, land, and jewelry to cur- rency and silverware, linens, beds, spices, skins, and other merchandise. Assets were the capital from which debits and credits were made. Then books had to be kept, recording spending and income as related to capital holding. Four books were necessary: the inventory of assets, the

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memorandum (memoriale), the journal (giornale), and the ledger (quaderno).6

In the memorandum, the merchant wrote down or pasted receipts from the day’s transac- tions, “hour by hour,” detailing “everything he sells or buys.” The memorandum was necessary not just for real-time recording of data but also for recording all the different monetary transac- tions that could take place in a number of differ- ent currencies—they would have to be calcu- lated into a single currency value. At the end of each day, the merchant would have to systemat- ically transfer notes, receipts, and summaries of transactions in the memorandum into the journal as debits and credits.7

The journal was a chronological record of all pertinent information for each transaction, noting the dates, the agents, the merchandise, and the currency. All would be noted under per (“for”), to be debited, or avere (“to have”), to be credited. These chronological debits and credits would then be transferred to the ledger. Each time a transaction was transferred to the ledger, a letter (A, B, or C) was written to mark where the transaction could be found in the

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corresponding book. Then a red line was drawn through the transaction to show that the credit had been transferred, and a second red line was drawn when it was balanced with a correspond- ing debit. The ledger was systematically organ- ized under headings for specific products, such as “Ginger,” or for specific businesses or ven- tures.8

Going beyond explaining what double entry was, Pacioli gave concrete examples of types of transactions. Readers could see exactly how to keep certain forms of accounts. He explained how to manage a household, a business trip, a multipartner venture, and a municipal public ac- count, as well as how to account for a loan for a drug store. Providing sample entries from exist- ing firms, he insisted on the rule the Medici had broken: Proprietors had to audit their managers.

Pacioli hoped that accounting would make his society better: “Businessmen maintain re- publics,” and he claimed that accountants needed more skill and discipline than lawyers. Indeed, for Pacioli, the merchant was the key figure in a republic, for merchants could count, calculate, and manage abundance and war,

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famine and pestilence. Republics needed well- educated, disciplined, and moral merchants, for they were disciplined and vigilant managers of both business and government. Pacioli did admit that accounting was not for everyone. Laziness, he warned, could bring catastrophe.9

The discipline of accounting was central to republican accountability. Pacioli insisted that a good merchant kept good books so that they could be easily audited by city officials. A good merchant or clerk kept accounts so there would be no suspicion that they were false. The iden- tity of all handwriting must be verified by notes or personal presentation to officials. Pacioli also explained how to handle accounting when deal- ing with tax or excise officials and how to present one’s accounts to them. He lamented that public accounting officials were often poorly trained and mixed up their books. “Woe to you if you have anything to do with these people.” The businessman must “keep his head in his store” and bring clearly kept books to any tax transaction or audit. Even more, tax offi- cials, too, had a responsibility to be impeccable accountants. Venice, he noted, is glorious for

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punishing tax clerks who misbehave or keep bad books.10

A practical man, Pacioli recognized that not everyone was fit to keep books. Discipline was essential, for nothing, Pacioli warned, could be omitted from the records. Even business conver- sations should be written down alongside trans- action accounts. “The merchant,” he noted, “can never be too plain.” Pacioli also recognized that cheating was a problem. It was always possible to keep two sets of books. “Unfortunately, there are many who keep their books in duplicate, showing one to the buyer and one to the seller. What is worse, they swear and perjure them- selves on them.” Even accountants often, and indeed systematically, kept secret books to hide their business from tax collectors and competit- ors. Datini did it, and so did Cosimo. Pacioli re- commended that all bookkeepers invoke the name of Jesus, “in whose name all business should be transacted,” by writing a cross on each account book. Datini and Cosimo did that, too, on their secret books. In reality, “For God and Profit” depended on an odd mix of clarity and deceit. Pacioli hoped that early training,

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based on sound religious ideas, would produce a form of accounting that was both ordered and moral.11

Here, for the first time, was Datini and Cosimo’s method, explained for all to see—and to copy. It was more than a model for mer- chants; it also outlined the basic methods and ethical controls necessary for good public fin- ance. A practical Italian reader might have seen it as the perfect handbook for the management of a prosperous republic. What had been com- mon but mostly private Italian knowledge was now potentially open to all. The secrets of the counting house were demystified and soon inter- nationalized. Potentially any city or prince could, with Pacioli’s book, establish accounting schools and train the kind of administrative elite described by Pacioli.

Commerce now had a rhetoric, a mode of ar- gument and proof. Humanists were obsessed with the Roman lawyer Cicero, who claimed that the rhetoric of making arguments and providing proof was a great civic virtue. Good citizens expressed themselves publicly and proved their points. It was a civic duty to do so.

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An account book was like an argument with a moral end. Its data were laid out and tallied, and its final sum was an argument for success or failure. Although the calculations might be com- plex, the final tally could be seen as an unim- peachable claim. That had authority in finance and law. It also had the numerical force of the sciences. Potentially, Pacioli’s printed manual could teach mathematics, the theory of propor- tion, and accounting to all who read and mastered it. Pacioli had high hopes for the suc- cess of his book.12

And yet the book did not catch on. Pacioli’s Summa itself was not a particularly successful book by Renaissance standards. There was the edition of 1494, which is extremely rare and must have been printed in a quite limited edi- tion, and the second edition of 1524. The aristo- cracy and high nobility still had a foot in the re- cent mercantile past, but they were not necessar- ily in the market to buy an accounting manual. Medici popes were the grandsons of Medici bankers. Figures like the powerful Chigi family of Rome were still merchants but also humanists

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and men of the church. Pacioli’s work would have made sense to them, for, in their lives, commerce, mathematics, and algebra all crossed in a quest for wealth, art, and wisdom. But among Italian merchants and even wealthy landowners, it was believed that accounting had to be learned by experience at home, in an of- fice, or in an accounting academy.13

In any case, in Italy, homemade accounting manuals were easily accessible. There is ample evidence that Pacioli’s chapter on accounting was a printed version of a commonly circulated Venetian manuscript accounting manual of the time. This might explain why there were few Italian translations of Pacioli’s book. In great humanist tradition, the book was used as a basis for others’ works that never directly credited him. The first person to reproduce large sections of De computis was Domenico Manzoni in his Double Entry Books and Their Journal (1540). Manzoni was a Venetian abacus master who had trained with the famous accounting teacher An- tonio Mariafior. Manzoni’s book included large passages verbatim from Pacioli. He also tried to clarify a number of questions, such as which

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items should be debits or credits and how to value live things (always tricky even with today’s statistical probability), and he included an illustrative set of account books with three hundred sample entries. A merchant could thus consult Manzoni on how to transform a transac- tion into a journal entry.14

What is most striking about the fifty years following the first publication of the Summa and De computis is how few reproductions of the work there were. Accounting knowledge flowed mostly out of Venice but not with any clear tra- jectory. Books about currency exchanges, mar- kets, tides, ports, exchange paperwork, and taxes had long been written by hand or printed and circulated as business manuals. There was a long manuscript tradition of homemade mer- chant manuals and books that traveled in boats and carts and were always kept near desks and accounting and exchange tables. These books were called the ars mercatoria, the business arts. Mostly, merchants made them by hand as part of their series of account books.15

Pacioli’s lack of success in spreading the theory of double entry was not entirely his fault.

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At the very moment his book was being pub- lished, his Italian merchant world was literally under attack by the Spanish and French mon- archies. In 1494—the year the Summa was pub- lished—France, followed by Spain, invaded the peninsula and turned the richest parts of Italy in- to a bloody battlefield for more than sixty years. It has been said that the age of the Italian repub- lic gave way to the age of chivalry, but the transition was brutal as civic, mercantile human- ism also gave way to the aristocratic, even im- perial ideal by the force of arms. In this new era of ascendant kingdoms and empires, Pacioli’s old dictum about healthy republics and good merchants had little echo. The ethics of busi- ness, banking, and the balance book befitted neither the divine right monarch, the soldier, nor the courtier in the same way it had the merchant managers of Italy.

Duke Guidobaldo of Urbino strikes a noble pose in his portrait with Pacioli. It is telling, though, that di Barbari’s painting is remembered for the accountant and not the duke. Guidobaldo had good taste in humanists, but he was a woeful

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ruler, sexually impotent, sickly, and unlucky in war. He was driven from his court by Cesare Borgia, the brutal son of Pope Alexander VI, but in spite of the continued domination of Italy by its Spanish masters, Guidobaldo was lucky to return to power in 1504. Serving him on his re- turn was a young soldier from Mantua, Bal- dassare Castiglione, in command of fifty men- at-arms. Castiglione is not remembered as a sol- dier or even as the papal nuncio he was at his death in Toledo in 1529. Instead, he is re- membered as one of the greatest authors of the Renaissance whose book The Courtier (1528) became one of the defining works of Western literature. It also undermined the values of ac- counting by describing the ideal noble as someone who did not dabble in the intricacies of finance.16

Castiglione described the perfect courtier as one who had “no shortcomings whatsoever.” This was not Christian humility, but rather a knightly form of Neo-Platonism. Castiglione’s flower of chivalric and humanist Christendom would be expert in personal discipline, self-con- trol, and all the knowledge required by the

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courts of the pope, the king of France, and the Holy Roman Emperor. A great courtier would have to be pious and know how to serve, con- verse, sing, dance, love, fight, and write sonnets. Like the legendary knight Amadis de Gaul, he would be a courteous, virtuous knight. Above all, he would have to be prudent—that ancient ethic of Aristotle, Seneca, Tacitus, Plato, and Cicero—and he would have to hide his emo- tions and motives, weigh his options, and navig- ate a world of courtly servility and power. Even more, Castiglione’s book preached the idea of sprezzatura, je ne sais quoi, or the aristocratic il- lusion of effortless achievement. It was in stark contrast with the ethic of meticulous bookkeep- ing in accounting and the revelatory practice of both calculating and auditing. There could be no sprezzatura in the cold numbers and relentless record keeping of accounting.17

What is interesting here is that Castiglione never mentions the kind of administrative ex- pertise harnessed by Cosimo and explicated by Pacioli. He never mentions finances, let alone accounting and the idea of being able to keep or audit books—an elemental practice of statecraft.

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It was The Courtier—a book without numbers that shunned merchant culture—that was, in the end, embraced by noble and even merchant readers. A nobleman, Castiglione was at first hesitant to publish his book, so the manuscript circulated instead. But demand was such that he eventually asked the great Venetian printing house of Aldus Manutius to publish it. In 1528, a first print run of 1,030 copies appeared. In all, around fifty editions of the work appeared in the sixteenth century, making it one of the great best sellers of its time, in stark contrast to Paci- oli’s two editions. There is evidence that The Courtier was read by even the Holy Roman Em- peror himself, Charles V (1500–1558), ruler of Spain, the Hapsburg lands in Austria and Hun- gary, the Netherlands, Burgundy, Milan, south- ern Italy, and an overseas empire on which the sun never set. When Castiglione died in 1529, the emperor remarked, “I tell you one of the finest gentlemen in the world is dead.” It was high praise from the ruler of half the world.18

Neo-Platonism discredited accounting not just for Castiglione but also among influential humanists by feeding into old prejudices against

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business and earning money through trade. When the most famous of all Neo-Platonist philosophers, Pico della Mirandola, scorned merchant knowledge, it was his school of aristo- cratic humanism that appealed to the elites of Europe and its empires. The humanist cur- riculums of giants of the late fifteenth and early sixteenth centuries, like famed scholar Erasmus of Rotterdam and Ignatius Loyola, founder of the Jesuits, stressed discipline, note taking, and record keeping, but not for financial gain. In Erasmus’s Education of a Christian Prince (1516), finance is never mentioned. Founded in 1534, the Jesuit order stressed mathematics in its curriculum, but not for trade. Indeed, Jesuits kept accounts themselves. To run their monastic order, Italian Jesuits taught themselves account- ing for the household and financial management of their enormous undertakings. They also cre- ated elaborate systems of moral accounting in which sins and good deeds were tallied in “spir- itual account books.” The Jesuits were famous for teaching applied geometry, navigation, as- tronomy, and even military engineering, yet their official curriculum did not include

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accounting. They would become the teachers of kings, but kings could do no reckoning on their own kingdoms. There was a cultural taboo on commercial accounting.19

Scholastic thinkers had long condemned money lending. Quoting Saint Jerome, the great twelfth-century legal thinker Gratian had clearly stated: “The merchant cannot please God.” This medieval view persisted in the Renaissance. Ra- belais noted that a truly “noble prince never has a sou” and that to “save money is truly a villain thing.” In his Essays, even Montaigne explained how the profit of one man damages another. Noblemen fought, prayed, lived in luxury, and even administered. But they did not count money.20

Accounting, or at least bad accounting, was associated with avarice and sin. The evolution of Quentin Matsys’s painting The Banker (or Moneylender) and His Wife gives a sense of this persistent discomfort with counting and ac- counting for money. Painted in 1514, and now in the Louvre, it shows a banker weighing coins, as others lie on the table. His wife, beside him, holds a page of a book of hours. The art

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historian Erwin Panofsky describes how Matsys mixed a religious, devotional scene with a real- istic portrait of Renaissance office life. Rather than a critique of money handling, the banker seems to portray the seriousness of a careful merchant and his pious wife. It was reported at the time that the picture’s frame contained a passage from Leviticus 19:36: “Just balances, just weight, . . . shall ye have.”21

Matsys’s image of money handling and piety would inspire a popular series of eight paintings begun in 1519 by Marinus van Rey- merswaele with the same title, but very import- antly, the book of hours in the wife’s hand was replaced with an account book. This substitution had major significance. The banker and his wife had lost the book with the image of the Virgin and Child. Now they had only a book of monet- ary numbers. Without the religious book, the scene was now purely mercantile, showing only material temptation and not pious management. These paintings were stark warnings to a profes- sion that, van Reymerswaele suggested, had no morals.22

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A Catholic who had attended the University of Leuven, Van Reymerswaele went further. He apparently copied another painting by Matsys, now lost, of two customs collectors, transform- ing it into the first popular anti-accounting im- age. His Two Tax Gatherers (1540, National Gallery, London) is not only an outright attack on the covetousness of moneylenders, but also on official tax collectors, taxes, and the tricks of accounting. It is exceptional in showing the tools of accounting: Books, receipts, exchange slips, and file boxes litter the room. The ac- countant dutifully makes readable entries into a finely bound account book. The second figure in the painting, twisted and grimacing, appears to be a client making a verbal order. The account book is in the center of the painting, and the second figure points to it, smirking and grim- acing, to give a clear sense that the transaction being recorded is dishonest. Whether depicting business or tax collection, the painting connects financial management and bookkeeping to im- morality, trickery, and unchristian behavior.23

Pacioli’s manual was tainted by this critical view of business.

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The moral conundrum was that kings needed bankers and merchants to raise revenues for their armies, navies, palaces, and courts. The sometimes vile act of accounting was an ever more necessary administrative tool. Kings needed it, but they most often did not have the knowledge or skilled administrators so common to merchant republics. The lack of an account- ing culture would strain the financial adminis- tration of many states and even the Spanish Empire.

By the late 1530s, the Holy Roman Emper- or, Charles V, had every reason to see himself as the first among gentlemen in the world. Ruler of the Spanish and Hapsburg empires, he had defeated the French, taken over the papacy, and ruled Italy through the Kingdom of Naples, out- ward to Milan and Urbino and down to Sicily. He had secured his New World holdings and set out his Hapsburg administration across South America. The fabled wealth of the Peruvian (now Bolivian) silver mines of Potosí was now in the hands of Castile. Charles’s grandparents, Ferdinand and Isabella, had captured that most exotic but familiar of jewels: The caliphate of

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Granada capitulated in 1492, and with it the wealth of Al-Ándalus, today Andalusia, fell into the hands of the Spanish who had lived next door for seven hundred years. But even more than the riches of the Alhambra or Peruvian sil- ver, Charles owned the most valuable jewel of all. For all his tropical and Mediterranean might, Charles was born in Ghent, and at the basis of his Burgundian inheritance were the old lands of the Charolais—Belgium and Holland. With their unending supply of international trade, the Netherlands was becoming the richest place in the world. Fewer than a million good Dutch burghers produced 40 percent of the tax receipts of the Spanish Empire, whose population numbered tens of millions of souls.24

Charles needed not only good courtiers; he also needed a good accountant, and while he knew it, he did not know how to transform this knowledge into effective policy. The problem of empire is that it is a source of unimaginable wealth, but good accounts often show that it costs more than it earns to hold regions, ports, and colonies across the globe. This was Charles’s problem, and it would be the enduring

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legacy of the great imperial dynasty he founded. Before Charles was ever rich, he was in debt. The Spanish nobility had conquered and stood to administer so much territory that it needed financial managers to handle its massive income and staggering expenditures. The emperor had to get his cut of everything, and being a good Burgundian, he relied on the massive legal ap- paratus of his empire to require that all transac- tions be calculated and that everyone pay their alcabala (5 to 14 percent sales tax) to the emperor.

Bankers were in short supply in Spain. So Charles put his fate in the hands of bankers from Germany, Italy, Holland, and Spain, and he set out to reorganize Spanish financial administra- tion. Not surprisingly, in a merchant empire with holdings in Italy and Holland, bankers in Genoa and Augsburg, and its massive fleet bringing gold, silver, spice, rare woods, plants, and the profits from its slave monopoly and sug- ar and tobacco farms into Seville, account books were everywhere. Yet the old imperial knight did not know how to use them.25

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The concepts of accounting and auditing ex- isted in some parts of the Spanish administration and the Spanish merchant community, espe- cially in Seville. Founded by their Catholic Majesties Ferdinand and Isabella in 1503, the Casa de la Contratación, or House of Trade, was a giant record house and center of administra- tion for Spanish trade with the Americas. It was managed by Sevillian merchants who, having traded across the globe and worked closely with Italians, were sometimes fluent in double entry. Basic accounts, the Libros de cargo y data (“charge and discharge books”), were kept in double entry. The bylaws of the institution stip- ulated that the Casa was to constitute a ware- house for moving merchandise to and from the Indies, and as such, it would act as a customs house. The crown appointed three chief admin- istrators: a factor, a treasurer, and an accountant. The Libros de cargo y data were to have dis- tinctive bindings, and the accountant was to re- cord in detail all the treasurer had received and spent. As in Genoa, there was a system to limit fraud: All operations had to be recorded in a

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central book, and each entry had to be signed by three officials.26

The complex operations of a sixteenth-cen- tury empire and colonization were, at least the- oretically, financially managed. For example, the belongings of those deceased in the New World were transferred to the Casa in coffers. Careful accounts were made of the contents of each coffer (often precious metals and jewels), and if they were not reclaimed by heirs, the con- tents were accounted for as income, indeed, im- portant income for the crown. Double entry was useful in accounting for this floating wealth that could be disbursed either straight to an heir or as state income spent on salaries and crown ex- penses.27

Charles needed to make the financial system of the Casa de la Contratación that of his own administration. The challenge, however, proved elusive. In 1523, Charles V centralized the Real Hacienda by bringing state administration and tax collection under one account. In the Prag- matic Sanction of 1552, the emperor decreed that all account books for merchants and admin- istrators be kept in double entry or at least in

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books that recorded receipts and expenditures. In 1556, the emperor created the position of Factor General of the Kings of Spain, an expert in double entry, who was responsible for keep- ing the Libros de cargo y data for the whole em- pire.28

This did not make Charles a financial man- ager, nor did it mean he had the skilled adminis- trators to carry out his policy. Although Charles wanted good administrative accounting, he nev- er implemented the reforms. In what was to be- come an ongoing tradition for the great mon- archs of Europe, Charles and his ministers simply juggled his income with his outsize im- perial debts. Because of his aristocratic ethic, account books were of no interest to him. By the time of his abdication in 1556, the empire was running a 36 million ducat debt and a million a year deficit, and 68 percent of total revenue went to pay previous loans to foreign bankers.29

When Charles’s son Philip came to the throne, he was not Holy Roman Emperor (his uncle Ferdinand inherited that title); rather he was king of Spain, Portugal, and ruler of the Spanish empire. Philip II was the first grand-

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scale, hands-on bureaucrat king, yet he, too, re- fused to do accounting. His information system was so vast, so intricate, and in some cases so efficient that even the Venetian ambassador sent his reports back to Venice via Spanish royal messenger posts. This king, on whose empire the sun never set, was not a traveler, but rather inhabited his own virtual world, enclosed in the halls of his immense monastery palace, the Escorial, which he filled with mountains of dis- patches and reports (he was known as “the king of paperwork”). The Escorial was a cavernous center of power from which the king worked at his desk, trying to read and respond to every re- port written from his international network of agents. More than 100,000 documents crossed his desk each year—far more than he could ef- fectively manage. He maintained massive archives, most notably in the walled castle of Si- mancas, as well as in the rapidly expanding im- perial trade and industry archives in the Casa de la Contratación. In the end, however, Philip’s information system was as cumbersome as the empire it tried to manage. His dominion was so large that it sometimes took seven years for him

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to respond to correspondence from such far- flung posts as the Philippines. Studies of Span- ish administration show the frustration en- gendered by one man’s control of too much minutiae. Philip managed to keep general con- trol over his system, but there were many issues and projects to which he could not give his at- tention, and accounts were primary among them.30

One would have expected a man so obsessed with data and control to take a keen interest in accounting. Indeed, Pacioli’s Christian account- ing might have appealed to Philip. Like Charles V, Philip spent a great deal of time worrying about money. He dressed in black, like a sober merchant or, as he said, like a monk. He studied Saint Thomas to understand the concept of “just price” rather than profit. Although he main- tained the identity of a monk-king, he was a much more hands-on administrator than his father. Yet Philip admitted his “ignorance as to financial affairs” and that he knew nothing of accounting: “I cannot tell a good account book or financial report on the subject from a bad one. And I do not wish to break my brains

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trying to comprehend something which I do not understand now, nor have I ever understood in all my days.” Philip felt only frustration and dis- dain for finance. Even with his obsessive habits of micromanagement, he had no intention of try- ing to understand the books of his empire. He would leave the absolutely essential task of managing the state’s books in someone else’s hands.31

Philip had to pay for the Holy League, a Mediterranean fleet that defeated the Ottoman Turks in 1571 at the Battle of Lepanto. It was glory indeed for his Catholic Majesty, but it came at a staggering price. Even after the battle, maintenance of the fleet cost 7 million escudos between 1571 and 1573. At the same time, Spain was fighting a rebellion in the Nether- lands. Not only were almost half the tax receipts of the empire threatened but also maintaining troops who were waging savage warfare even on civilian populations cost 11 million ducats between 1572 and 1575. Balance this against the 5 to 6 million ducats the crown received in in- come from both American and Castilian hold- ings, and it is clear Philip’s position was

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untenable. Bankruptcy loomed, and Philip needed to act.32

In 1573, Philip appointed Juan de Ovando (1515–1575) to oversee a new Council of Fin- ance and implement reforms to avoid bank- ruptcy. An inquisitor at the Sevillian Tribunal of the Holy Office, Ovando was a powerful mem- ber of the great governing bodies of Spain’s em- pire: the Council of the Spanish Empire and Presidency of the Council of the Indies. Inquisit- ors were not simply crushers of heresy but also highly trained administrators. They oversaw church religious doctrine, law, and finance. Ovando’s job was to reorganize state finance. He recognized that the king had given him a dif- ficult job, pointing out that “finance was an ob- ject of especial terror [to most in government] since so few seemed to grasp what was in- volved.”33

Ovando studied the effectiveness of state financial reporting and auditing. What he found was that the three principal financial institutions of the crown failed to share essential informa- tion. The Contaduría de Hacienda concerned it- self with the day-to-day running of the treasury

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and the collecting (farming) of taxes. The Contaduría de Cuentas checked the accounts and presented its findings to the crown. The Consejo de Hacienda developed financial policy with an eye to raising more royal income. Without intercommunication, these three institu- tions often replicated each other’s functions. Ovando saw a “multi-headed hydra” that was constantly in dissonance and often misinformed. Financial information was not accurate. He complained that the heads of his own adminis- tration were “so busy . . . nobody considers [fin- ancial] affairs as his own.”34

Ovando did not know double entry, but he understood its centralizing and balancing prin- ciple. His office would need a building of its own and trained, dedicated administrators to at- tend meetings in which all Council of Finance decisions would be made with a quorum of four. Ovando evoked as a model the Spanish viceroy- alty of the Kingdom of Naples and its Royal Council of Finance, of whose members it was said “there is not one who does not understand it (accounting and finance) as if it were his own domestic budget.” Naples not only had abacus

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and double-entry schools; Pacioli himself had taught there for a time and had probably helped train accounting masters. As in other Italian cit- ies, double entry was a prized form of know- ledge, even among the governing class. The Spanish viceroy, don Pedro de Toledo, collected taxes through the established Neapolitan system, and although this system was chaotic, the state financial records were at least centralized and its managers highly trained in accounting tech- niques.35

Ovando’s correspondence makes it clear that this was not the case in Spain. The council, he warned, needed not “priests and lawyers,” but trained “clerks and accountants” who could be promoted as auditors. Only in this way could the Spanish government create complete account books. One internal memo noted that the offi- cials in charge of international taxation and fin- ance did not have the financial tools to effect- ively negotiate with Genoese and German bankers. Finally, Ovando made an essential and, by this time, revolutionary point: This central council would need the direct support and atten- tion of the king. Only he could be the final

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auditor. Without this, Ovando’s concept of an inquisitor of state accounts would not have ef- fective authority.36

On April 11, 1574, Ovando produced a giant balance sheet of Philip’s finances. Although it was based on faulty financial reporting and primitive accounting, the report was a remark- able achievement, and its numbers were unargu- ably dire. The crown had an estimated income of 5,642,304 ducats. It had a debt of well over 73,908,171 ducats. Essential annual expenditure was around 3 million ducats. Even without any expenditures, it would take the crown fifteen years of full income to pay off its debts.37

Ovando and the king had a global financial crisis on their hands. With the Netherlands burn- ing and all corners of the empire calling out for funds, Ovando felt the crown needed to raise taxes. But to collect more tax revenue, the state needed better accountants and financial admin- istration. Here was Philip’s moment to modern- ize and centralize the Spanish government. At Philip’s behest, Ovando had proposed central- ized accounting as the necessary administrative tool. Yet, as Philip himself admitted, double

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entry is a very threatening tool. He knew that whoever mastered his books would have, in some ways, more power than he did. Ovando lamented in a letter that “his majesty did not trust me or the (other ministers) of finance,” so financial matters were often decided by Philip’s smaller council of high ministers, which Ovando considered financially ignorant.38

Threatened by Ovando, these powerful members of the government fought back. One of Philip’s counselors, Antonio de Padilla y Meneses, questioned whether Ovando, already an old man, knew anything of financial matters. He had neither able ministers nor formal train- ing. Padilla questioned if anyone at an advanced age could truly learn finance from scratch. It was a science and true profession, he said, like being a doctor or lawyer. Padilla admitted that he himself could never learn it. He knew that good accountants had to be trained at a young age to gain fluent mastery of numbers and the discipline of keeping daily, complex books. But the crown would not train accountants to fill its own administrative needs.39

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By refusing to fully implement Ovando’s re- forms, Philip made the government’s financial woes worse. Perhaps this fulfilled Philip’s per- sonal obsession with maintaining control over his government. Rather than creating and cent- ralizing state accounts, Philip went on a finan- cial witch hunt and in 1575 made a series of audits of his own administration, bogging it down at the very moment Ovando believed it needed to be mobilized to manage the state bankruptcy. He obsessed about paperwork and administration, but there was a deep voyeuristic quality to his interest. He loved confidential memoranda from informants and was most in- spired by Ovando’s claims that ministers were embezzling royal funds. Yet this was a distrac- tion, and the king now had even more trouble raising revenue to master his empire, the richest part of which was tearing away in the Dutch Re- volt. More than ever, the crisis of the Spanish monarchy seemed a crisis of accounting and ac- countability.40

Philip, for all his faults, realized that one can fire one’s accountant, but the problems do not go away. And he realized that Padilla was right:

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He needed a trained accountant to master his finances. Merchants had been part of the em- pire’s administrative apparatus, and they most often hailed from Seville, the merchant entrepôt of the empire. Those who learned to mix trade with state administration passed through the Casa de la Contratación and could be effective administrative experts. Philip’s attention was drawn to Pedro Luis de Torregrosa (1522–1607), a man who had the practical mer- chant experience Juan de Ovando lacked and was less of an administrative threat to the jeal- ous king.

From 1559 to 1562, Torregrosa had worked for the Casa de la Contratación—the state im- perial house of trade—one of the few parts of the government that kept double-entry accounts. Benefiting from his superior administration and the wealth of precious metals from the New World, Torregrosa made a welcome profit for the crown. By 1573, Torregrosa had begun ad- ministering the sales tax. Trusted by Philip II, he was a state auditor and helped manage the royal mint. By 1580, Philip clearly understood that Ovando’s recommendations needed to be

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followed. He asked Torregrosa to create a cent- ral state account book in double entry. This re- quired other state officials to give Torregrosa their own books, and there was so much resist- ance to the reform that the emperor himself complained of “those who opposed the creation of this account book.”41

Again, Philip’s interest in administration was outweighed by his grander ambitions and follies. In 1588, he launched the most disastrous naval expedition Europe had ever known: the Armada. It had deep roots in accounting, for building a fleet, maintaining ships, and keeping their logs all necessitated skilled accounting. The facts of the debacle are well-known—the captain of the fleet was inexperienced, and the weather played against the Spanish. The English small boats decimated the larger open-sea Span- ish vessels. Dozens of ships were lost, and tens of thousands of men died or were taken prison- er. Added to this was the ongoing revolt of the Dutch provinces and the loss of their massive tax revenues. The Armada was a financial dis- aster that Philip, as part of his personal penance, now had to work to fix. The direness of Spain’s

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situation—which Philip considered a punish- ment by God—perhaps explains why he acqui- esced and backed major accounting reform.

Torregrosa understood that to survive these disasters, the Spanish state needed a functioning accounting system. Without a Spanish manual on double entry, it would be impossible to ex- plain the necessary reforms, let alone train the accountants Ovando had insisted were so clearly needed. Torregrosa worked with his godson Bartolomé Salvador de Solórzano, an interna- tional merchant from Seville, to publish the first Spanish treatise on double-entry bookkeeping. Solórzano had traveled the Indies as a merchant. He had worked for the Italian merchant Gio- vanni Antonio Corzo Vicentelo de Leca, who had become a wealthy citizen of Seville and who had clearly taught Solórzano double entry. Ninety-six years after Pacioli’s Summa, and three imperial bankruptcies later, Solórzano published his Cash-Book and Accounting Manu- al for Merchants and Other People.42

Pacioli’s influence is clear in the manual, but Torregrosa was the mastermind behind a lar- ger project to use this book to reform society

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and politics. Torregrosa went further than Paci- oli in his dedicatory preface to Philip II, in which he explained that double entry was a method necessary not only for commerce but also for the statecraft of “kings, princes, and great lords.” The manual, he boasted, was par- ticularly suited for kings who wanted to rule justly. It was a remarkable claim and a pioneer- ing vision of what kings and princes did. In Tor- regrosa’s eyes, they were the arbiters of busi- ness, profit, and financial administration, and as such, they needed the tools of calculations and audits. Even more, he explained how to bind and count ledger pages to prevent fraud. Here was perhaps an appeal to Philip’s inquisitorial instincts.43

In the 1580s, Torregrosa began putting his theory into practice. The king had allowed him to create the office of the General Book of Roy- al Finances. He kept double-entry accounts for all state receipts and expenditures, “ordinary and extraordinary,” in four large account books and a number of journals. In order to keep his central ledger, Torregrosa kept more than a dozen books for various branches of financial

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administration. He even had a stock of specially made paper with special punched binding holes to guarantee that no outside pages could be sur- reptitiously introduced. By the early 1600s, Tor- regrosa kept two central state ledgers that con- tained the royal accounts for moneys distributed and received for royal services.44

Although initially successful, Torregrosa’s reforms met with fierce opposition. Members of the Grand Chamber of Accounts, a medieval body, sent the king a list of twenty-five objec- tions against Torregrosa. The keepers of the books of expenditure and revenue did not like being audited. Even businessmen felt that Torre- grosa had become too effective and were appre- hensive about having their profits exposed to the insatiable state. Philip died in 1598 and Torre- grosa in 1607. The monarchy was still in finan- cial disarray and again declared bankruptcy. There was only so much a good accountant could do. The Duke of Lerma, the favorite min- ister of the new king Philip III (reigned 1598–1621), kept a central state ledger but did so poorly, and it was not balanced. Torregrosa’s reforms had failed. He had never found a

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competent staff to man his department, and few administrators had been trained in double entry. There was still a shortage of accountants, and his reforms worked only where he could keep the books. Spain had no effective accounting training centers. Pacioli’s manual and all the work of the accounting reformers had had little influence in Spain and its empire.

By the reign of Philip’s grandson Philip IV in 1621, Spain was still in debt and deep into the Thirty Years’ War that would ravage Europe. With little will, Torregrosa’s accounting office had simply stopped functioning, and the mon- archy disbanded it that same year. Spanish writers like Cervantes considered the monarchy jaded and lazy. Reform languished, and Americ- an gold and silver had begun drying up, with bullion shipments declining by five times from a high in the mid-sixteenth century.

In 1628, north of Cuba, the Dutch admiral Piet Hein, along with the Dutch Jewish pirate Moses Cohen Henriques, seized a Spanish treas- ure fleet containing more than 11 million guild- ers in gold and silver, enough to fund the Dutch army for eight months and enrich the coffers of

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the shareholders of the Dutch East India Com- pany. Not surprisingly, this was a monetary dis- aster for Spain. The state had no more income. In Don Quixote, Cervantes described the ragged and miserable poverty of Spanish nobles, sol- diers, students, and professionals who could squeeze no more income out of the parched Castilian earth or out of the government, which rarely paid its pensions. The state was so corrupt that it was common knowledge that the wealthy noble grandees were now starving the popula- tion and holding the monarchy ransom with pro- hibitive loans. Philip’s historic accounting re- forms disappeared silently into the hot dust of Castile and from the memory of history. It was remarkable that with so few trained administrat- ors and in the face of prejudices against ac- counting, the reforms happened at all. More than a missed opportunity, it represented how difficult powerful kings would find it to imple- ment financial reforms that led to political ac- countability. Pacioli’s book would eventually find a receptive audience not under a king or emperor, but ultimately in Holland, among the

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sympathetic citizens of a merchant republic op- posed to absolute monarchy.45

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CHAPTER 5

THE DUTCH AUDIT

Everything has remained obscure and they haven’t come up with anything but procrastination and excuses instead of the accounts book (rekenboeck), which, as we suspect, they had smeared with bacon and which was eaten by the dogs.

—DUTCH EAST INDIA COMPANY SHAREHOLDER

COMPLAINT, 1622

By the early sixteenth century, the Neth-erlands—the richest European provinceof the Hapsburg Spanish Empire—had

replaced Northern Italy as the center of the in- ternational economy. In 1567, a Florentine trader described the staggering wealth of Ant- werp’s rich merchants, their beautiful shops, fine tapestries, grand houses, forty-two churches, stock exchange, and Hanseatic Trade House. It was, the Florentine noted, the richest and most beautiful city in the world. Portuguese ships laden with spice and Spanish silver ships made port in the second biggest city in northern Europe. It also became the center of accounting in Europe. It was here that Pacioli’s work on ac- counting would finally be put to use and dif- fused on a large scale. It was these Dutch ac- counting books that sparked an international in- terest in accounting. Yet even as the Dutch mastered, popularized, and used accounting for state administration, they, too, struggled not only with the rigorous demands of double-entry bookkeeping but also with the challenges of maintaining financial and political accountabil- ity. This might be the very lesson of the Dutch Golden Age: Those who wanted accountability had to struggle to learn accounting and to de- fend its legitimacy. The story of Holland shows

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not simply how the Dutch invented accountable government and finance but also how hard they were to maintain.1

For all its riches, the Netherlands in 1567 was not a free state, but instead ruled by King Philip II of Spain as part of his father’s original domin- ions. Although Flemish and Dutch subjects of the Hapsburg king prospered with international banking and trade (as well as whale oil, fishing, and cheese making), they also had to survive Spanish taxation, as oppressive imperial audit- ors sought to make the Dutch pay for the con- tinually bankrupt Spanish Empire. The Dutch came up with multiple schemes to sate the needs of the Spanish crown. Like other states in need of bond money (a publicly financed loan), they devised ways to raise public monies through the forced sale of life annuities (annual payments maturing into life insurance or pension-like be- nefits) to wealthy citizens. With this income, the Dutch paid off the Spanish.2

Interest-bearing annuities were nothing new. Italian city states, France, and Britain had also tried them. What made Holland different was

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that it had an effective provincial tax collection system, the trusted Kantoor van de Financie van Holland. The Dutch trusted the state to pay in- terest. European interest rates (between 4 and 5 percent) were pegged to Dutch bonds precisely because provincial tax receipts were considered reliable. Tax receipts were sometimes managed in double entry, but even more, they were leg- ally subject to public scrutiny. Not only liquidity but the very possibility of accountability en- gendered trust. Yet no one ever called for an audit of the provincial tax collectors, or for a central state account register, because the tax collectors apparently did their jobs so well.3

As the Dutch economy grew, accounting schools sprang up, primarily in Antwerp. Be- cause the Hapsburg dominions had once been part of the ancient kingdom of Burgundy, Dutch tax law was written in French, and thus Dutch accounting schools were called “French schools.” Dutch subjects learned French and double-entry accounting to pay taxes to the Spanish Holy Roman Emperor.

All that changed with the Dutch Revolt (1568–1648), during which the seventeen

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Protestant provinces of the northern Netherlands revolted and ultimately broke away from their repressive Hapsburg overlords to become a de facto republic in 1581. The immediate loss of Dutch tax revenues caused yet another Spanish bankruptcy. But Philip II not only wanted taxes from his richest subjects but also tried to force them to remain Catholic; he believed that no subject should ever have a religion different from his king. “And so I would rather lose all my kingdoms,” Philip remarked, “than consent to this.” The emperor got part of his wish. Philip, who faced a war with the Ottoman Turks in the Mediterranean, uprisings in Italy, and the challenges of managing his worldwide empire, could not pacify the Dutch on their home soil. With less than a million inhabitants, this little federated Protestant nation, of which 20 percent of its landmass was below sea level and another 40 percent was exposed to tides and flooding, had taken on the mighty Catholic Spanish em- peror and, with military victories in the 1570s, finally beaten him in war and declared inde- pendence in 1581.4

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In 1585, the massive Spanish Imperial Army laid violent siege to the southern city of Ant- werp. When the city fell, its Protestant residents fled to the free north. Once with a teeming pop- ulation of 100,000, Antwerp was reduced to 40,000 inhabitants when its rich artisans and merchants headed for Amsterdam, which, in turn, became the republic’s leading city and the center of world trade.5

Amsterdam also became the world center of accounting expertise. One poet later wrote that double-entry bookkeeping was the secret to Dutch wealth:

This was the fam’d and quick invention, which

Made Venice, Genoa and Florence rich: The Low-Countries (in all senses such) By this Art now speaks high and mighty

Dutch.

By the mid-seventeenth century, Amsterdam’s burgomasters had founded the Wisselbank, which guaranteed currency for invesment.

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Adam Smith would later note that balanced ac- counts made the bank run smoothly. The Dutch Republic was also home to the world’s primary stock exchange. Dutch banks offered loans that could be directly invested in merchandise fu- tures. With the proliferation of business to every level of Dutch society, there was a general con- sensus that double-entry accounting was neces- sary knowledge. From street vendors and even prostitutes, to merchants and nobles, the Dutch needed to know double-entry accounting to nav- igate their little oasis of commerce and toler- ance. With the complexity of the stock ex- change, Dutch merchants’ knowledge of finance became more sophisticated than that of their Italian predecessors or German neighbors.6

With publicly traded, multipartner firms or- ganizing worldwide seaborne commerce, Hol- land’s riches became legendary. The Dutch East India Company managed a merchant empire that brought in cargoes of Brazilian wood, Asian plants, and Arctic whale oil. Many of these riches came from the Spanish Empire, which Holland exploited more profitably than the Spanish themselves. The marketplace in

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Amsterdam was flush with the treasures of its trade: fish and fruit from the four corners of the globe; round and long pepper; several sorts of nutmeg, some covered in skin, others flowering; batons of cinnamon piled high in cross stacks; packets of cloves; shining borax crystals. There were stalks of rhubarb and sugarcane, piles of gunpowder and saltpeter, wax, gum, and ginger. The odors of styrax flowers, spicewood, frankincense, and myrrh wafted across what was, to visiting foreigners, an overwhelming display of commercial marvels.7

Along with products, other things flowed in from around the world, including reports, ac- counts, logbooks, and works of science and nat- ural history, assessing political climates, trading routes, and fluctuations in commodities prices. Dutch consuls sent reports from Dutch whale oil factories in the Arctic, plantations in the West Indies, and trading posts in Europe, Brazil, Suri- nam, Manhattan, and Aden. Dutch trading posts could be found anywhere in the streets of the world, even in their own backyard, in cities of their hated neighbors the French, such as Nantes and La Rochelle.8

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Accounting became a central element of Dutch education. Dutch elites formed a small, tight- knit group. They had a sense of the importance of both literacy and financial fluency. Literacy was at the center of both Dutch Calvinist and Catholic religions—reading and understanding the Bible oneself was part of the individual’s re- lationship with God and salvation. By the seven- teenth century, Holland was the most literate place in Europe and the most literate in account- ing.9

Dutch accounting schools proliferated in the 1500s, often alongside the Latin schools, where even prestigious scholars and educators like Isaac Beeckman, founder of the influential Dordrecht Latin School, had detailed knowledge of accounting practices. On April 26, 1503, Ja- cob van Schoonhoven from Bruges received a license from the burgomasters of Amsterdam to teach reading, writing, arithmetic, and French to “anyone who might be interested.” Van Schoon- hoven was given the legal right to “teach all that was useful for merchants.” This included weights, measures, tolls, and exchange rates. As early as 1509, Amsterdam saw the introduction

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of a “French school” that taught double entry. The public demanded that city governments sponsor bookkeeping schools. From the late fif- teenth century onward, merchant schools could be found in Leiden, Delft, Gouda, Rotterdam, Middelburg, Deventer, Nijmegen, Utrecht, and Bergen-op-Zoom.10

Accounting manuals also proliferated. The Flemish Yan Ympyn de Christoffels (1485–1540) first adapted Pacioli’s work into a Dutch accounting manual. A cloth trader from Anvers, he traveled extensively, visiting Por- tugal and residing in Venice for more than a decade. Only after Ympyn’s death, his wife, Anna, published New Instruction and Proof of the Praiseworthy Arts of Account Books (1543) in Antwerp. It differed from Pacioli’s manual in that it did not include a chapter on inventory, but it did give a full sample set of books, ex- amples of exchange bills, and introductions on how to account for them. Ympyn’s work did not always improve on Pacioli’s model. It failed to systematize balance sheets of profit and loss and recommended that books be closed when they were full and not at regular intervals (which

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allowed for more systematic management con- trol). Nonetheless, Ympyn’s manual became an important conduit of double-entry bookkeeping in Dutch, English, French, and German.11

Other influential mathematicians, such as Valantijn Mennher and Claes Pietersz, also fol- lowed Pacioli in combining the teaching of formal mathematics with merchant bookkeep- ing, which, in Holland, was seen to be the fin- ishing touch on a good education. Mennher was a Bavarian who moved to Antwerp and became a citizen in 1549. He became famous for teach- ing mathematics and double entry, rising to the head of his guild. He published four works on bookkeeping between 1550 and 1564. He prom- ised his readers the calculation of profit through making audits for all branches of a business periodically, on the same day. From the 1570s until his death in 1606, Claes Pietersz not only taught private courses in arithmetic in Amster- dam but also, in 1576, published two manuals in Amsterdam on Italian bookkeeping, calling the practice “very profitable for merchants.” One manual was translated into English under the title, The Pathway to Knowledge (1596).12

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The notion that the Netherlands was the cen- ter of world commerce and that this dominance was founded on the mastery of double-entry bookkeeping is suggested by the famous Ger- man woodcut, Allegory to Commerce (first pub- lished in 1585) by the German printer, calli- grapher, and accounting teacher Johann Neudör- fer the Elder and Jost Amman, a Swiss artist and engraver. The large woodcut is remarkable not only for its fine detail but also for showing a public consciousness that commercial success depended on double entry. Even more, the woodcut explained how to keep books. There are three sections of the woodcut: At the top, the patron deity of commerce, Mercury, holds a scale in his right hand. Each of the two pans of the scale holds a book, and they are connected by two cords marked “debitor” and “creditor.” Under the scale, the goddess of Fortune stands on a large book marked “Journal,” which stands atop a pillar. All of commerce rests on fortune, but it rewards moderation and deliberation, which are the products of accounting.13

The two bottom thirds of the woodcut are earthly. The central part of the engraving shows

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the worldly center of commerce, represented by Antwerp and ships upon the River Scheldt. Commerce and accounting had a place now, and it was not Venice or Florence. The message is even clearer in the lower third of the image. We not only see merchants in their storerooms and accounting houses but also see them keeping double-entry books, and the basic practice is ex- plained. In the center of the workshop is a taber- nacle containing a book entitled Secretorum Liber, the “secret book.” Underneath are three set of images describing how to keep double- entry books. At the top is a memorandum that shows live transactions being kept. Below it is an accountant putting entries into a journal with inscriptions on how to keep each book: “Every day I write in my Journal.” Under the scene de- picting the keeping of the final ledger is the ba- sic lesson of double-entry: “The Debit to the left-hand side / The credit belongs to the right.” The Allegory’s message is clear. Commerce de- pended on mastering double entry. Yet it also makes clear the limits of this earthly science and the medieval warnings against financial hubris. A skull and a vase emitting smoke represent the

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transitory nature of both life and business. Next to them is “Be devout, fear God and repent.”

As pious as many of the Dutch were, they also took massive risks, invested in stocks, outfitted ships, and made enormous fortunes. Although Holland espoused religious tolerance and a more egalitarian society than its neighbors (peasants owned land, got rich making cheese, and could buy stock), it was part of the early modern world, and as such, it was a potentially violent place. It was ravaged during the revolt by Span- ish soldiers of the Duke of Alba who put babies on pikes and hung peasants on trees like dead game. In 1584 in Delft, a French Catholic sup- porter of Philip II assassinated the Protestant William the Silent, the first prince of Orange- Nassau, the leading house of the County of Hol- land, with a pistol shot to the prince’s chest as he descended from his dinner table. The prince’s dying words asked for God’s mercy on his soul and on his people. The burgomasters of Delft were less merciful and had the assassin’s hand cut off and his body disemboweled and drawn and quartered.

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William’s son, Prince Maurice, became the stadtholder—the head of state—of the Nether- lands and duly went off to universities in Heidelberg and Leiden, becoming one of the most learned princes of his time. He mastered the classics, mathematics, and engineering to make war on the Spanish, which he did with great skill. And he took a course in double-entry accounting, which he learned and later used.

Maurice struggled for power with the de facto prime minister of Holland, Johan van Oldenbarnevelt, a soldier and primary leader of Holland for thirty-two years of its rebellion. In 1617, during internal religious conflict that pit- ted him against Prince Maurice, Oldenbarnevelt demanded that the Protestant northern States of Holland (the Staten after which Staten Island is named) declare independence from the southern, mostly Catholic States of the Spanish Nether- lands. During the struggle, he and his support- ers, including the father of international law, Hugo Grotius, were captured. Oldenbarnevelt’s head was chopped off in the public square after the old leader asked his executioner to “make it short.” Like a seventeenth-century Dutch still

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life painting, the Netherlands gave the impres- sion of stolid peace, but moments of political crisis brought blood and gutted corpses.

Amid the political chaos and violence, the Dutch continued to succeed in business, and with religious discipline, they immersed them- selves in bookkeeping. While at the University of Leiden, Prince Maurice met Simon Stevin (1548–1620), one of Holland’s leading human- ists and an admirer of the practical tradition of Alberti and Pacioli. He ignored the noble Neo- Platonic warnings of Pico della Mirandola and mixed high learning with the merchant arts. That a prince and a lowborn (indeed, bastard) engineer would meet at a university and become friends was already a European anomaly. That Stevin would teach the prince double-entry bookkeeping was another.14

Stevin excelled in linguistics, cosmography, perspective, algebra, the study of decimal frac- tions, the theory of numbers, physics, naviga- tion, and astronomy. He also made a careful study of double-entry bookkeeping. Stevin was a civic humanist whose achievements far sur- passed those of Pacioli. His learning had

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practical applications, especially in the manage- ment of water, and he was given the most sensit- ive positions in civil administration. He became the inspector of dikes and the chief administrat- or of the Dutch army.15

Stevin was attuned to the connection between mathematics and government. His manual of accounting, Accounting for Princes (Amsterdam, 1604) went through several edi- tions. The book was innovative in recognizing the difference between the capital of the enter- prise and that of the owner, and it explained how to minimize entries by compounding vari- ous transactions into larger numbers. Confident in the world of numbers, Stevin did not mention God in his treatise. In true scientific fashion, he called his balance sheet his “proof statement.” Stevin’s manual was revolutionary in recom- mending accounting for civic financial manage- ment. Double entry was not simply good for governments; it was essential for princes and leaders. Stevin condemned those who argued against the usefulness of double entry for muni- cipal administrations. Why, he asked, do gov- ernment clerks and bailiffs become rich yet

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leave their offices in debt and financial chaos? Unaccountable management, he insisted, made governments fail. A prince versed in double entry could read treasury books himself and not simply rely on the treasurer’s word. Merchants, he assured the prince, would make better treas- urers than the bureaucrats and taxmen presently in the prince’s employ. Prince Maurice was stunned by these ideas. Although he admitted he found bookkeeping difficult to grasp, he claimed he would study it further. Maurice not only had his personal accountant keep double- entry books for his personal affairs but also ap- plied double entry in his administrations. Hol- land had achieved what Spain never could. It was the first time a prince—albeit a republican one—learned double-entry accounting and used it for political administration.16

On September 1, 1638, Marie de’ Medici, former queen regent of France and mother of King Louis XIII, made a triumphal four-day royal visit to Amsterdam. Much had changed in the fifty years since Philip II launched his ill- fated repression in the Netherlands. Philip’s

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Armada fiasco had sealed the decline of Spain, and the Dutch Golden Age had begun. The Medici French queen had come to Amsterdam not to see the riches of its culture, but, rather, the wonders of its great company, the United Dutch East India Company (de Vereenigde OostIndische Compagnie, or VOC). By the be- ginning of the seventeenth century, the VOC boasted double the tonnage of goods shipped of the English East India Company and ten times the capital investment, as well as unparalleled profits. It set the prices for most internationally traded goods from Amsterdam, Brazil, and Manhattan to China. It built warships and forts and fielded armies. Privately financed, it was the international arm of the Dutch government, and for almost a hundred years, it made little Holland the center of world trade.

There was great symbolism, then, in this Medici queen (although exiled by Cardinal Richelieu) visiting the rich market city on the Amstel, with its policy of religious tolerance and relative political freedom, its canals full of ships overflowing with goods, and its banks and stock exchange humming with the activity of

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entrepreneurs. In hindsight, Marie de’ Medici appeared to be visiting the future (a little more than a month later, the first Dutch settler would install himself in the Bronx). Amsterdam was a city of wonder, in which the exotic goods of the world could be seen for the first time by European eyes.

In a description of the queen’s visit, the Dutch humanist Caspar Barlaeus claimed that the grandeur of monarchy would come face-to- face with the opposing grandeur of “industry” and “international trade.” Far from Florence, the burgomasters of Amsterdam were showing the “daughter of Cosimo” (in truth, she was a dis- tant relation, from another branch of the family) the greatest trading city. Most important, Marie visited the House of the East India Company. If the very idea of monarchy was based in its mil- itary prowess, here was a new force that had gutted Spain and its empire. This great “com- pany,” bragged Barlaeus, is like “a prince”: It raised armies to fight wars across the globe and despoiled the king of Spain of his empire. This was not simple pageantry, but ideology, too. “Our Republic,” said Barlaeus, clearly echoing

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the claims of Spain, spreads its empire “as far as the sun shines.” Monarchy had met its match in “commerce,” “work,” and “industry.” All this, the Dutch knew, depended on good account- ing.17

The VOC had been created thirty-six years earlier by Johan van Oldenbarnevelt, who was concerned that too much competition among the Dutch would undermine trade. He designed a single federated company to represent all the re- gions of Holland—the United Dutch East India Company. The charter of the company showed the mixture of private capital and state interests that Oldenbarnevelt felt would best serve the re- public. The company was charged not only with a trade monopoly but also to uphold the interests of the Netherlands.18

The charter also stipulated that any Dutch citizen could buy shares in the company and that “there shall be a distribution of dividends as soon as 5% of the proceeds from the return of the cargo have been cashed.” The company was directed by the Heren Seventien and the Bewindhebbers: seventeen principal stockhold- ers and the next sixty or so largest investors.

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The stock was traded on the Amsterdam Stock Exchange, making the VOC the first publicly traded limited liability company in history, a milestone in the history of capitalism. Dutch cit- izens could freely invest in and divest out of the company by simply buying or selling shares, not by removing their capital investment directly from the company. Confidence in the company was to be based on internal accounting. The charter stipulated that the company hire profes- sional bookkeepers and that the board of the company would regularly audit the accounts of all boats and warehouses. In the Dutch spirit of open government, the charter mandated that every six years the company would publish a public audit that would make a general account of all the costs of the company, as well as its profits and losses. Any manager failing to present his accounts would be subject to punish- ment.19

The Dutch fondness for accounting did not derive only from a merchant ethic. It also came from an older tradition in Dutch culture: water management. If the dikes broke and the water came in, Holland would be lost. Good municipal

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management, therefore, became a matter of life and death, and this provides one reason the Dutch took accounting and accountability so seriously. The Netherlands could not survive without its system of dikes, dunes, drainage sys- tems, and canals, which were administered by local Waterschappen (“water boards”). Like the different regional chambers of the VOC, the wa- ter board directors were directly accountable to their local populations. They had to be. If funds and public works were mismanaged, regions would simply be swallowed by water, and many would die.

A Dutch saying goes, “Wie het water deert, die het water keert” (“Whom water harms stops the water”). This might have been why Stevin, Holland’s finest engineer and a master of double entry, was chief inspector. It might also explain why municipal accounting had to be good and relatively transparent. Local audits, or schouw, were communally recognized as part of a “prag- matic consensus,” necessary to guarantee good municipal administration and dry land.20

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Trust developed from consistently good civic financial management was one reason the Dutch had the faith to buy shares and were able to cre- ate the first publicly traded company. But this trust was soon tested by the internal workings of the VOC, which caused the first modern com- pany to have the first shareholders’ revolt. The biggest investor in the VOC was Isaac Le Maire (1558–1624), a Flemish merchant settled in Amsterdam who, like Francesco Datini, had his hands in numerous business interests, from selling merchandise and handling bills of ex- change to selling marine insurance and equip- ping Eastern trade voyages. He had a history of dodgy accounting practices and predatory com- mercial ventures. Despite being a swindler him- self, La Maire called for corporate accountabil- ity. In 1602, he bought 85,000 guilders’ worth of shares in the VOC. But Le Maire was no simple investor. He not only wanted returns; when he did not get them, he secretly organized competing trade expeditions while hedging against VOC stocks by a futures share-selling scheme. He was accused of embezzling from the VOC, whose board then sued him. Le Maire

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vowed revenge against the company and not only continued to support competing (and fail- ing) ventures but also corrupted the VOC’s chief accountant, Barent Lampe, and had him put false shares into the books to favor Le Maire’s schemes. In 1609, Le Maire wrote a let- ter of complaint to Oldenbarnevelt demanding public audits. Between 1607 and 1609, stock values dropped from 212 percent to 126 per- cent.21

Le Maire’s schemes failed, but stockholder fears were real. To dispel them, the VOC’s board of seventeen directors—the Heren Seven- tien—declared that they would issue more di- vidends but that they could not submit to a pub- lic audit of accounts, which would play into the hands of the Spanish and threaten the interests of the state. The VOC was the military imperial arm of the Dutch state, which could not afford such a loss. Accountability posed risks to all in- volved. The directors successfully pushed this argument and garnered shareholder and public trust during the first twenty years of the VOC to avoid a true public audit. Perhaps this explains why, in its early years, the VOC did not keep a

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central double-entry ledger, which would have facilitated audits.

By 1620, no external audits had been made and no dividends paid, and there were accusa- tions of insider trading—profits made by sweet- heart deals within the company itself and a ma- nipulation of accounts by not including share capital on balance sheets, thus making assets ap- pear larger than they were. The VOC rates of re- turn dropped to 6.4 percent from the historical average of 18 percent. Public opinion began to turn against the Heren Seventien and other lead- ing shareholders, the Bewindhebbers. Stocks were now being bought and sold not on the basis of financial data, but on rumors in the mar- ketplace. Secrecy was undermining the first modern capitalist venture.22

Finally, in 1622, disgruntled stockholders published a pamphlet, The Necessary Discourse, attacking the Heren Seventien and Bewind- hebbers. In it, they rejected the logic of state secrecy on the grounds of national security and insisted that the company be run transparently. They complained that there had been no audits and that instead of producing a rekenboeck, or

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accounts book, they graphically claimed that the Bewindhebbers had “smeared it with bacon” so it would be “eaten by dogs” to hide their illicit earnings. The stockholders sarcastically com- plained that the directors would conduct a gen- eral audit only once everyone was dead. They further accused the Bewindhebbers of not be- having like serious merchants.23

The complaining stockholders argued that what they wanted was a proper financial audit, a reeckeninge. Then followed specific accusations of corruption, such as directors’ sale of indigo at below-market prices for a personal profit. Dir- ectors were accused of having made personal profits from manipulating stock prices and tak- ing a cut of every part of the massive industrial and commercial project. The theft was said to be shameless. One director, while inspecting a ship’s cargo, saw a golden crucifix, stole it, and put it in his pocket. But due to its size and weight, it broke through and could be seen hanging out of his half-opened trousers. When another director noted that the thief was “not able to bear his own cross,” the man un- abashedly grabbed the crucifix from his pants

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and walked away with it. This was truly an em- barrassment of riches.24

In the end, Prince Maurice’s administrators found a solution. Although he used double entry in his own administration, the student of Stevin rejected the language of accounting and ac- countability and instead embraced reason of state, but in a Dutch style. There would be no public reckoning, but the state would audit the company in secret.

Although Holland was the European leader in accounting and political accountability, main- taining transparent government and finance was a constant struggle. As Johannes Hudde (1628–1704) found fifty years later, there was still no central ledger for calculating the total balances for the company. Hudde was a math- ematician and mayor of Amsterdam and, in 1672, was named governor of the VOC, head of the Heren Seventien. He epitomized the govern- ing elite, being not only fluent in mathematics and bookkeeping but also willing to use them for government and for internal audits. His man- agement of water levels is still famous, as he es- tablished a system of stone markers, Hudde

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Stones, that marked high-water points throughout the city. He studied mathematics at Leiden, was a follower of the French philosoph- er Descartes, and corresponded with famed skeptical philosophers and mathematicians Spinoza, Huygens, and Newton. Hudde worked with Leibniz to develop infinitesimal calculus, establishing Hudde’s Rule: two polynomial equations, or two different equations, that come up with the same sum. It was a fitting discovery for a man who set as a task trying to balance the books of the VOC.25

Hudde sought to create a balance sheet for the VOC but realized that the central bookkeep- ing of the company made this difficult. One reason was that the company did not account for liabilities. He set about separating assets from li- abilities. Assets included all goods at sea (mer- chandise and cash), ships, equipment, war ma- terials and forts, food, property, and ammuni- tion. To measure liabilities, he took into account debts with or without interest, unpaid wages, and share capital (the cash value of a share upon its sale), as well as risks such as losses at sea and shipwrecks. The loss of a ship could ruin a

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merchant or an entire firm. Hudde also sought to take account of all the heterogeneous currencies used in world trade, no easy task, and to apply risk values to merchandise according to local contingencies. He tried to tally statistics over ten-year periods, something only someone who was both a mathematician and a merchant ac- countant could do. This was one of the pioneer- ing moments in the use of probability statistics in merchant accounting. He realized that the cost of maintaining merchandise surpluses often outweighed their value and therefore recom- mended, for example, destroying certain stocks of spices that ended up costing more than they were worth after duties and shipment costs. He figured that rather than amassing stock, he needed to create more demand to spur sales. This was profit thinking based on liability ac- counting and careful trade and probable price statistics.26

To make his point, Hudde wrote philosoph- ical principles and sample problems for the VOC managers, essentially outlining early prin- ciples of cost accounting: “A merchant has a stock of 100 pounds of cloves. The annual sale

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is 50 pounds and the annual production 50 pounds. What is the value of the 100 pounds stored?” The answer, he stated, was “Nothing, on the contrary, they involve losses, as they cost warehouse rent and other expenses.” His quest for the right valuation was absolutely necessary for keeping books and making profits. He also tried to balance the recording of expected profits with real profits, something we struggle migh- tily with today. To do this, he devised a statistic- al calculation to predict profits over twenty-five- year periods. This was the only way to calculate trade values of commodities thousands of miles away, whose sale value would not be estab- lished for years to come. Hudde’s principle was that no transaction could be recorded without assigning a value and loss to it through a credit and debit entry for each item.27

There is not enough evidence to conclude that Hudde actually succeeded in drawing up ef- fective balance sheets for the VOC. As director of the Heren Seventien and mayor of Amster- dam, he was a busy man. But he did appoint a number of internal bookkeepers to continue his work. One died in a shipwreck, and another,

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Daniël Braams, was appointed in 1690 to keep accounts for the whole company, taking into ac- count valuation principles. However, he died right after making the first drafts of his ac- counts. The Heren Seventien appointed another bookkeeper, but the order was never carried through. If the directors of the company failed to keep good books, they nonetheless took Hudde’s lessons to heart and were very prudent about predicting profits and costs. The spirit then, if not the practice, of good accounting took hold within the VOC’s administration.28

The lesson from the VOC is thus complex. The greatest capitalist enterprise predating the 1800s never instituted double entry in spite of an awareness of the practice and a rich number of experts who could have done the job. Non- etheless, the spirit of accounting weighed over the company, inspiring internal audits, attempts to make calculations, and great prudence in cal- culating value, profits, and loss. Stevin’s general idea held.

Figures like Hudde—fluent in humanist learn- ing, the sciences, and commercial

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mathematics—ruled Holland by the second half of the seventeenth century and applied their skills to state management. In 1662, the free- market republican theorist Pieter de la Court (1618–1685) wrote True Interest and Political Maxims of the Republic of Holland, a virulent attack against monarchy and a detailed outline of how economic management through account- ing and free markets spurred the Dutch eco- nomy. To effectively forge economic and polit- ical policy, de la Court believed he had to mas- ter political theory, ethics, history, mathematics, accounting, and an expert knowledge of com- merce and trade.

De la Court saw Dutch freedoms and politic- al accountability as the response to monarchical tyranny. The inhabitants of Holland, he ex- pounded, can “receive no greater mischief in their polity, than to be governed by a monarch or supreme lord.” He recognized that this tradi- tion came from the Italian republics. Before John Locke wrote his Treatises on representat- ive government, de la Court claimed that in- dustry, commerce, free trade, and political liberty could trump monarchical might. De la

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Court’s writings were a victory call of mer- chants over princes in a battle that raged as both Spain and France invaded Holland, trying in vain to wipe out the threatening republican political system. Indeed, de la Court’s message was an open challenge to oppressive, absolute monarchy: Successful industry and commerce were not possible, de la Court claimed, without political and economic freedom and accountab- ility, as well as religious tolerance.29

De la Court successfully sought the protec- tion of Johan de Witt, the Grand Pensionary of Holland (leader of the government when there was no effective stadtholder). De Witt not only paid for the publication of de la Court’s work and allowed his name to be added as a coauthor but also may have added some of his own writ- ings. He was both a sophisticated philosopher and a skilled merchant administrator who worked to develop republican political theory as well as economic policy. With de la Court, de Witt represents the Dutch ruling elite, which saw both republican ethics and mathematics as a tool for good government. As Grand Pensionary of Holland from 1652 to 1672, de Witt oversaw

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a particularly rich period of the Dutch Golden Age during which, in spite of the hostility of Spain, Sweden, England, and France, Holland flourished as a center of trade and tolerance and also art, science, philosophy, and theology, as well as political debate, printing, and interna- tional communication.30

De Witt was a product of the classical edu- cation of the Dordrecht Latin school and also of Cartesian mathematics, on which he published. He trained as a lawyer and traveled through France and England. He was a classical states- man in his knowledge of courtly government and diplomacy, but he was also a mercantile manager and a trained mathematician, and his lasting achievement was to develop mathematic- al principles for life annuities in his Treatise on Life Annuities (1671), one of the first practical applications of the theory of probability on eco- nomics. Working off Descartes’s theories of geometry, in 1659 he published a book about the calculations of lines and curves, which was useful not only for applied physics but also for ballistics.31

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By the seventeenth century, Holland’s wealth and freedoms were both celebrated and feared throughout the world. Yet peace did not come to the Netherlands. After the death of the Stadtholder William II of Orange in 1650, Johan de Witt had led the Netherlands for more than twenty years. Yet as Holland’s wealth grew, so did the envy of its powerful neighbors, France and England. In the 1650s and 1660s, the Eng- lish and Dutch fought numerous battles over the English Channel, trade routes, and even colon- ies. The English captured the Dutch colony of New Netherland and its capital Manhattan in 1664. In 1672, Louis XIV’s troops raided and plundered Holland. De la Court and de Witt could calculate, account, and call for republican government, but even with all their wealth, 1 million Dutchmen could not resist 23 million Frenchmen with a hostile, absolute Sun King and his giant army bent on bringing the arrog- ant, lowborn merchants to their knees to beg for mercy from Catholic France. The Princes of Orange, with their long and violent political tra- dition, sensed an opportunity to seize power from de Witt and regain their authority as

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heredity stadtholders. They deposed him and or- ganized a mob to gut and lynch him and his brother Cornelis (the de Witts’ fingers and toes were cut off, and members of the mob ate their internal organs). A silversmith exhibited Cornel- is’s heart in his shop for years. Tolerance, math- ematics, and free trade could not trump the rabid government of violent men and mobs.

Accounting had come of age, but it had not imposed reason yet. Indeed, many saw just how powerful double entry could be, and like de la Court, they understood that it could threaten ab- solute power and entrenched interests. From now on, politics and accounting would be ad- mired and emulated, but also feared. The bloody end of the de Witt brothers presaged a long struggle to bring mathematical clarity and ac- countability to politics.

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CHAPTER 6

THE ACCOUNTANT AND THE SUN KING

I have already begun to taste the pleasures to be found in working on finances myself . . . no one should doubt that I will continue.

—LOUIS XIV TO HIS MOTHER, ANNE OF AUSTRIA, 1661

In March 1661, Louis XIV of France cameof age and took possession of the largestkingdom in Europe and possibly the richest in the world. It was a time of great hope. After a near century of war, revolt, and violence, France had a brilliant young king, a man of culture,

with an affinity for great artists and love affairs. We rightly think of Louis XIV, with his enorm- ous powdered wig, dancing ballets and attend- ing fireworks and plays by Molière. Like his great-grandfather, Philip II of Spain, Louis be- lieved in his absolute, divine right. God gave him his power, and, in his mind, he was ac- countable only to this high authority. But Louis lived with a paradox. Although he hated the smug wealth of the Protestant Dutch burgomas- ters, he was fascinated by their tool of com- merce: accounting. The problem was that he saw not only its uses for administration but, later, its threat as a tool of accountability.

The man who would become the master of Versailles and the greatest artistic patron of his age, and who would wage war on all of Europe, began his reign under the watchful eye of his trusted accountant. His godfather and de facto prime minister, the wily old Italian Cardinal Jules Mazarin, on his deathbed left the young king not only part of his fortune (including the priceless Mazarin diamonds) but also his per- sonal accountant who built it: Jean-Baptiste Col- bert (1619–1683). Mazarin assured Louis that

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there was no more useful man in the entire king- dom. The monarchy was managed by a top ac- countant, a man versed in the practices of double entry. Thus Louis’s story is tightly inter- twined with the history of accounting. Louis’s brilliance was not only in valuing artists and culture and using them for propaganda. He also understood that he needed a good accountant and that to audit his own accounts, he, too, would have to learn accounting to oversee his fortune and administration.

Louis came to the throne of a country im- poverished for a king of his stature. The crown had suffered from the Fronde (1648–1653), the civil war that followed the death of his father, Louis XIII, and shook the regency (1643–1651) of his mother, granddaughter of Philip II of Spain, Anne of Austria, and her chief adviser and minister, Cardinal Mazarin. Indeed, Louis’s own fortune was next to nothing, and he de- pended on Mazarin to run and finance the king- dom. He needed to build a fortune that would al- low him to master not only France but also the world.

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Louis immediately asked Colbert to initiate him into the secrets of accounting, which Col- bert had used so effectively to support the crown during the Fronde. Louis later described to his son how he and Colbert set out to make ac- counting reforms. Louis understood that one of the central pillars of his administration was the main register of royal accounts. Louis wrote that he gave Colbert control over state finances, not only because he was “diligent” and trustworthy but also because Louis knew Colbert could keep books.1

Louis was very lucky that Mazarin had found Colbert, for in another time and place the Col- berts might have been patricians, in the mold of the Medicis. In any case, they not only shared the merchant knowledge of the old Italian bankers but also were directly related to them. Jean-Baptiste Colbert came from a merchant banking family from Reims, the great cathedral and cloth town and capital of the Champagne region. Seventeenth-century France, however, was not Renaissance Italy, and bourgeois patri- cians did not become the princes of their cities.

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In a culture dominated by wealthy nobles and increasingly by a centralized monarchy in the tradition of Philip II, the primary avenue of so- cial ascension for an ambitious financier or mer- chant was through service to a great aristocrat or, inevitably after the failed noble rebellion of the Fronde, to the crown.2

Colbert’s father began his career not as a simple cloth merchant, as the cliché goes, but as a négociant: an international wholesale mer- chant and financier. The Florentine tradition was never far from Reims and Lyon, which had been connected through trade and banking since the Middle Ages. The Colbert family was linked to the Particelli, the influential Franco-Italian banking family into which Colbert’s sister mar- ried.3

Colbert attended the Jesuit school in Reims. Aside from grammar, humanities, and rhetoric, Jesuit pedagogy had a special curriculum de- signed for merchants that did away with theo- logy and classical culture and focused instead on geography, natural science (with possibly some engineering), reading comprehension, note

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taking, filing, and the formal organization of one’s reading and lecture notes into notebooks.4

In his mid-teens, Colbert trained to be an ac- countant. Unlike Italy or Holland, France had no official accounting schools, so Colbert appren- ticed in firms with strong ties to his family. He first worked in the Lyon office of the Italian banking family Mascranni, where he learned in- ternational banking and basic accounting and exchange practices, as well as some Italian. He then went on to take a clerkship at the Parisian accounting house “l’étude Chappelain” and later at the law firm of Biterne, where he learned fin- ancial law, a basis of state administration.5

Working in merchant houses and accounting firms provided specific sorts of training. An ap- prentice would learn the ars mercatoria, the mechanics of running a firm, involving diligent record keeping at all levels. For actual trading, it required a mastery not only of merchand- ise—from cloth, metals, plants, and spices to slaves—but also of its evaluation and measure- ment. As they had since the Middle Ages, mer- chants still carried with them reference books, but many made personal notebooks of currency

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exchanges; customs forms and rules; the transla- tion of basic financial terms in major European languages; a schedule of tides, sunsets, and sun- rises; merchandise descriptions; maps; naviga- tion information; and city descriptions. Colbert was particularly skilled in paperwork handling, the laws and procedures of exchange and trade, and administrative archiving. Finally, appren- ticeship offered Colbert real-time training in ac- counting. He was now ready to apply his skills to the French job market.6

Colbert’s initial training led in 1639 to his purchase of a position in the French army. This was his first position in royal administration; as a financial administrator and accountant, he traveled across France, writing administrative reports on troop numbers and supplies and man- aging regimental finance. Decades earlier, this might have been the end of the story: Colbert would have remained a wealthy bourgeois fin- ancier or simply a bureaucrat. But his mastery of accounting and clear report writing brought him to the attention of his superiors, and soon Colbert was named personal intendant, or ad- ministrator, to Cardinal Mazarin himself.7

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The meeting of Colbert and Mazarin brought together two complementary spirits. Mazarin had amassed a colossal fortune, larger than that of the crown, but he did not have the expertise to manage it. Colbert, on the other hand, had spent his entire youth training to manage large fortunes, but he did not have one. He was now close to the largest fortune in France. The car- dinal’s cellars were filled with treasures—a massive collection of artwork, antiquities, and jewels. But Mazarin’s real wealth was contained in enormous and unorganized piles of feudal contracts and deeds for various sorts of land- holdings, industries, and dubious financial schemes. Mazarin stated frankly that he had no idea how much wealth he actually had or how much he could raise to fund his armies. In any case, as the Fronde drew on, Mazarin needed ever more funds. Thus he needed a good ac- countant not only to put his finances in order but also to raise money quickly for the war effort.8

Colbert’s persistence was boundless, and he began the hard job of ingratiating himself to the cardinal and rendering his services indispens- able to the de facto ruler of France. Colbert

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began examining Mazarin’s archives, pouring over mounds of paperwork and feudal deeds, and finding untapped revenue and unpaid debts. He also began managing industrial projects and various sources of income, along with Mazar- in’s massive ecclesiastical landholdings. During the years 1650 to 1653, a detailed correspond- ence between the two men reveals the extent of Colbert’s management of Mazarin’s affairs. In a report on the cardinal’s finances dated Septem- ber 31, 1651, Colbert informed his master that he indeed had received “all the papers” and that he was working to “terminate the difficulties” in bringing order to the cardinal’s finances. In 1652, working with the queen’s treasurer, the parliamentary President Jacques Tubeuf, Col- bert was still trying to obtain all Mazarin’s pa- pers and bring to term the cardinal’s various business ventures. Colbert the auditor was at work, studying the cardinal’s papers, “clearing up” errors, and saving “his Eminence” hundreds of thousands of livres of income. “I beg you to believe,” he wrote the surely grateful Mazarin, “that I have not made any notable errors.”9

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Although Mazarin initially found Colbert vulgar and presumptuous, within a year he declared him simply “indispensable.” Colbert’s work bore fruit, and any personal faults an accountant or financial adviser might have are easily over- looked when money starts flowing in. In 1658, after the Fronde, Mazarin had 8 million livres in cash. By the time of the cardinal’s death in 1661, Colbert had turned this sum into 35 mil- lion livres, a great part of which would be Maz- arin’s legacy to Louis XIV.10

As much as Colbert succeeded in building and managing Mazarin’s fortune in the 1650s, he nonetheless remained a household servant. As an accountant, he was close to the center of the new royal state, but he was not yet a part of it. Indeed, the idea of an accountant rising high- er was unheard of in France. However, Col- bert’s services were so important, and his coun- sel deemed so valuable, that on his deathbed Mazarin recommended him to Louis, and Louis wisely took Colbert as his accountant and per- sonal confidant. When Louis took power in 1661, he and Colbert were already at work.11

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Jean-Baptiste Colbert is famous for his the- ory of mercantilism: that there was only so much gold and wealth in the world and that France had to create industry so that this limited supply of wealth would flow away from Hol- land and Britain to France. To do this, he set up state-sponsored monopolies and organized France’s empire in the New World (with its es- tuary in Louisiana, the Mississippi was then called the Colbert River). Whether Colbert’s in- dustrial project worked is the subject of fierce debate. What is less debatable is how innovative Colbert was as a financial manager. Adam Smith warned against state interference in finan- cial matters, but he admired Colbert, foremost for his skill as a financial manager, tax collector, and accountant. Smith lauded Colbert’s know- ledge of industry and state accounts, as well as his success in “introducing method and good or- der into the collection and expenditure of the publick revenue.”12

Accounting was not simply about good ad- ministration. It was also a tool of power and re- pression. On taking the office of Controller General of Finance, Colbert immediately began

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raising revenues and auditing the king’s per- ceived political foes. Colbert was particularly involved with bringing down his own nemesis, Nicolas Fouquet (1615–1680). Fouquet was Mazarin’s and Louis XIV’s early superintendent of finances. By all accounts, he was brilliant, dashing, greedy, and paranoid. A writer and keen political observer of the time, Madame de Sevigné, painted Fouquet as the victim of Col- bert’s ambition and Louis XIV’s dictatorial tendencies. But Fouquet was undeniably pre- sumptuous. He made the infamous mistake of assuming that he would be Louis XIV’s prime minister and that he could dictate polity to the young king.13

In August 1661, at the moment Louis had taken personal rule after the death of Mazarin, Fouquet threw an ostentatious party at his chat- eau in Vaux-le-Vicomte, south of Paris. Louis was humiliated by his minister’s sophisticated opulence and patronage of high society and cul- ture. Vaux was grander than any abode Louis possessed. Like all intendants of finance before him, Fouquet pilfered money from royal funds; this was an understood advantage of the

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position. Not only did Fouquet steal, however, but also he managed royal funds badly, and he made the error of using them to outshine the king, whose personal finances after the Fronde were still shaky. Had Fouquet spent his money on only culture and parties, perhaps Louis might not have been so bent on destroying him. Louis had Colbert place a spy dressed as a fisherman off the coast of Belle-Île, Fouquet’s island off the southern coast of Brittany. Colbert’s agent provided a detailed map of the island, as well as a report that detailed Fouquet’s 1,500 laborers, 200 garrisoned soldiers, and 400 cannons on the island, as well as munitions and supplies for 6,000 men. The great engineer Vauban was building fortifications on the island’s coast. Even more, Colbert’s agents reported that Fou- quet had made plans to take over the Caribbean island of Martinique and to use his own coastal island to receive all the goods produced there. In short, Fouquet was building a miniature king- dom and a small empire. As an independent and wealthy noble, with an army and fort held out- side royal authority, he was a threat to Louis.14

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In September 1661, Louis and Colbert moved to arrest Fouquet and exile his family and friends. Colbert wrote out several detailed plans for the arrest. All Fouquet’s offices would be sealed, and state lawyers would invest the premises and confiscate all papers. Colbert wanted not just Fouquet’s secret plans and let- ters; he also wanted Fouquet’s accounts, which, to him, were the strongest proof of treason. Col- bert insisted that royal tax lawyers be present not only to seal documents but also to rush them back to his own office. Colbert knew that an ef- fective audit was based on control of all finan- cial papers. As the chief of the king’s musket- eers, Captain Charles d’Artagnan—who would be immortalized by Alexandre Dumas in The Three Musketeers—led the arrest of Fouquet and the ensuing search and ransack of his house. In Fouquet’s office, behind the armoire, they found a massive, bound folio notebook, called the Cassette. Colbert ordered the papers sealed and speedily sent to him by courier. D’Artagnan was ordered to arrest all Fouquet’s assistants and search them for hidden papers.15

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Unprepared and outmaneuvered, Fouquet was stunned by Colbert’s raid, which also un- earthed Fouquet’s massive correspondence with various ladies who served as lovers and inform- ants, as well as accounts pertaining to payments, gifts, and bribes. The Cassette listed all of Fou- quet’s various agents and spies, many in the royal court and administration. The detailed ac- counts revealed his financial dealings as well as his plans and finances for building his fortress on Belle-Île.16

When Fouquet was put on trial for treason, the public rightfully perceived Colbert as pulling the strings behind the scenes, giving new meaning to his family crest’s symbol, a climb- ing snake. Even if the trial did not convince the public of Fouquet’s guilt, it made clear the in- tention of the crown to act above the law. It also revealed something essential about Colbert: He was willing to use accounting as a political weapon. Colbert rightly saw the keys to over- throwing an enemy in his account books, which revealed his network, his finances, and his plans. It was a political move worthy of the Medici, but the stakes were higher. With

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France’s population of 23 million, the largest army in the world, an expanding seaborne em- pire, and the aid of a very good accountant, Louis hoped to become master of Europe.17

Immoral and ultimately cruel though he was, Colbert still made notable innovations as Louis’s de facto prime minister. In his Historic- al Memoirs on French Financial Affairs (1663), Colbert explained how he and Louis integrated accounting into statecraft. He described not only how he taught Louis the basics of “the Italian method” of accounting but also how the king then used it in daily royal administration. There is only one copy of this text, written in Colbert’s hand. Unfinished, it is Colbert’s longest and most detailed single work. It was meant to in- form Louis of the financial precedents of past kings.18

Its detailing of royal accounts suggests that Colbert’s Historical Memoirs were meant for Louis alone. The text explains how much previ- ous kings taxed, how much revenue they earned, and which officials managed the funds. But Col- bert warned that in the past, kings only

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confirmed financial policy: Auditing and control were done solely by their ministers. Kings could not actually confirm the books themselves, and this led to graft and mismanagement. With ac- counting, Colbert argued, he could produce up- to-date figures on royal finances, taxes, manu- facturing, and seaborne trade. Colbert included past financial accounts from the time of Fou- quet, which conveniently showed the fallen minister’s errors and “dissipation.”19

Most important, Colbert described how the king should preside over the Council of Finance and how Colbert himself should organize it and the state account book. Colbert would be the chief accountant and Louis the chief auditor. Colbert recommended that “an exact register be kept of the entire receipts of expenditure of the State for each year” and that those of past years be verified.20

To be the auditor in chief, Colbert explained Louis needed to understand the basic methods of bookkeeping, straight out of Pacioli. What is new in Colbert’s text is that the word firm or company is replaced by the State. Colbert innov- ated, recasting double entry as an art for kings.

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And state account books, Colbert noted, would be classified. “By this clear and easy method, “Colbert assured Louis, “His Majesty has placed in himself all his own security, and has reduced his reliance on those who have the honor to serve him in this function.” Except, of course, Colbert, who throughout his life kept the books.21

Louis understood and liked bookkeeping, at least in complex single-entry form. Louis wrote to his mother, “I have already begun to taste the pleasures to be found in working on finances myself, having, in the little attention I have giv- en it, noted important matters that I could hardly make out at all, but no one should doubt that I will continue.” Twice a day for more than two hours, Louis went over dispatches from his min- isters and agents concerning all topics of gov- ernment, often examining financial reports in detail. At the same time, Louis never became a true accountant at the level of Cosimo de’ Medici. The king competently followed Col- bert’s bookkeeping. Louis and Colbert corres- ponded constantly on questions of finance, with Colbert sending the king requests for

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expenditures to be authorized. The king’s chief reporter was Colbert, who presented his sum- maries to the king more than twice a week but most importantly on Friday, when he presented an overview of all the information he had col- lected and the royal accounts. Colbert would leave half the page of his reports blank so that the king could respond in the margins. At first, Louis liked the numbers, writing to Colbert that it was “very agreeable” to hear him speak of fin- ances. And at first, Louis uncharacteristically deferred to his accountant, writing in the mar- gins of account books: “It is for you to judge what is best.”22

Colbert collected vast amounts of informa- tion, and he then had to find a way to present it to the king. Colbert kept state account books and one hundred thematic administrative scrap- book folios. Louis sometimes wanted to see Colbert’s various compendia, but more often, he wanted the final report. As a good accountant, Colbert kept vast inventories containing the scrapbooks, journals, and ledgers for each head tax collector and for most offices of govern- ment. He maintained ledgers of state accounts,

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which Louis could verify himself. Above all, the account books were clear, easy to read, and easy to annotate. Louis did not have time for messy paperwork, and Colbert made sure never to give him any, often berating accountants and agents for poor bookkeeping or inaccurate memos.23

Due to the vast and still medieval adminis- tration of much of the government, Colbert was unable to systematically establish the use of double entry for general government business. Colbert was expert in double entry, but few ad- ministrators were trained in this merchant art. Nonetheless, Colbert developed a sophisticated form of state accounting that worked according to a number of the principles of double entry. Louis, Colbert, and other ministers of the Coun- cil of Finances signed off on the tallied account books. If these final accounts were tallied in the presence of the king and his council, the more complex preliminary bookkeeping and verifica- tion was done by Colbert for Louis, who set up the books so that they would be easy to verify. These account books represent an ideal of kingly financial information handling that Col- bert used to exhort Louis to become an

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accountant king, which, to a certain extent, Louis did, at least for a time.

Clearly trying to make his reforms perman- ent, Colbert was the first to successfully intro- duce accounting into the educational curriculum of French kings. In 1665, Colbert wrote manuscript instructions for Louis’s heir that contained information pertaining to finances. In them, he discussed the need to master finance through handling and keeping account books. Colbert recommended to the young prince that he should note by hand all state accounts every year. He should learn to audit state financial re- gisters, so as to verify everything from state sav- ings to expenditures and receipts. He should never stop doing this work, warned Colbert, for it is so delicate that it can be left to no one else. In short, Colbert felt the young prince needed to learn the basics of accounting and inventory management in order to be king.24

More than that, Colbert imbued Louis’s gov- ernment with a merchant’s sense of financial secrecy. In 1661, as the king and his leading minister worked to form their first government, Colbert wrote a memo to Louis on how to

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organize and manage the Royal Council, man- dating that all ministers and members of govern- ment take oaths of secrecy and that anyone breaking the oath be expelled from government. Secrecy meant not only the discretion of minis- ters and secretaries but also keeping state finan- cial information under tight control.25

This state secrecy contrasted with Colbert’s public accounting policies. He championed a number of works on economics and accounting. He ordered Jacques Savary, the author of many of Colbert’s trade laws, to write the The Perfect Merchant (1670), featuring a section on double- entry bookkeeping for business—part of Col- bert’s Law of Commerce of 1673, which re- quired businesses to keep double books to be regularly verified by the government. In this case, Colbert’s public rules for accounting not only set standards but also were a form of poli- cing, for merchants rightly feared the heavy arm of taxation to follow public royal audits. The crown was now sponsoring accounting at all levels of society and the state.

Colbert also created something unique for the king: pocket account books for Louis, which

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were state ledgers and explanations of how ac- counts worked. These portable accounts are the most dramatic example of how Colbert turned accounting into a personal tool of government for Louis XIV. The French National Library has twenty notebooks under the heading “Note- books of Louis XIV.” During or after each fiscal year, one or two of these carnets were made for Louis, summing up various accounts and giving the final budget tally for the year. They are bound in red maroquin leather, with gold titles, and held closed by two gold pop clasps. They measure about six inches by two-and-a-half inches, made to be kept in Louis’s pocket for easy reference. In the first edition from 1661, the manuscript is written on paper. However, it is clear that such simple ledgers were beneath Louis’s sense of personal grandeur. If Louis was going to carry account ledgers on him, he was going to do so in a manner befitting the Sun King. Colbert appears to have sought the aid of Nicolas Jarry—France’s famed manuscript illu- minator—and his workshop in creating new vel- lum notebooks with illuminations. Starting in 1669, the notebooks contain richly adorned

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illuminated frontispieces. One 1670 notebook has fleurs-de-lis on the spine of the binding. By the late 1670s, even after Jarry’s death in 1674, the notebooks were illuminated, and even simple accounts were written out in gold and colored paint and decorated with flowers. Using his own account books, Colbert created ledgers that were treasures fit for the Sun King, which Louis kept in his pocket and probably consulted during meetings with counselors and secretaries, as well as while going through state dispatches and intendant reports.26

The royal ledgers were simplified, listing only expenditures and earnings, as well as com- paring the income from each tax farmer. They gave final single-entry tallies of spending as compared with cash on hand. They gave com- parisons, such as tax farmer income between 1661 and 1665, so Louis could see change over time. For example, the Abrégé of 1680 com- pares state revenue between 1661 and 1680. The ledgers listed all state tax revenue and all the names of the local accountants who produced accounts in a given regional capital.27

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Humanists kept commonplace books of reli- gious or political maxims, but Louis kept in his pocket Colbert’s ledgers with their golden, illu- minated calligraphy. What is significant here is that the notebook and archiving culture of ac- counting moved ever closer to the central prac- tices of royal statecraft. Louis mixed his tradi- tional, late humanist education with the practical and legal knowledge that Colbert and his house scholars, intendants, and agents provided him. Humanist education was clearly useful, but it was not enough to run a state effectively. For the first time, in the administrative project of Louis XIV and Jean-Baptiste Colbert, account- ing and traditional learning were used together to manage a large government.

Jean-Baptiste Colbert fell ill, with great pain and a fever, on August 20, 1683, and died on September 6. Despite a rumor that a partial dis- grace had led to his illness, his autopsy revealed a “giant stone” in his kidney, blocking his ureters. No one had expected him to disappear from the scene so suddenly. Although Louis was clearly upset to lose an old friend and his closest

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political confidant, he had become increasingly irritated with this harbinger of bad news and his all-too-clear accounting updates on the state of French politics, finance, and industry. For al- most a decade, Colbert had complained to Louis about his expensive palaces and even more ex- pensive wars against neighboring countries like Holland, which bankrupted the fiscal state that Colbert had built. Louis had grown tired of Col- bert’s nagging and the unbalanced figures in the notebooks in his pocket.28

Louis chose not to replace his chief inform- er, and the notebooks duly stopped appearing. He broke up Colbert’s power base centered in the Ministry of Finance and the Royal Library. With this move, Louis stopped the possibility for a true state apparatus to emerge beyond his personal control. “L’État c’est moi” was quite literal and in stark contrast with Max Weber’s ideal of the impersonal centralized state. Louis clearly saw a well-oiled state bureaucracy and central archive as a threat to his personal power monopoly. More than wanting to be informed, Louis wanted to have the sense that he was in control. By closing down Colbert’s central

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office within the state and the information state that supported it, Louis could divide and rule his ministers.

After Colbert’s death, no minister under Louis XIV would again have as much power and as much information. Even more, Louis began playing the great ministerial families of Colbert and his rival Le Tellier against each oth- er, and they began hoarding financial informa- tion to retain power. The limits of absolutist government were, in part, the limits Louis im- posed himself. Indeed, Louis XIV did not leave his heirs a centralized state, but a very messy set of strong, competing ministries, with no single administrative core. By breaking Colbert’s sys- tem, Louis hobbled the French state in the long run. Without a central and powerful figure like Colbert, skilled in bookkeeping, at the head of each ministry, no serious audits or central ac- counting was possible. The minister’s heirs now used the family financial archive as a defensive weapon. The great memorialist of Louis XIV’s court, Duke de Saint-Simon, recounts that the Colbert family made a formal policy of keeping state financial information out of the hands of

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the hostile Louvois family, which held compet- ing government ministries. Colbert’s brother, Édouard François Colbert, Count de Maulévrier, recommended that all requests for even official state financial information be met with “good grace” but ignored. Claude Le Peletier, who became Controller-General of Finance on Col- bert’s death in 1683, in turn complained to Louis XIV that he was unable to understand the state’s financial workings, for Colbert had kept them secret—“enclosed in his very self,” Le Pe- letier perceptively noted. He said Colbert’s fam- ily was not forthcoming with information, and the papers of the Royal Treasury did not add up without Colbert’s personal account books.29

Without financial data going to a central state register, France continued in the tradition of the Middle Ages: A minister’s financial re- cords were seen as a valuable piece of private property, and not that of the state. The endless failures of eighteenth-century French govern- ments were due not only to the secrecy and folly of royal fiat and terrible financial management but also to Louis’s splintering of the state appar- atus. Its accounting capacity remained limited

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and in the hands of a few ministers and their families. It helps explain why, with all its pos- sibilities, genius, and might, France stalled and began to crumble. By Louis XIV’s death in 1715, France was bankrupt, with no effective accounting system. Seventy-five years of finan- cial crisis and a great reckoning awaited the French.

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CHAPTER 7

THE FIRST BAILOUT

I can calculate the orbit of heav- enly bodies, not the madness of people.

—SIR ISAAC NEWTON, 1721

Like the French, the English in the seven-teenth century struggled with govern-ment accounting reform. Even in the country of constitutional monarchy and parlia- mentary oversight, financial accountability came slowly, met fierce resistance, and re- mained a fragile political tradition. The whole idea of a constitutional monarchy was account- ability to Parliament, yet it would take the

English more than 150 years to establish over- sight of royal finance.1

As early as 1644, following public calls for inquiry into the management of state revenue, Parliament established a Commission of Ac- counts. Led by William Prynne—a Presbyterian leader deeply concerned with the public ac- countability of the state, and whose political pamphlets critiquing royal power caused Charles I to chop off Prynne’s ears in 1634—the commission never gained political traction. The powerful Earl of Clarendon, an ally of the crown, worried that the commission allowed Parliament to exceed its jurisdiction. There would be no end to the inquisitorial powers of such a body, which, Clarendon worried, had no financial expertise. Although the monarchy fell in 1649 during the Civil War and was restored under Charles II in 1660, no effective system of financial accountability was established. In 1675, in response to parliamentary demands for full accounts of royal revenue and expenditure, the crown responded: “Tis not usual for this House to inspect the King’s Treasury.”2

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The lack of qualified accountants within the state was a concern of both members of Parlia- ment and crown ministers. Chief Secretary to the Admiralty Samuel Pepys (1633–1703) be- moaned the lack of accounting expertise in Charles II’s government. In his famous Diary, Pepys regularly discussed accounting for the state, and for himself, “striking” his “tallies” at the Exchequer office, and then later, at home, settling more accounts with another official, which he found “very troublesome,” before bed. Pepys worried that neither his superior, the Commissioner of the Admiralty, the Earl of Sandwich, who was responsible for the British Navy, nor King Charles himself understood ba- sic accounting. Even worse, Pepys considered the Lord Treasurer of the Navy, Sir George Carteret, a “madman” for not knowing how to keep accounts and for not knowing someone who did. The navy was without a financial rud- der.3

Nonetheless, Charles II came to understand that reforming state accounting could be to his advantage. In 1667, he founded an accounting office in the royal treasury. Although Pepys

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doubted it would work, this new financial ad- ministration managed to hire competent secret- aries of the Treasury, who kept good books. However, members of Parliament in turn wor- ried that the Treasury would give Charles too much power by the simple fact that its good ac- counting practices and sound financial manage- ment gave him access to more revenue. Thus both the monarchy and Parliament tried to use accounting and calls for accountability to their respective political advantage.4

In 1688, by request of Parliament, the former Dutch Stadtholder King William of Orange- Nassau and his joint monarch, Queen Mary II, ousted Charles’s brother and heir, the Catholic James II, in a bloodless coup known as the Glorious Revolution. William and Mary ruled under a parliamentary constitution that en- shrined religious tolerance, protected Protestant and commercial interests, and subjected all ma- jor royal decisions to Parliament’s approval. In many cases, supporters of the new monarchy were Whigs with merchant backgrounds from the cities. In turn, the crown depended on this

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new urban elite to counter the landed Tories, who often held sympathy for the absolutist-lean- ing Stuarts.

The 1689 Bill of Rights stipulated that the monarch could not tax without approval of Parliament and, ideally, that both the crown and Parliament would be financially accountable. Spurred in part by John Locke’s writings on political liberty, relative freedom of the press began to emerge as Parliament eased restrictions on publishing. Yet even with new political openness, it remained difficult to hold the gov- ernment financially accountable. In 1698, the economist critic, excise tax collector, and Tory Member of Parliament Charles Davenant (1656–1714) tried to calculate public tax reven- ues, but, in his Discourses on the Publick Rev- enues, he complained that he “met with extream Difficulty and Opposition in Procuring the sight of Accompts relating to the Revenue.” The state account books had been shut to him, and all his inquiries had been rebuffed. Davenant believed that public accounting of state funds was a ne- cessary part of governing a successful commer- cial society, for secret reckoning was

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untrustworthy and undermined competent gov- ernance and trade.5

By the reign of Queen Anne in 1702, full- fledged party politics were taking place on the floor of Parliament, pitting liberal city Whigs against traditionalist country Tories in a battle of pamphlets and arguments about the nature of the new monarchy. As debates raged about pub- lic debts, trade balances with France, and the finances of union with Scotland, the Tory news- paper The Mercator exhorted its own critics to “search the Books” to prove their arguments. The scene was ripe for a savvy politician, fluent in accounting, who could tap into public dissat- isfaction with state finance.6

Robert Walpole (1676–1745) stepped into this role. Walpole would go on to be First Lord of the Treasury, Chancellor of the Exchequer, and Britain’s first Prime Minister, holding power a record twenty-one years. He understood the power of accounting in government, and he harnessed it. But like Louis XIV, Walpole would find political accountability an unwelcome by-product of good state accounting.

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Walpole grew up in a uniquely British world in which accounting and mathematical calculation had become part of political life. Francis Bacon (1561–1626), an influential politician and the inventor of the empirical method, had founded a tradition of scientific thinking and merchant methods in political administration. Bacon pion- eered the idea that looking into nature and its management, and into commerce, was part of the act of researching God’s presence in the ma- terial world through observation. Both Bacon and the political philosopher Thomas Hobbes saw accounting as a tool not just for commercial management but also for thinking about politics. In his Leviathan (1651), Hobbes ascribed the very birth of logical reasoning to accounting. Without addition and subtraction, Hobbes claimed, it was impossible to find the morally correct thing to do in politics. No one had ever so emphatically made the connection among ac- counting, ethics, and politics.7

Walpole was educated in the climate created by these political philosophers. Although his ethics were frequently questioned, he was re- puted to be a brilliant accountant. Educated at

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Cambridge—and with a father who was an avowed follower of Baconian philosophy and an active manager of his estates—Walpole came from a background steeped in accounting cul- ture. He represented a new breed of English politician, one highly versed in applied financial mathematics, in the style of the Dutch leader de Witt. But arguments about the numbers were not always accurate. Audits, or claims of audits, were thrown around in the political arena, most often with no factual basis. Walpole took office as Treasurer of the Navy in 1710, only to be dis- missed by Robert Harley’s new Tory ministry one year later in a hail of accusations of corrup- tion in the Duke of Marlborough’s military ad- ministration. Walpole fought back, defending Marlborough by drafting the financial calcula- tions for Arthur Maynwaring’s pamphlet, A Let- ter to a Friend Concerning the Publick Debts, particularly that of the Navy (1711), in which he calculated the costs of the Navy in relation to the public debt and claimed that costs had not particularly risen during his administration des- pite to the added expense of the long and costly War of Spanish Succession fought against

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France. Walpole’s wartime calculations allowed Maynwaring to lay the blame of debt at the feet of Walpole’s predecessors.8

In April 1711, England and France were locked in war. Both countries amassed enorm- ous debts in the conflict. In Britain, there was fear that the government could not pay back the £50 million the state had borrowed. The debt took 60 percent of the British national income to service. Many believed that it would undermine the nation and lead to financial and political catastrophe. There was public outcry and calls for parliamentary action.

Edmund Harley, the Auditor of the Im- prests—responsible for verifying the expendit- ures of state ministers—accused Walpole of be- ing responsible for much of the debt by not hav- ing accounted for £30 million in naval funds. This time, Walpole defended himself with a pamphlet titled A State of the Five and Thirty Millions mention’d in the Report of a Committee of the House of Commons (1712). It gave a de- tailed explanation of how state accounting worked and of how the money that seemed to be missing from state accounts had not yet been

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posted because of the time it took for many ac- countants to pass accounts in front of a state auditor. Walpole blamed missing numbers in his own accounts on the process of keeping state books. Accounts were not official until the “Charge” and “Discharge” columns were “bal- anced and signed off on by the Auditors of the Imprests.” If his foes in the Country Party—a political faction of the landed gentry opposed to the financiers of the city and the rising power of the Prime Minister—had understood “common addition,” he complained, they would have un- derstood the House of Commons report. It was a remarkable moment: a leading government min- ister defending himself by accusing his foes of not understanding the basic methods of double- entry accounting.9

In his pamphlet, Walpole issued a public de- mand to reform how state accountants worked. The outdated rules of the Exchequer would need to be reformed so that checks and limitations would force state accountants to keep clear and timely books. But the Tories’ accusations of “notorious corruption” stuck, and Walpole was convicted by the new Tory government and sent

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to the Tower of London for seven months. But his reputation as a wily master of state finance was now established. He was called “ ‘Lynn Bob,’ the ‘Norfolk Robin,’ alias ‘Robin Hood,’ alias the ‘Norfolk Gamester,’ alias the ‘Norfolk Punch,’ the ‘Norfolk Sting,’ the ‘Quaker’ or the ‘Jew’ of Norfolk,” all epithets of scorn, but also measures of his prowess and appetite.10

In the midst of arguments about the national debt, Walpole came back to power again, a month after the death of Louis XIV, in October 1715. This time he had real power as the First Lord of the Treasury. The national debt was now within his personal purview. At George I’s accession on August 1, 1714, the debt had stood at more than £40 million, with annual interest payments of more than £2 million. This was the point of political contention: How could this debt be lowered, while still maintaining a de- fensive military footing against France? Wal- pole set to work studying the debt and making a plan to present to Parliament on how to reduce the 6 percent interest payments on the debt.11

In 1717, Walpole passed a plan through Parliament to lower debt interest to 5 percent.

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The savings from this would then be placed into a sinking fund, a sophisticated way to pay off debt. The sinking fund was based on the idea of stopping compound interest by paying off the debt’s principal and thus preventing the spiral- ing of future interest payments. This meant that the government would both pay interest on the debt and dedicate a fund to pay off the capital on the debt. Further savings on interest would again be reinvested in the fund. Through his knowledge of finance, Walpole had managed to find an effective way to cut the debt, but not fully pay it down.12

What appeared to be the solution to the debt crisis came in the form of an investment scheme. In 1720, the Tory First Lord of the Treasury and Chancellor of the Exchequer Robert Harley created a stock company whose proceeds could be used to pay public debt. He modeled his plan on the French Mississippi scheme, which, by 1719, was reaping massive returns for investors across Europe. With ru- mors that Spain had given up its trade rights in South America and old stories about Drake and Raleigh finding an El Dorado in the New World

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catching the imagination of both the public and the political classes, Harley, together with John Blunt—director of another stock company and bank—created the South Sea Company. The crown would give the company a trade mono- poly for the east coast of South America from the Orinoco River to the Terra del Fuego and for the entire west coast. In return, the company would offer all holders of government debt shares in the company. In other words, using creative accounting, government debt was ma- gically turned into shares of the South Sea Com- pany. The company agreed to assume around £31 million of government debt for a payment from the government of 4 percent interest and £1 million in cash for liquidity (cash so that it could operate). Once stocks were sold, the com- pany would pay the government £4 million out- right for monopoly rights. In exchange for a trading monopoly, the government had found a way to service its debt using private investors. It was a miracle of modern finance.13

But there was a catch. When anticipated in- come failed to materialize in early 1720, the company relied on false profit statements to lead

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a speculative boom. In what now amounted to an early form of a Ponzi scheme, the company issued more stock to pay its dividends, which, by April, inflated stock prices to £360 per share from the original price of £128. By June 1720, the price had risen to £1,000 per share. Many subscribers paid for shares by borrowing at around 5 percent. As confidence in the South Sea Company wavered in August, creditors raised interest rates or suspended loans, thus starving the credit which fed the company. The pyramid began to collapse, and the stock price plummeted into the hundreds of pounds, leaving investors—among them great nobles, govern- ment ministers, and the king’s mistresses—with massive losses on their hands. The English free- thinker John Toland lost a fortune and, in his dying years, could not even pay his doctor. Worse, the crash threatened to undermine the public credit market, industry and business, the stability of the government, and even British na- tional security.

When the Mississippi bubble had burst in France earlier in 1720, the French government possessed neither the tools nor the funds to save

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the Mississippi Company that had caused the crisis. Believing him to be a financial wizard, the French crown had foolishly contracted out management of the Royal Bank and Mint to a brilliant but untrustworthy Scottish gambler named John Law (in French, his name was pro- nounced “l’as,” meaning “the ace”). After the Mississippi crash, with few financially literate government ministers and no national bank, France had to continue borrowing from the Swiss at unsustainable rates. The French mon- archy and public lost faith in the idea of public credit, currency, tools like accounting, and fin- ancial markets as a whole. Without effective fin- ancial reform, France struggled for much of the eighteenth century without a modern taxation system, near bankruptcy, its industrial innova- tion and growth stymied.14

Yet Britain bounced back from its crash. It did so with something that no other country at the time had: a vibrant and also innovative ac- counting culture that permeated politics to an extent beyond even what the Dutch had known. This culture allowed Walpole, in particular, to design a government bailout of the South Sea

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Company and of British credit markets. Wal- pole’s bailout is a vivid story of the promise and failures of financial and government accounting and of how even those politicians well trained in the techniques of accounting can be tempted to break their rules.

Tories had hoped the South Sea Company would balance to the power of the Bank of Eng- land, which they saw as giving too much power to England’s Hanoverian king and the Whigs who supported him. (A German, George I had inherited the British throne in 1714 through the tangle of dynastic rights brought on by the ar- rival of the Dutch King William in 1688.) For this reason, Walpole, a Whig, had initially been a foe of the company. In spite of interparty de- bate over the debt scheme and an admission that he had, at first, found the South Sea scheme “a chimera,” Walpole eventually embraced it.

If it seems surprising that Walpole would have gotten entangled in the South Sea bubble, it should be remembered that even Isaac New- ton, the great astronomer, lost the immense sum of £20,000 speculating at the height of the

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scheme. Walpole believed in the scheme in spite of public financial data that put it into question. He was no less shrewd than Newton, but he very well could have been blinded by greed.

In 1720, at the very moment Walpole was both supporting and investing in the South Sea scheme, the lawyer and MP Archibald Hutcheson made a fairly accurate calculation of South Sea stock value. In the pit of corruption and partisan interest that was the House of Com- mons, Hutcheson was regarded as a man of rare integrity. In works such as The Present State of Public Debt and Funds (1718), Hutcheson’s skill was to use public financial data to calculate state finance at a level of sophistication that had never, until then, been seen.15

In 1720, he published Some calculations re- lating to the proposals made by the South Sea Company and the Bank of England, which, in some ways, was an attack on Walpole’s policy, as well as on his fellow Tories who created the scheme. Walpole had come to support the South Sea Company as a way of helping the Bank of England and the sinking fund to alleviate state debt. That way, there were three operations

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working to lower the debt, something that would prove crucial when the crash came. Hutcheson’s calculations went beyond accounting into the new realm of financial analysis.

South Sea stock value was based on profit assumptions. Using present values (the value of past and future money at its calculated present value), discounted cash flow (discounting the value of future money, which loses its value) and annuity tables (how much a payment will be worth over time or at a given time), Hutcheson calculated the shortfall between necessary com- pany profit and the stock’s value, on which now depended £43 million of government debt. His calculations illustrated that when the govern- ment was paid via new subscriptions, it made money, as did those who invested early and cheaply. However, new investors stood to lose more than 20 percent of their investment. For investors to make a profit, the company would have to make massive and unrealistic profits, otherwise “thousands and thousands of people” would be “undone” in the pyramid scheme. “If the computations I have made, are right,” ar- gued Hutcheson, there was no foundation for the

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company’s “Annual Profits.” He calculated that the dividends the company paid to new sub- scribers were simply impossible.16

Hutcheson’s calculations were complex, based on measuring conversion rates of debt payable to the state, company profit, stock sub- scription income, and the values of company as- sets and possible profits with interest rates. But the reasoning was clear. To justify a share price of 300 percent of its original value, the company would need to earn a highly improbable £5.3 million in profit annually, more than ten times the annual military budget.17

Walpole knew these numbers, for they had been presented and even debated in Parliament. Indeed, the MP Thomas Brodrick called for the South Sea scheme to be given detailed and pub- lic scrutiny, and there were debates about Hutcheson’s calculations. The company, in- vestors, and supporters of the scheme published their own analysis of the value of company stock. In April 1720, the Flying Post and the Weekly Journal both published calculations aiming to prove stock values between £440 and £880 per share. As numbers were bandied about

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by all concerned, Walpole sided with the com- pany because he believed in it—he needed money to further his career and build his coun- try house. Perhaps he ignored Hutcheson’s ana- lysis because the latter was a political gadfly. In any case, profit and politics all stacked up against Hutcheson’s numbers.18

When the bubble burst in August 1720, sending stock value plummeting from £1,000 to less than £400 in a matter of weeks, Walpole was taken by surprise. At his country house in Norfolk, he was in the process of balancing his own household books, buying properties and lending money to those who wanted to buy more South Sea stock. Even more, he had just sent his banker, Robert Jacombe, to London to purchase £5,000 in shares. When news came that the price of the stock had dropped over 50 percent in three days, Walpole was faced with ruin and in shock. He frantically tried to reach Jacombe. When word finally arrived from Lon- don, the news was almost miraculous. Jacombe had not invested the money. The shrewd banker had gone to the South Sea offices to meet the directors, whom he found unconvincing,

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“terrified,” and in a “bustle.” Jacombe had lost faith in the scheme at the moment it began to collapse and held back the investment, saving Walpole from even more losses than he had already sustained.19

Outrage was palpable as shareholders learned of Hutcheson’s calculations. Not a polit- ical realist, Hutcheson insisted that the govern- ment forgo £7 million, which the company owed it, to help “the middling people” who had lost everything in the scheme. In today’s terms, he wanted to bail out Main Street. Influential political critics like John Trenchard, writing from the republican wing of the Whig Party, made their own calculations of stock value and public debt and called for a general audit of the South Sea Company, as well as of all other stock companies, for the benefit of shareholders and investors. In Trenchard’s words, before pay- ing a dividend, each company would have to present an annual “state of their stock, as their accomptant shall declare upon oath, before one of the Barons of the Exchequer, to be the true state of such company’s stock.” Only such a public audit, Trenchard implied, would allow

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investors to make sound judgment. Trenchard lamented that financial opacity profited not only the company directors but also government min- isters who enriched themselves in the shadows, while all others had to “gamble” blindly.20

Trenchard was calling for an independent financial auditing office. But the old-fashioned politician Walpole instinctively resisted public accountability. His power and, indeed, his per- sonal fortune depended on secret state finance. He would find a way to stabilize the market with neither true political nor financial accountability.

Walpole was politically effective, yet cor- rupt. And although he coveted power and money, he also believed it was his duty to save Britain’s financial and industrial markets. With Britain’s economy near collapse and the govern- ment’s ability to raise and service debt under threat, Walpole had the state intervene to create a rescue package for the South Sea Company. It could not have the same fate as the French Mis- sissippi Company.21

Investors in the South Sea Company had hired Charles Snell, a well-respected

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accountant, to audit the company. Walpole un- derstood the possible ramifications of such a public audit. He felt he needed to stop the audit and stabilize the financial system by restructur- ing the company. The South Sea Company was, as we say now, too big to fail. With the Act to Restore Publick Credit, Walpole’s first order of business was to make sure the company retained and continued to service about £33 million in government debt, while also saving investors and the banks that had lent them money to buy shares. To bail out the entire financial system, he first had the government lend money to the company to keep it afloat. He then convinced the Bank of England to take nearly £4 million of South Sea government debt; the South Sea Company was obliged to pay a ransom to the government by transferring its silver holdings to the mint. By keeping the markets and the com- pany afloat, Walpole helped investors recoup £52 on a £100 investment.22

But to Walpole, the stability of the markets and the financial class, as well as the monarchy and his own Whig Party, was his first order of business. Figures like Hutcheson and the writer

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and political critic Daniel Defoe excoriated “stockjobbers,” “gamesters,” and “tricksters.” Parliament moved to “establish Publick Credit by preventing Stockjobbing.” Walpole, in turn, attacked his political opponents with the famous saying, “All those men have their price.” Non- etheless, he moved in to save his banker friends. Using his close contacts with Nathanial Gould at the Bank of England, Walpole successfully restructured the South Sea Company, the Bank of England, and the East India Company, as well as his own innovative sinking fund.23

Rather than a feat of finance, Walpole’s re- structure was a masterful act of negotiation. Al- though not everyone agreed on his settle- ment—Hutcheson protested against it in Parlia- ment—no one else came up with a viable oppos- ing plan. Walpole’s skills were political. His plan saved national credit markets and at least propped up the damaged companies and banks. The plan also maintained political stability by averting public audits of either the state or the private companies. Central to managing the fraud was the Secret Committee, a Parliament- ary group whose members—including

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Hutcheson—clearly hoped to uncover the extent of corruption, while Walpole managed damage to the government.24

The Secret Committee found a staggering £574,000 in stock bribes made to members of Parliament and the government. Not only had the company directors committed various frauds but also parliamentarians, ministers, member of the royal household, and even the king’s mis- tresses had all accepted bribes of stock in sup- port of the scheme. And all these bribes were found in the company’s books. However, they had failed to catch Robert Knight, the cashier of the South Sea Company, who, six months earli- er, in December 1720, absconded with the key to the whole affair: the Green Book, the com- pany’s secret ledger, which contained full re- cords of its most important bribes. Knight man- aged to flee from prison to the territories of Liège, in the Austrian Netherlands, where, con- veniently, there was a nonextradition clause. He escaped from prison through a hole in the wall with helpful “persuasion” from unnamed British high authorities. Walpole and King George II himself were relieved to hear that the accountant

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had disappeared. Although many figures were tainted and even prosecuted for corruption, the most important figures in the case—Walpole’s allies the Earls of Stanhope and Sunder- land—escaped total disgrace. Having shielded select ministers and top financiers from ruin and prosecution, Walpole was now called “the Skreen-Master General.”25

Walpole’s tactics led to public outrage, and he was famously attacked in Cato’s Letters by Thomas Gordon and John Trenchard, who called for what they believed to be the antique republican virtues of transparent, accountable government through the opening of government books and the auditing of government ministers. Most remarkable, Thomas Gordon equated political liberty and virtue with public account- ing. For him, unless government figures literally opened their account books for public audit, there could be no liberty, only political chaos and destruction. Gordon invoked Pericles in making his moralistic demands for transparent government. Pericles, he said, had spent lavishly to perpetuate his power and to avoid a public audit. Even more, Pericles made war to cause

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political confusion, protect his own reputation, and keep his accounts secret. The collapse of Athens was the fault of the “ruinous folly” of a man who would not render his accounts pub- licly.26

This was a dramatic historical indictment of secretive government finance. The problem was that Walpole was no Pericles. He was proud that his manipulations had kept Britain financially afloat and out of foreign wars. And his restruc- turing of public credit markets and the sinking fund, although opaque and the very opposite of so-called laissez-faire liberalism, on the whole had worked, at least at first. In the 1720s, the state’s debt was about £40 million and the annu- al interest payment £2 million. By 1727, Wal- pole had managed to lower interest payments by 1 percent, almost £377,381, nearly the size of the entire military budget. He began putting sur- pluses of sometimes more than £1 million per annum into the sinking fund, which went to ser- vice the debt and lower the debt principal. This brought confidence to the markets and led to a general feeling that the debt was under control.

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By the time he left office in 1742, Walpole had lowered the debt by £13 million.27

In The Wealth of Nations (1776)—the defin- ing work of morality and free-market econom- ics—Adam Smith expressed doubt that a sink- ing fund was a solution to debt. Instead, he con- sidered it a temptation to ignore debt and, in- deed, to contract new debts. Smith was thinking of Walpole. Although Walpole was a man of finance who governed during the Enlighten- ment, he was a politician first, and as political pressure regarding the debt lightened, the sink- ing fund looked less and less like a debt-servi- cing instrument and more like a political slush fund.

In 1722, Walpole started raiding the sinking fund. At first, he used it as collateral for £1 mil- lion in Exchequer bills that functioned as paper currency. In 1724, £15,144 were taken from the fund to cover treasury losses from the reduction in value of gold coin. By 1727, the fund had be- come a major policy arm for Walpole: He raided it for £100,000 to raise the capital of the king’s Civil List fund (salaries paid directly by the crown) to £800,000. The king could not

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disagree with this move, but one member of Parliament publicly protested that Walpole was destroying his own sinking fund. Walpole re- mained silent and continued to raid the fund to pay for East India Company annuities and to re- duce the land tax by a shilling. In 1734, he ap- propriated £1.2 million for government ex- penses. What Walpole had claimed was a lever to manage debt and balance government books had become a black box through which he cir- cumvented parliamentary oversight of govern- ment spending.28

These financial maneuverings helped Wal- pole remain in power. In 1732, King George II made a gift of the residence of 10 Downing Street to his able minister. Ever shrewd, Wal- pole agreed to inhabit it, but, in an act of public altruism, left it as a legacy to the government as the official residency of subsequent prime min- isters. But even Walpole’s term as prime minis- ter had to come to an end. After failing in 1739 to prevent the War of Jenkins’ Ear over trade disputes with Spain in the West Indies (and over the fact that a British seaman, Jenkins, claimed that a Spaniard had cut off his ear), and after

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making poor showings in the election of 1741, “the fat old squire of Norfolk” suffered a parlia- mentary vote of no confidence and fell from power in 1742. Walpole’s twenty-one-year ten- ure in power had been unprecedented—he re- mains the longest serving prime minister in Brit- ish history. But the country had tired of this bril- liant but unscrupulous minister.

The paintings of William Hogarth (1697–1764) have shaped the modern vision of the British eighteenth century and faithfully represent the contradictions of figures like Walpole. Hogarth showed the gluttonous prosperity of the “Robinocracy,” the rich city merchants seen to be pulling the financial strings and, indeed, rob- bing the public in the age of the Hanoverian monarchs. Hogarth’s painting Shortly After the Marriage, or The Tête à Tête (1743–1745), de- picts a hungover viscount slouching on his chair after a night out in a brothel or with his mistress, while his wife begins to wake up after a long card party at home. Their steward, carrying re- ceipts and a ledger, walks away in disgust. Ac- counting is prominent but ignored. This is a

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vivid portrayal of the ambivalent relationship of the British elite to a tool they had come to mas- ter at a remarkable level. This tool, so respected, so connected to prosperity and salvation, could, like life itself, be wasted and thrown away. The story of Walpole and accounting explains how the English got out of the South Sea disaster, but at the same time, it explains how a culture of self-enrichment and political patronage preven- ted Britain from creating accountable, transpar- ent government.

Rather than being associated with his finan- cial bailout and other policies, Walpole was called a robber. The greatest writers of his time excoriated him, and Walpole complained that “these scribblers grow so bold of late.” In his poem London (1738), Samuel Johnson de- scribed a city impoverished by financial culture:

Explore your Secrets with insidious Art, Watch the weak Hour, and ransack all

the Heart; Then soon your ill-plac’d Confidence

repay,

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Commence your Lords, and govern or betray.

By Numbers here from Shame or Censure free,

All Crimes are safe, but hated Poverty.

Henry Fielding, the satirical novelist and author of Tom Jones, also painted a dystopian vision of a Britain not “rewarded by virtue,” as the novel- ist Samuel Richardson had idealistically de- scribed in Pamela (1740), but riddled by shams. His Shamela (1741) was an attack not only on Richardson but also on Walpole’s Britain, where even the most apparently virtuous were financial cheats who avoided the auditing of their accounts by any means necessary. In Shamela, the maidservant is no paragon of un- touchable virtue, but rather a cunning thief who has married her husband to rob his estate: “Sir, says I, I hope I am not obliged to give you an Account of every Shilling; Troth, that will be being your Servant still. I assure you, I married you with no such view, besides did not you tell me I should be Mistress of your Estate?” In bar- tering sex for forgiveness, she gloats that “I

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fancy I have effectually prevented any farther Refusals or Inquiry into my Expences.”29

The public had a right to be deeply skeptical of the corrupt financial culture that Walpole’s policies made sure benefited his friends. It also had no reason to believe that its government was accountable. The Parliamentary Commission of Accounts to oversee government spending would not be called again until after the War of American Independence. Walpole had managed to bail out Britain, but he had not brought the kind of reform and accountability he promised in his first years in politics.

He certainly did not hold himself account- able. In 1722, in the years following the South Sea bubble, Walpole began building Houghton Hall on his lands in Norfolk, one of the great Palladian mansions of the eighteenth century, with a sumptuous interior by William Kent, the great architect and designer who would go on to build the Treasury and Horse Guards buildings at Whitehall. It was a testimony to Walpole’s power that when he left office in 1742 and his painting collection was moved to Norfolk from 10 Downing Street, it became one of the great

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artistic treasures of the world, containing four hundred masterworks. Like Cosimo de’ Medici and Jean-Baptiste Colbert, Walpole was a polit- ical financial manager and a great patron of art. However, after Walpole’s death in 1745, his son was shocked to find that the great man’s estate was £40,000 in debt. The inventor of the first bailout died in the red.

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CHAPTER 8

“FAME AND PROFIT”: COUNTING ON THE WEDGWOOD VASE

Sum up all the values of all the pleasures on the one side, and those of all the pains on the other.

—JEREMY BENTHAM, 1781

Eighteenth-century Britain was not onlyhome to the unique financial politics ofWalpole’s bailout. It also became the great imperial power of the world. As the world’s foremost producer, exporter, and

importer, the tiny island nation continued to maintain its fearsome navy and overseas empire. And it was the birthplace of the Industrial Re- volution or, as some historians have called it, an “industrious revolution,” where the Protestant faith in utilitarianism and scientific inquiry, mixed with boundless ambition and relative political freedom, fed unprecedented technolo- gical innovation and economic expansion. It was here that religious dissenters and industrial- ists such as Josiah Wedgwood—the famed in- ventor of Wedgwood porcelain—would pop- ularize accounting and use it to manage innovat- ive companies and formulate new concepts of human happiness and worth.1

Central to British industrial power was that, sur- passing even Holland, it had become the center of accounting culture and education. Ever since the Middle Ages, grammar schools had taught accounting to boys who would later be appren- ticed. Echoing the old educational model of Italy and Holland, grammar schools prepared boys both for the university and for commercial activity. In a virtuous circle, as industry

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expanded, so did the demand for accounting ex- pertise. Accounting was seen as something in- creasingly necessary for a gentlemanly ruling class that valued commerce.

The work of Charles Snell—who was later hired by shareholders to audit the South Sea Company after the crash—showed a ready mar- ket for accounting manuals for gentlemen and merchants who wanted to manage their own es- tates and businesses. He was author of Accompts for landed-men: or; a plain and easie form which they may observe, in keeping accompts of their estates (London, 1711). In his 1714 Gen- tleman Accomptant, the Cambridge-educated lawyer, musician, and sixth son of the Baron North, Roger North, explicitly stated that it was a great advantage for gentlemen and “persons of quality” to have a knowledge of accounting so that they could manage their own affairs and follow those of international trade and state. North claimed that accounting had become so perfect that it could be considered one of the sciences. North insisted that those who wanted to rule needed to know accounting. And it made sense. After the Revolution of 1688, excise tax

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accountants had begun keeping state accounting in double entry. Political power and administra- tion were ever more connected with the know- ledge of bookkeeping.2

Scotland was a center for this mixture of classical and commercial teaching. In 1727, John Mair was appointed master of arithmetic, bookkeeping, and other sciences at the Ayr grammar school. He would go on to write one of the most influential English-language account- ing manuals of all time, Book-keeping method- iz’d (1736), which would go through nine edi- tions by 1772 and was the most prominent ac- counting manual in eighteenth-century North America. Along with grammar schools, ac- counting schools—or “writing academies,” as they were called, for accountants and adminis- trators needed clear writing—taught accounting even to those pupils going on to Cambridge and Oxford because they might later need it for ca- reers in the navy or government.

By the second half of the eighteenth century, accounting and even double-entry accounting had become common in English society because of an unprecedented explosion in accounting

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schools. By 1740, more than eleven accounting academies were active in Britain. By the end of the eighteenth century, there were more than two hundred. John Rule’s Islington Academy advertised that it trained the “gentleman, schol- ar, and the man of business.” Many heads of academies were self-made men, but at least nine were well-known scientists or members of the Royal Academy. A backbone of the Industrial Revolution, these academies mixed scientific, experimental training with practical merchant arts. They taught double-entry accounting, nav- igating, surveying and gauging, and even milit- ary subjects. In a world of expanding opportun- ity, speed in training was of the essence. A 1766 advertisement for the Islington Academy boas- ted that gentlemen who intended to go into busi- ness could learn double-entry accounting “in a very short time.”3

With the rise of business and industry in daily life, it became more difficult to bar wo- men’s access to accounting education. Indeed, some saw it as a necessary protection for famil- ies without men at their head or for single wo- men who could fall prey to the fraud of financial

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predators. As bookkeeping knowledge spread across classes, aristocratic women, as well as the wives of shopkeepers, industrialists, and simple property owners, increasingly learned double-entry accounting. Indeed, many were said to learn it “at their mother’s knee.” As one advertisement claimed, private schools for wo- men taught “English, writing, arithmetic as far as it is related to ‘keeping accounts,’ drawing, needlework, dancing and a little French.” Al- though some enlightened industrialists taught accounting to their daughters, others still felt ac- counting was a masculine art.4

Many accounting academies were led by Dissenters—Low-Church Protestants who, like Puritans, had been excluded from the Anglican Church and the universities for refusing to re- nounce their religious beliefs. They were im- bued with ideals of happiness, self-discipline, scientific progress, and salvation—the heady and unique mix of British Enlightenment Prot- estantism that Max Weber would idealize as the Protestant work ethic. Their belief in accounting was inspired by religious fervor. Dissenters

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followed the old English tradition of attempting to marry scientific rationalism and the natural sciences with Christianity. Their beliefs rested on Isaac Newton’s ideals of order, harmony, and progress as revealed by mathematics. For these divinely inspired people of discipline and profit, accounting was a tool of personal industrious- ness, as well as for realizing political freedom and faithfully watching over the God-given gift of prosperity.5

Private academies not only afforded Dis- senters income but also were a place where they could apply their unique brand of scientific, mercantile learning. Protestant outsiders—Deist Unitarians, Quakers, and Presbyterians—also flocked to academies across Britain. The War- rington Academy in Lancashire was set up to educate the sons of Dissenters, and it focused on “Business and Commerce,” as well as the “best methods of Book-keeping.” The Standard Hill Academy in Nottingham was founded with the goal of providing a nonconformist discipline that would help young men “distinguish them- selves in the professions and in various trades and industries.”6

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There was even an acceptance of this com- mercial curriculum in the High Anglican Church. British Protestants of all social stripes sought God’s work in nature through scientific experiments and observations and tried to fulfill God’s will by turning this natural knowledge in- to worldly wealth. Liberal Anglicans also be- lieved that science and the work of Newton would strengthen Protestant Christianity against other religions and atheism and would be the basis of a new scientific Christianity. They sought to bring Puritans and Dissenters back to the Anglican Church by publicly embracing mathematics and the ideal of profit. As the renowned classical scholar Richard Bentley put it in his Boyle Lecture at Cambridge in 1696, God had commanded “men” to find “profit” and “pleasure” by “pursuing” their “own interest.” Accounting was central to these philosophical views.7

But Puritans and Dissenters had more im- portant reasons to keep personal accounts. Brit- ish law forbade them to hold public office or to organize an official church. This imposed lack of hierarchy and oversight meant that this

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British version of Protestantism, unlike the hier- archical Church of England, truly became a church of all believers, and a new culture of “watchfulness” permeated Dissenter and Calvin- ist life. The individual would have to “watch” the world to defend against the Devil and aid in the “winning of Christ.” To seek the kingdom of God, the faithful would, like spiritual scientists, write down their observations of the world in notebooks and spiritual account books. Dissent- ers, Quakers, and Calvinists had to account for their own sins and virtue, and they often did this by writing diaries and autobiographies in which good works, sin, and economic success were re- corded. In many cases, they wrote not only auto- biographical observations but also accounts in order to search for evidence of personal failure or, by predestination, that one was to be saved by God.8

Literary figures such as Jonathan Swift kept detailed account books, and the Presbyterian writer Daniel Defoe included descriptions of bookkeeping in Robinson Crusoe (1719), a fic- tional autobiography in which Defoe—who had written expert accounting manuals and was a

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prolific financial critic—had Crusoe account for himself “like Debtor and Creditor,” trying to balance the positive and negative aspects of his life. Like the Jesuit account books of good works and sin, Defoe tried to calculate the good in life.

A successful Leeds clothier and Dissenter, Joseph Ryder, wrote in his diary in 1739 that he used his daily writing and accounting to admire “the Goodness of God In making man a rationall Creature.” Wealth was seen as a product of godly conduct and of good accounting. Like the Italian Catholic Datini 350 years earlier, Ryder tallied his moral accounts in his diary and his finances in his ledger. What was new for Ryder was the idea that if one mastered industry or sci- entific problems through the study of nature—God’s work—and gained wealth by it, this success was not sin, but rather a sign of pre- destination. Good science, good records, and good accounting brought one closer to God and profit. And the better one’s accounting was, the more clearly one might see in it possible predes- tination to salvation. Thus bookkeeping had a special place in the lives of everyone from

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Anglican, Cambridge-educated, and scientific- ally minded noble second sons to high mer- chants and landowners, city businessmen, and financiers, as well as average or middling people—the very literate and often business- minded Dissenters. It was a binding thread in the complex tapestry of British Protestantism.9

Of all the Dissenters, the industrialist Josiah Wedgwood (1730–1795) stands out. He not only exemplified the success of industrious Dis- senters but also showed the importance of ac- counting in their project and the heights to which it could be taken in industrial innovation. Inspired by his Dissenting religion, Wedgwood created one of the most successful and innovat- ive companies in history—Wedgwood china is still coveted today, with a six-person dinner set costing well above $1,000. He did this by an in- tensive study of cost accounting: the calculation of the cost of production time, labor, materials, machinery, and sales. Wedgwood took industri- ousness and accounting to new levels of innova- tion and success, but even he struggled to bal- ance morality with his bottom line. He would

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find that accounting, as he practiced it, could bring him the world’s riches but not necessarily the ideals of health, happiness, freedom, and so- cial harmony.

Whereas Walpole was a brash and greedy politician famous for his massive dinner parties and Hogarthian appetites, Wedgwood was a me- ticulous and moralistic man who ran his famous porcelain factory in Burslem, north of Birming- ham, by the time of a famous clock in the court- yard. Like Walpole, Wedgwood used account- ing for personal enrichment; his was enrichment not through political tricks, but rather through personal piety and industry, which Wedgwood believed would better his soul and those of his workers.10

Josiah Wedgwood regularly boasted to busi- ness partner and friend Thomas Bentley that through industry he sought “Fortune, Fame & the Public Good.” (In his more candid moments, he was less virtuous, simply stating that selling more porcelain would bring “Fame and Prof- fit.”) Wedgwood’s early letters are full of refer- ences to the need for political liberty and the im- portance of science, but they are also filled with

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numbers. Sophisticated forms of double-entry accounting were the foundation of the first In- dustrial Revolution (circa 1760–1840). Walpole used numbers, but Wedgwood lived through them. He loved to count, for example, the num- bers in Queen Charlotte’s porcelain order for what would become known as Queensware: “The articles are 12 Cups for Tea, & 12 Saucers, a slop bason, sugar dish wth. cover & stand, Teapot & stand, spoon trea, Coffeepot, 12 Cof- fee cups, 6 pr. Of hand candel-sticks & 6 Mel- lons with leaves.” Although he regularly sent Bentley calculations on extraneous things like the cost of building the Stoke-on-Trent Canal, Wedgwood believed that accounting could solve the problem of industrial productivity and prof- itability.11

Whereas medieval and Renaissance painters had regularly underlined the risks of accounting, eighteenth-century British artists reflected the hubris of the young industrial nation’s golden age. With profits rolling in, account books ap- peared to make British merchants, at least the successful ones like Wedgwood, happy. It

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became common for British businessmen and bankers to pose for portraits smiling and with their account books open on their desks. These portraits were a sign of confidence in modern techniques of accounting. The Baring Broth- ers—whose bank was founded in 1762 and fol- ded only in 1995 because of the famed rogue trader Nick Leeson, who was also his branch’s auditor—were painted by Sir Thomas Lawrence poring over their main ledger like conquering explorers with their fingers on a map. A promin- ent businessman in India, John Mowbray, was depicted sitting cross-legged at his desk, with an air of satisfied confidence, his account books strewn around him as a local messenger brought him a report. A good accountant could master his books and even the world.12

However, this confidence belied the chal- lenges of industry. Although British merchants exuded confidence, the advances they made in accounting were, nonetheless, surprisingly small. Industrialists struggled with the complex accounting needed by factories, and they often gave up. Their goal would be to adapt account- ing to industrial production. Wedgwood needed

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to figure out production costs for his porcelain works to squeeze out higher profits through effi- ciency. Industrialists began dissecting their factories, breaking down each part of the chain of production through accounting analysis. Al- though cost accounting had existed in primitive ways since the Middle Ages, there was no pub- licly recognized method for measuring the costs of labor, machinery, and raw materials. Entre- preneurs also needed to measure returns on cap- ital investments. This was not possible unless one could ascertain whether a new piece of ma- chinery was making a return.13

Thus periodic accounts of the cost of various parts of a manufacture were necessary. To ef- fectively run factories and mines, managers had to price the costs of tools and each manufactur- ing process and decide which mines and mills, for example, to expand or shut down, as the Quaker Lead Company attempted to do in 1774. In 1777, the accountant and mathematician Wardhaugh Thompson wrote one of the most innovative works on the application of double- entry bookkeeping to industry and alluded to the difficulties of accounting for industrial profits.

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Nonetheless, he noted, without accounting, there was only “guess’d-work.” Economic theorists like Max Weber saw the first Industrial Revolu- tion as progress, but accounting and industrial management were still much as they had been hundreds of years before. The techniques of cost accounting, which would seem obvious today, were consistently overlooked. Although com- panies did do periodic accounts for distinct ele- ments of their factories (materials, labor, pro- duction machines, cash, payments, share pay- ments, profit and loss), few ever did general, overall audits.14

Yet the leaders of industry knew that their wealth sat on the foundations of accurate ac- counting. James Watt (1736–1819), scientist, in- ventor of the steam engine, and Scottish Presby- terian, was deeply aware of the importance of accounting in his various enterprises and factor- ies. As a young apprentice, Watt had borrowed money from his father, and to repay the debt—and to show his father his pro- gress—every day, after working more than twelve hours, he still found time to keep good double-entry books.15

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Watt’s partner, Matthew Boulton (1728–1809), saw the lab, factory, and account books as part of the machinery of industry. He claimed that the same care and exactitude neces- sary in science was also necessary in keeping books. The chief accountant of the firm Boulton and Watt created a special kind of accounting for the merchant and manufacturer that attemp- ted to show real profit within a production cycle. With increased industrial production and ever more accounts to keep, industrialists such as Watt were challenged by keeping extensive financial paperwork. Indeed, Watt invented a copying machine—which functioned by press- ing special thin paper with very strong ink so that the ink would make an imprint on the next sheet—in part to make up for a shortage of ac- counting scribes to keep his financial records. Aware of just how important accounting was to his competitive edge, he spied on other firms to see how they kept their books. He was one of the first to understand that accounting methods could be an industrial secret.16

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Like Watt, Josiah Wedgwood was a highly com- petitive man. He sought not just fame and profit; with his Queensware china, he hoped to “ASTONISH THE WORLD ALL AT ONCE, for I hate piddling you know.” He had managed to do just that in 1765, when Queen Charlotte of England placed an order for a full set of china. Wedgwood was giddy, as his pious modesty gave way to unadorned pride. He banked that the royal order would create demand and ce- ment the reputation of his china manufacture. Wedgwood had created a marketing strategy. He wrote to his business partner, Bentley, to look to the English peerage for elite clients, for they, he said, were the “legislators in taste.” King George III soon followed suit for his own full service of the hand-painted floral Queen- sware, as did courtiers and diplomats around the world. In 1770, Lord Cathcart, the British am- bassador to Russia, ordered a full set for Em- press Catherine the Great.17

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Jan Provost, Death and the Miser, early sixteenth century. Groeningemuseum, Bruges, Belgium (©Lu- kas—Art in Flanders VZW / Hugo Maertens). Dutch and Flemish Masters painted warning images both celebrating their citizens’ prowess in accounting and warning that humans could never fully balance their books. Man would have to be accountable to God, who would always make the final reckoning.

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Hendrick ter Brugghen, The Calling of St. Matthew, 1621. Central Museum in Utrecht, The Netherlands (©Collection Centraal Museum, Utrecht). The patron saint of accountants, bankers, and perfumers, St. Mat- thew gave conflicting messages about finance, leav- ing Christendom with a great moral puzzle: Was it, or was it not, immoral to manage and make money? Matthew insisted that wealth had to be handled com- petently and honestly but, at the same time, that it was earthly and sinful. This moral ambiguity is still with us today.

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Hans Memling, Last Judgment, central panel, c. 1467–1471. Pomorskie Museum, Gdansk, Poland

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(Scala / Art Resource, New York). The director of the Medici Bank’s Bruges branch, Tomasso Portinari, commissioned Hans Memling’s painting The Last Judgment (painted between 1547–1461). In it, the archangel St. Michael holds a scale of final reckoning on which he weighs souls and decides who goes to hell. Life imitated art when, in 1477, Portinari ruined the Medici Bank with risky investments and was cast into poverty and disgrace.

Francesco Sassetti, Libro Segreto (Archivio di Stato di Firenze, Italy, Carte Strozziane, Su consessione del Ministro per i Beni e le Attività e Culturali e del Tur- ismo). The pages of the secret account book of the chief accountant for the Medici Bank, Francesco

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Sassetti, reveal his failings as an accountant. By the time these accounts were made in the early 1470s, Sassetti had become careless about his audits and entries, and the bank was on the brink of financial collapse.

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Domenico Ghirlandaio, Confirmation of the Francis- can Rule by Pope Honorius III, c. 1485. Detail of the nave of the Sassetti chapel, Santa Trinita, Florence, Italy (Scala / Art Resource, New York). Rather than

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focusing on disciplined accounting and bank manage- ment, Sassetti was consumed by his patronage of Ghirlandaio’s Sassetti Chapel in Florence’s Santa Trinita Church, a masterpiece of Neo-Platonist civic art. No longer seeing himself as an accountant but rather as a pious and learned patrician, Sassetti had himself painted alongside his employer and the ruler of Florence, Lorenzo “The Magnificent” de’ Medici.

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Domenico Ghirlandaio, Francesco Sassetti and His Son Teodoro, c. 1488. The Metropolitan Museum of Art (©The Metropolitan Museum of Art / Image: Art

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Resource, New York). Ghirlandaio’s portrait Francesco Sassetti and His Son (1488) is notable for its lack of resemblance to its subject. It was painted in his absence because Sassetti had left for Lyon to take responsibility for the collapse of the branch and left the painting as a memento of himself to his sons. Once a skilled and respected accountant, the man who helped bring down the Medici Bank would re- turn to Florence a ruined man.

Jacopo de’ Barbari, Portrait of Fra Luca Pacioli, c. 1500. Museo di Capodimonte, Naples, Italy (Alfredo

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Dagli Orti / The Art Archive at Art Resource, New York). Jacopo de’ Barbari’s famous portrait of Fra Luca Pacioli, author of the first printed manual on double-entry accounting. Pacioli’s stature as a teacher of mathematics and accounting was such that he was painted in the foreground, with his student and pat- ron, Guidobaldo da Montefeltro, Duke of Urbino, standing behind him. An accountant would never again be painted in a relation of superiority to a nobleman.

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Jan Gossaert, Portrait of a Merchant, c. 1530. Na- tional Gallery of Art, Washington, D.C. (National Gallery of Art, Washington, D.C.). By the early 1500s, Antwerp and its surrounding towns had

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become the center of world trade and accounting ex- pertise. Jan Gossaert’s famous portrait celebrates the wealth and corresponding accounting tools of the suc- cessful Dutch merchant Jan Snouck Jacobsz (c.1510–1585).

Quentin Metsys, The Moneylender and His Wife, 1514. Musée du Louvre, Paris, France (©RMN- Grand Palais / Art Resource, New York). Quentin Metsys’s painting is a study in how merchants can

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lead pious lives by managing their money well while also being devout Christians. Note that the wife holds an illuminated Book of Hours with a portrait of the Virgin Mary and that accounts and bills of exchange are on the shelf in the background.

Marinus van Reymerswaele, The Moneychanger and His Wife, 1539. Museo Nacional del Prado, Madrid, Spain (©Museo Nacional del Prado / Art Resource, New York). In a later version of Metsys’s painting, Marinus van Reymerswaele removed the religious

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aspect, replacing the psalm book with an account book, thus celebrating both Flemish prowess in ac- counting and the virtue of good stewardship.

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Quentin Metsys, The Money Changers, c. 1549. Mu- sei Bellas Artes de Bilbao, Spain (Alfredo Dagli Orti / The Art Archive at Art Resource, New York). By the 1540s, however, artists such as Quentin Metsys and Martinus van Reymerswaele began portraying ac- counting as a possibly fraudulent and immoral finan- cial activity. Both Metsys and van Remerswaele painted a number of versions of this image of untrust- worthy and possibly Jewish “money changers” or “tax collectors.”

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Marinus van Reymerswaele, Two Tax Gatherers, c. 1540. National Gallery, London (© National Gallery, London / Art Resource, New York). In this painting of tax gatherers keeping accounts, van Reymerswaele vividly depicts the tools used by accountants: ledgers,

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bills of exchange, seals, and file boxes. Yet he associ- ates financial management with twisted figures and satirical headdresses, possibly pointing to the human folly of greed and the hubris of hoping to manage for- tune. Rather than celebrating accounting and com- merce, these paintings warned against the dangers of putting too much faith in human tools of financial calculation and management.

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Jan de Baen, The Corpses of the De Witt Brothers, c. 1672–1675. Rijksmuseum, Amsterdam, The

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Netherlands (Rijksmuseum). In spite of the fact that Jan de Witt’s financial and accounting sophistication and dedication to the Dutch republican model of politics were a model for modern political expertise, in 1672 he and his brother Cornelis were deposed by the powerful Prince of Orange. At the prince’s orders, a mob gutted and lynched them, cutting off their fin- gers and toes and eating their internal organs.

William Hogarth, Marriage à la Mode: no. 2, The Tête à Tête, c. 1743. National Gallery, London (©Na- tional Gallery, London / Art Resource, New York). Hogarth’s painting Shortly after the Marriage, or The

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Tête à Tête (1743–1745) is a vivid portrayal of the ambivalent relationship of the British elite to account- ing in the age of Robert Walpole. It shows a hungov- er viscount propped on his chair after a night out in a brothel or with his mistress, while his wife begins to wake up after a long card party at home. Their stew- ard walks away in disgust, carrying receipts and their clearly unbalanced ledger, which is of no interest to them.

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Josiah Wedgwood and Sons, Dark Blue Jasper Dip Medallion of Jacques Necker. c. 1770–1800 (Metro- politan Museum of Art, New York). A fine example of Josiah Wedgwood’s valuable jasper pottery, this medallion is a portrait of the French minister and au- thor of the Compte rendu, Jacques Necker. While Wedgwood’s radical Dissenting friends fought for the political ideals espoused by Necker, Wedgwood

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satisfied himself by selling profitable cameos of polit- ical figures and balancing his books.

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Thomas Hickey, John Mowbray with His Money Agent, Banian, c.1790. British Library (©British Library Board / Robana / Art Resource, New York). By the mid-eighteenth century, British industrialists and colonialists used accounting with such success that they earned unprecedented wealth. They had such confidence in their skills as financial managers that a series of portraits of leading British merchants were painted showing their subjects smiling over their account books. This happy confidence in ac- counting would fade by the time of Dickens, a cen- tury later.

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Benjamin Franklin, Directions to the Deputy Post- Masters, for keeping their Accounts, Philadelphia, 1753 (Historical Society of Pennsylvania). Benjamin Franklin was fascinated by accounting. He kept

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double-entry books, wrote about accounting, and even composed his autobiography on the pages of a ledger book. While British postmaster for the Amer- ican colonies, he created this broadside for every post office. It not only explained to postmasters how to keep postal accounts but also included a minimanual on double-entry accounting so that anyone who came to the post office could learn the basics of accounting, which Franklin considered essential for daily life.

Compte rendu au roi par M. Necker, Paris, 1781 (Rare Books Division, Department of Rare Books and Special Collections, Princeton University Library). The final tally from the French director of finance un- der Louis XVI, Jacques Necker’s revolutionary and

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best-selling Compte rendu au roy (1781). It was the first time that a politician would use the claims of a surplus—in this case 10.2 million livres—as a declar- ation of political success. Necker began a tradition of using big and often inaccurate numbers as political propaganda, a well-worn tradition that still continues today.

United States Register of the Treasury, A general view of receipts and expenditures of public monies, by authority from the superintendent of finance, from the time of his entering on the administration of the finances, to the 31st December, 1781 [Philadelphia, 1782]. #Am 1782 United States Treasury Dickinson 60.2 (Library Company of Philadelphia). Inspired by

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Necker’s Compte rendu, American Superintendent of Finance Robert Morris published his own copy of the state accounts for the U.S. government. Transparent accounting became central to the American founders and was enshrined in Article 1, section 9 of the Constitution.

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Henry David Thoreau, Accounts from Walden, 1846–1847. Huntington MS 924, vol. 1, page 59 (Image: Huntington Library, San Marino, Calif.). As one of the leaders of the American Transcendentalist

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movement, Henry David Thoreau sought to return to nature and a pure state of spirituality by rejecting ma- terial goods. In these rare sheets from the work notes of his classic Walden, he turned the principles of ac- counting on their head by calculating backward, try- ing to figure out the bare minimum he needed for subsistence.

In spite of the success of his Queensware, by 1769 Wedgwood faced a cash flow problem. The company was spending more than it was earning on expensive products for an elite few. Wedgwood worried that the fabrication of rep- lica antique vases might “bring upon us as much proffit as loss.” Paradoxically, more business meant creating a loss for Wedgewood. “Collect. Collect,” he wrote his partner Bentley, “set all your hands & heads to work.” By the end of the year, they had manufactured pottery worth £12,000 but had debts of £4,000.18

Echoing Philip II, this brilliant man of in- dustry also found accounting to be a challenge: “I have been puzzling my brains all the last week to find out proper data, & methods of cal- culating expense of Manufacturing, Sale, loss

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&c to be laid upon each article of our manufac- ture.” So Wedgwood went back to the books, but he was perplexed that even when his calcu- lations appeared to allow for the expenses of production, he still managed to calculate only half of the real expense of making and selling his goods. He asked Bentley to verify the books, for he could not figure out his error.19

Wedgwood now began to make accounting innovations. He calculated depreciation, admin- istrative costs, the expense of sale, and the in- terest on capital. He broke down fourteen cat- egories of expenses, from “Wages to Boys, Odd Men, Warehouse and bookkeeping” to “acci- dents” and “Rent, Wear and Tear, and incidental expenses.” He explained to Bentley how he cal- culated all these things, down to each color of clay, in columns.20

His notebooks are filled with accounting notes based on the single goal of lowering labor costs. He would use his books, he said, to pro- duce more for less. Wedgwood concluded that he could mass-produce his extrafine china and recoup his production costs. By examining his accounts, Wedgwood saw the complexities of

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the production cost over time move “like clock- work.” Industry was a machine, which like the universe moved according to fixed intervals. Through accounting, Wedgwood saw clearly that he could price these intervals of labor.21

Accounting meant Wedgwood no longer had to guess at his costs. Always grumbling about drunken, “worthless workmen,” he now sought to manage them with greater efficiency. He learned that child labor was much cheaper and more efficient than adult labor, as was paying by the piece rather than by the day. He even began to calculate future sales, based on past history, and designed “means to augment” them in the future. He also gained insight into con- sumer psychology. He was able to see that the rich do not mind paying a little more but that this slight difference in price might scare off the “middleing people.” He needed, therefore, to create products for both the rich and the middle class.22

Even more, Wedgwood’s calculations re- vealed to him that his chief accounting clerk was robbing him. Wedgwood realized that as the final auditor in the firm, his only way to

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understand costs and see fraud was constant, real-time auditing. He sent his trusted personal accountant, Peter Swift, “to assist in Examining & settleing the matters with the Clerks so that I may have the accounts weekly, & by every Mondays post, in a way I have mentioned to him, & to put the necessary business of collect- ing into a way of perpetual motion.” For ac- counting to work, the tallying and the auditing could never stop.23

Not only did Wedgwood create detailed cost accounting, which allowed him to manage pro- duction costs, labor, and pricing, but also he came up with accounting theories. His writings on cost accounting are some of the most funda- mental to the history of economics. Wedgwood created a taxonomy or ranking of costs to pre- dict probable costs. Thus probability entered in- to his equations and his method of management.

And in Wedgwood’s case, it paid off. In 1773, a crash in prices spread across Europe, af- fecting pottery and other consumer goods. Wedgwood had lowered his manufacturing ex- penses, set prices strategically, and expanded production and his international market

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presence. As we know from the longevity of the Wedgwood brand, it weathered the long eco- nomic storm, and Wedgwood went on to be- come a very rich man. When he died in 1795, his fortune was estimated at £500,000 ($45 mil- lion today, but by its purchasing power, im- mensely more in the eighteenth century).24

Whereas Datini left his fortune to God, Wedg- wood left his to his family. His business would “provide for the wants and comforts of the world.” Far from the old Dissenting humility, Wedgwood was proud and even vain about his success. But for all of Wedgwood’s confidence, even he worried that his success lay on fragile foundations. With increasing social inequity and the challenges of the American War of Independence (1775–1783), the country was in need of reform, indeed, accounting reform. But the now wealthy Wedgwood was loath to call for radical changes. The Dissenter had become a pillar of the establishment.25

One reason there had been so few account- ing reforms within British government was that the state had, ever since Walpole, been able to

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manage its public debt. But the American War of Independence sent a financial storm back to Europe, as England and France scrambled to pay for the war that set the colonies free. The shock hit England before France as a heady mix of anti-Catholic sentiment and falling wages brought about the Gordon Riots of 1780, which destroyed a fifth of the buildings in London and rightly terrified propertied elites. Reform was needed. Dissenters would split: on the side of the status quo on the one hand, and for radical reform and even revolution on the other.

As reforming Whig parliamentarians like William Pitt and William Wyndham Grenville looked to fix the crisis caused by the American war, figures like Wedgwood’s Dissenting friend Richard Price offered the old solution of a sink- ing fund. Price’s Two Tracts on Civil Liberty, the War with America, and The Debts and Fin- ances of the Kingdom with A General Introduc- tion and Supplement (1778) called for a govern- ment for “the benefit of the people governed,” against the “rapaciousness” of an oligarchy bent on holding onto power and also hoarding wealth. The greatest danger of all, warned Price,

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was the national debt. Even after Pitt became prime minister in 1783, the debt continued to rise. By 1788, Britain was spending 70 percent of its tax revenue to service a debt that had bal- looned from more than £40 million under Wal- pole to an astronomical £250 million in 1784. Once considered a Dissenting radical, Price was now praised in Parliament as “that able calculat- or,” the term calculator having become a com- pliment. His treatise contained hundreds of pages of calculations and accounts, showing how his proposed sinking fund would vanquish national debt.26

Pitt’s administration finally gave real powers to the old, toothless parliamentary Com- mission of Accounts, which was supposed to oversee state expenditure. Pitt needed more in- come, and he would now try to harness the old tools of state accounting. Working under Pitt’s watchful eye, the commissioners first met on July 15, 1785, at Downing Street but left for Scotland Yard to look over the accounts of the Auditors of Imprest, who audited all crown of- ficers. Their aim was to examine all the ac- counts and try to bring them together into a

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single budgetary report. A series of examiners, inspectors, and commissioners would all make audits that would be checked, noted, sent back with objections, and checked again before an of- ficial statement was sent to the Lords of the Treasury, who helped make the most important national economic decisions.27

In 1806, Pitt’s former secretary, George Rose, wrote that there had been no period in British history when the public had been so in- formed of state accounts. Rose believed that keeping double-entry books for state receipts and expenditures, along with a public rendering of these accounts, would calm worried spirits. The convergence of war, economic crisis, over- whelming debt, and social strife helped bring about many of the accounting reforms cherished by Dissenters, who, ideally, wanted a democrat- ic republic. In spite of Pitt’s and Price’s reform and Rose’s claims, many of the commissioners admitted that they still had difficulty in figuring out state accounts. The Commission of Ac- counts would finish its reforms only fifty years later, in 1832.28

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One would have expected Wedgwood to be happy about these reforms, or at least engaged. Here, after all, was one of the greatest account- ants of his age, a Dissenter, and a close friend of radical reformers. Wedgwood complained that all who did not have the vote were slaves. He also bitterly complained of slavery itself and about Britain’s “obstinate rulers” who had brought “calamity” in the war with America. But he showed a distaste for politics. Wedg- wood’s letters show the passivity of a man of the establishment. He hoped that his old Dis- senting friend Joseph Priestley would find more time for “leisure” rather than the radical preach- ing that would drive him from England to Pennsylvania in 1791.29 Wedgwood was ever solicitous to European monarchs and the great aristocrats of his realm, on whose purchases he still relied. As the French Revolution began in 1789, the chief pottery maker to the British monarchy and to the great and the good of the world was less concerned with liberty than with making snuffboxes adorned with the heads of French Finance Minister Jacques Necker and, more prophetically, King Louis XVI’s

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revolutionary brother, the Duke d’Orléans (who would soon lose his on the guillotine). The world was in revolution; Dissenters believed their moment had come, and Wedgwood was fo- cused on making cameos.30

In 1791, Wedgwood wrote to support Priestley in the wake of Birmingham’s Priestley Riots, which were directed against Dissenters and his friend’s revolutionary preaching. An old friend of the family, Priestley—a scientist and Dissenting preacher—was the discoverer of oxygen, a believer in industry, and also an in- domitable defender of political and religious liberty. Wedgwood supported Priestley against the rabble that burned down his church. But when Wedgwood read Priestley’s appeal in sup- port of the French Revolution and for republican government in Britain, he protested against pas- sages that called for armed revolt and recom- mended temperance. Wedgwood’s discomfort with his revolutionary friend had become palp- able, and James Watt, a former radical himself, agreed with him. Watt also warned Priestley that “while Great Britain enjoys an unprecedented degree of prosperity,” other countries were in

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the chaos of revolution and thus he would con- sider “the overturn of all good government” as folly.31

After Priestley was forced to flee to Phil- adelphia for his safety—where the mayor and Benjamin Franklin welcomed him as a revolu- tionary hero—Wedgwood’s letters contained no more radical talk. In his letters to his close friend Dr. Erasmus Darwin—whose son Robert would marry Wedgwood’s daughter Susannah, to beget Charles Darwin, the father of the theory of evolution—Wedgwood remained more fo- cused on calculating the advantages that a good canal system would bring to Britain. In the age of world revolution, Wedgwood continued to take comfort in his very favorable bottom line and his legacy: sound industrial management and tableware for the middling sort.

Yet harsh reality appeared even in the suc- cessful factories of Burslem. The effects of in- dustrial pollution on Wedgwood’s workers and their families made him wonder why science had not brought more human improvement. As war and violent revolution gripped Europe, tuberculosis ravaged Wedgwood’s and other

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industrial families. Joseph Priestley’s and James Watt’s daughters both suffered from it, and the lead and coal of the Wedgwood factory dam- aged the lungs of Josiah’s son Tom. In his later years, James Watt wrote, “Nothing now re- mains, as I can find it [money] can neither bring health nor happiness.” With his constant faith in science, Wedgwood spent money on research to cure these diseases, but his heart was more in profit and industry than in medical progress and human well-being.32 The horrors of industry in- spired Romantic poets like William Wordsworth to lament that industry was England’s “bane” and had spread darkness “O’er hill and vale.” There was poison in this great industry, and even with Wedgwood’s true genius, he had not accounted for this heavy cost.33

Although Wedgwood the innovator would, in the end, use accounting to try to hold the status quo, economists and philosophers saw that ac- counting could be a tool for wider social and cultural change and progress. Adam Smith used accounting data to develop free-market theories. It was in ancient accounts, like the Domesday

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Book—which he called a “very imperfect book of accounts”—that Smith traced the movements of the invisible hand of market prices. He cited the accounts of French, English, and Scottish food markets to understand pricing. A professor of moral thought, Smith mixed the numbers of accounting with theories of moral commerce and liberty in his quest to design a model for hu- man happiness.34

Moving beyond profit-oriented accounting, British Protestant thinkers tried to budget pro- ductiveness as well as happiness. In 1781, the utilitarian philosopher Jeremy Bentham tried to account for the “greatest happiness principal” with a “hedonic, felicific calculus,” which was a double-entry method of valuing pleasure. Bentham called for an account of pleasure and pain: “Sum up all the values of all the pleasures on the one side, and those of all the pains on the other.” The balance, he said, would show the good and bad tendencies of a person so that he might try to improve his life and find not salva- tion, but earthly happiness.35

Thus the science of bookkeeping became a way of thinking about happiness, well-being,

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and individual worth, beyond the bottom line. Bentham pointed out what Wedgwood could not recognize: Holy industriousness could bring both pleasure and pain. The challenge in life, as in business, was to find balance and seek im- provement and happiness beyond wealth itself. At the end of the eighteenth century, however, a harmony of human happiness and commerce was still unrealized. As Priestley had tried to tell Wedgwood, there was great inequity in the world, and many felt that only the human reck- oning of a revolution could bring freedom and human happiness.

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CHAPTER 9

BIG DEBTS, BIG NUMBERS, AND THE FRENCH REVOLUTION

Sire . . . to follow the example of England, which publishes its ac- counts . . . is an insult to national character. . . .

—COMTE DE VERGENNES, FRENCH FOREIGN MINISTER,

TO LOUIS XVI, 1781

After fifty years, the English budgetarypamphlets of figures like FrancisHutcheson had found no echo in Europe or the Americas. For accounts to be- come a way of talking about politics and making

news, it would take a Parisian argument about numbers and a French revolution. From the be- ginning of debates about numbers and political accountability, the numbers had been dubious. The French Revolution would begin, in part, as a fight about accountability and accurate num- bers in government. This fight would popularize the use of financial accounts in the modern politics.1

It is surprising that a lasting language of ac- counting and accountability emerged not in Hol- land or England, but in France. As we have seen, Dutch political leaders had a grasp of ac- counting and maintained relatively open govern- ment. With its parliamentary system, constitu- tional government, and national bank created to manage its debt, England had a system of finan- cial accountability that eighteenth-century des- potic France did not. Perhaps it was precisely because of its very lack of open government that a political language of public accounting and ac- countability emerged more forcefully in France.2

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John Adams famously noted on his 1778 trip to Paris that the ancient French monarchy and its privileged nobles surrounded themselves in a glittering world of luxury, even as most of France wallowed in increasing poverty. The government had managed to make some spend- ing cuts, but even so, the threat of a government default on debt interest payments spiked interest rates. The only way to lower the debt, inflation, and interest rates was to tax France’s proud no- bility, the great landowners, who, although less than 3 percent of the population, owned 90 per- cent of France’s considerable wealth. For more than a hundred years, French elites had resisted attempts to make them pay tax above 5 percent and all reforms that might lead to such a thing, especially national accounting audits, which they saw as the first step to measuring their wealth, all the better to tax it.

A culture of accounting and accountability existed, but only among a small group of mer- chant administrators and political economists. In 1716, one year after the death of Louis XIV, un- der the bankrupt government of the Regent Phil- ippe d’Orléans, the reforming Pâris

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brothers—the financial officers who had been given the job of trying to manage the private tax collection system, the “tax farms”—came up with a plan to streamline tax collection and per- form audits on the independent tax collectors. Their legal Declaration of June 10, 1716, ordered all tax collectors and state accountants to render their receipts, as well as keep day- books, to be audited by regional accounting “controllers,” who themselves would then integ- rate all administrative daybooks into a double- entry ledger. As part of this law, the Pâris broth- ers published abbreviated accounting manuals on small posters that were to be publicly dis- played. What had been part of the world of busi- nessmen and accountants, they claimed, would now be a systematic part of their political ad- ministration.3

Not surprisingly, these reforms met with much resistance. Tax collectors were slow to ad- opt double entry because of both its difficulty and their unwillingness to give up their privilege to profit from tax collection (or perhaps fearing the competition and the potential domination of the Pâris brothers, formidable state financiers in

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their own right). This change coincided with John Law’s establishment of a Banque Générale in 1716 and the beginnings of his Mississippi scheme. Clear accounting was not a priority for the brilliant though ultimately disastrous Scot- tish financier. With enemies among the financi- er class and the old nobility (who feared taxes and any attacks on their privilege), as well as in Law’s influential circle, the Pâris brothers were banished in 1720. As was typical with the vicis- situdes of courtly favor, the chief minister, Car- dinal Dubois, called them back in 1721, after Law’s Mississippi bubble burst, as the French government scrambled unsuccessfully to man- age the financial crash.4

Although they never came up with a plan like Walpole’s bailout, during the next four years, the Pâris brothers continued their ac- counting reforms. More than simply wanting to use accounting to reform the state, they saw ac- counting as a new kind of statecraft. In a secret treatise, possibly made for the government, Claude Pâris Le Montagne stated that the only path to an “ordered Government” was financial accountability through double-entry

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bookkeeping. He maintained that it was to an absolutist king’s disadvantage to keep secret the “shadow finance” of private tax farmers. He warned that secrecy caused corruption and that the only antidote was through the “solid and geometric plan” of “faithful tables” of double entry, which would provide a “General Control” of all state finance. Public, double-entry ac- counting, he concluded, was the basis of “the public good.”5

In spite of all their reforms, the Pâris broth- ers had no lasting impact on state policy. Jarred by the collapse of Law’s bubble, few in public or in government had the financial literacy to fully understand the basic ideas about account- ing and accountability. France was not merchant Britain, and the regent was no Dutchman. The Pâris brothers later complained that the regent “never saw more than the covers of the Books (the Registers of the general Treasurers).” The debate over comptes rendus, which the Pâris brothers hoped to spur, never materialized.6

Economic debate in France was dominated by the Physiocrats, pioneering economists who believed that wealth came from agricultural

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production and free markets. Physiocrats had grand ideas and used numbers in their theories, but they did not do the kind of financial analysis of accounts and budgets done by Hutcheson or by the Pâris brothers. The most famous idea that emerged from the works of the French econom- ic philosophers François Quesnay, Vincent de Gournay, and Anne-Robert-Jacques Turgot is what they famously called “laissez faire,” a the- ory of commerce based on the natural law of freedom. Before Adam Smith, it was their hope that by lifting government subsidies, price con- trols, and guild monopolies, an “invisible hand” would spur agricultural production and national wealth. Large-scale, state financial management was not necessary in a market regulated by the balance of nature itself. Although Quesnay used mathematics to study economic theory and de Gournay and Turgot were skilled accountants, their published work rarely contained analysis of complex numbers, accounts, or budgets. While the English argued about state tax re- ceipts, lending rates, and sinking funds, the French lived in a financial information blackout,

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imposed by their secretive, absolutist mon- archy.7

Physiocrats and free market pioneers did, however, believe that public debt undermined economies and society. They echoed the views of the Scottish philosopher David Hume, who, in 1751, had characterized public credit as “dan- gerous,” “rash,” and ultimately devastating to nation-states. Hume framed the choice between budget surpluses and deficits in apocalyptic terms: “Either the nation must destroy public credit, or public credit will destroy the nation.” At first glance, Hume would appear prophetic: By 1776, the French monarchy, saddled with in- surmountable debt and a large deficit in spend- ing, had long been on the edge of bankruptcy. And indeed, when deluge of the revolution came in 1789, it wiped away the old order. Yet the state remained, and so, too, did public credit.8

The question was how to manage it. The French public increasingly hungered for

the financial details of their own state and its as- sumed massive debts. During the tumult caused by the American War of Independence (1775–1782), as France’s massive debts

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ballooned, Louis XVI found it harder and harder to borrow. Although earlier reformers had im- proved tax collection, the basic abuses of a sys- tem managed by private tax collectors remained and, given the nation’s mounting debts, weighed all the heavier. Without a central accounting system within the state, no one really knew the level of income or outstanding debt. The fermi- ers and regisseurs, the crown’s private tax col- lectors, kept scant records, turning in primitive and often falsified accounts years after the fiscal year in question. With weak-handed audits con- ducted every three years, there was ample time to falsify accounts. Some state financiers sent their account books to the Royal Treasury nine- teen years late. At the same time, these unac- countable tax collectors, while withholding their tax revenues from the Treasury, lent money to the crown at high interest rates. Corruption, had, in effect, been institutionalized.9

Unable to secure loans or raise revenue, in 1777 the crown named Director General of French Finances the famed Protestant Swiss banker Jacques Necker (1732–1804). A commoner,

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Necker had made his fortune as a banker and a trader in his native Geneva and in Paris, specu- lating on grain and administering the French East India Company. His wife hosted a famous salon attended by the leading lights of the Parisian world of arts, letters, and sciences, in- cluding Diderot, d’Alembert, Grimm, Mably, and Mme. du Deffand, as well as Madame Necker’s former lover, Edward Gibbon, who, at that very moment, was writing his timely and all too apropos History of the Decline and Fall of the Roman Empire (1776–1778).

Whatever faults Necker had—and acquiring wealth in the French market of grain trading and public companies required a certain moral flex- ibility—he was a proven manager and a man of high culture and ambition. His brilliance, finan- cial acumen, and access to the world of ideas and public opinion through Madame Necker’s salon made him a formidable figure on the Parisian political and social scene. Most import- ant, his connection with Geneva allowed him critical access to credit on behalf of the French crown, whose debts following the Seven Years’ War and the War of American Independence

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had ballooned to more than 3 billion livres of debt. Servicing this debt cost more than 300 million livres annually, at an average of 5.5 to 6 percent interest, which was more than 50 per- cent of all state expenditure and more than half of state revenue. A country one-third France’s size, England, by contrast, successfully serviced a comparable debt, in part with 3 percent in- terest loans from its independent national bank.10

Necker worked to stop the tax farmers from lending money to the crown before turning in their revenues and tried to have tax collectors keep accurate, daily books that could be audited at any time. He proposed eliminating three- quarters of the forty-eight tax collectors (regisseurs), streamlining them into twelve heavily audited officers. In his accounting regu- lation of October 18, 1778, Necker attempted to centralize the state financial system into a single caisse, or account, based on double-entry books he would closely audit.

Like the reformers before him, he threatened the entire independent financial class of the an- cien régime. And, of course, any time any

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privilege was threatened, the nobles smelled blood. Having resisted reform for more than a century, they were not about to stop now.11

It wasn’t long before Necker was attacked in the popular press in a burst of publicity and pro- paganda, which the future Minister of Finance Calonne maliciously called “Neckromania,” a “sickness” of public opinion. As a foreign, Prot- estant finance minister and a magician of Swiss credit, Necker could not have been shocked to see his name dragged through the mud of the popular press. In the Parisian hive of rumor and libel, Necker was an ideal target.12

As his even more famous daughter, the writer Madame de Staël, later admitted, her father thrived on publicity and believed, at least in the beginning, that the public was a rational political force. Yet as his reforms continued, the attacks against him became more pointed and potentially threatening. In 1780, one particular libelous pamphlet seized public attention. The Parisian barrister Jacques-Mathieu Augéard’s anonymously published Letter from Monsieur Turgot to Monsieur Necker was filled with so much financial information that it gave the

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impression that a government insider had writ- ten it. Augéard attacked Necker as a Swiss banker bent on draining money from the state for his own fortune (the grand sum, he claimed, of 1.75 million livres). He critiqued “the Citizen of Geneva’s” skill as an accountant, saying, “you know better than I the ABCs of business [accounting and keeping Registers],” and claimed that Necker’s vulgar, common manners added up to nothing more than “a little calcula- tion of banks and money.” Most seriously, Augéard charged that Necker was another John Law, printing speculative paper money (billets noirs) that would lead to a financial crash like the Mississippi bubble. “The example of 1720 is still in sight,” he warned.13

Although he mocked accounting, Augéard used numbers as his primary weapon in the pub- licity battle, claiming, for instance, that Neck- er’s reform of the tax farms had cost the tax farmers 98 million livres. Even more, he ac- cused Necker of falsely claiming that there were 250 million livres to be had by collecting unpaid debts from the companies of state financiers alone: “What an assertion, Sir!, deign to

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calculate this again with me, for I know the mat- ter well.” Numerical proofs and refutations ac- companied the narrative of indictment. The in- fluential opinion maker Madame du Deffand claimed that six thousand copies of Augéard’s pamphlet quickly circulated through Paris and Versailles. In his own Mémoires Sécrètes, Augéard later gloated that his pamphlet was “devilishly successful.”14

Political publicity was, by 1780, a well- developed, rough-and-tumble art, yet Necker had, until this time, managed to keep his hands clean of it. With these attacks, however—sus- tained, popular, coming on all fronts, and em- ploying financial calculations authoritative- sounding enough to convince the public—Neck- er saw no option but to respond. It was un- seemly and dangerous for a minister to descend into the mud-slinging world of pamphleteering. Necker could use his position within the state to try to ban the offending pamphlets, but this would have only a minor effect; there was no truly effective censorship machine within the state. Thus he had to turn the tide of pamphlets threatening his position and reputation by taking

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control of the discourse not just at court, but in the streets.

In 1781, Necker published his Compte Rendu au Roi (Accounts Rendered to the King), an explan- ation of the crown’s finances for the year. It was the first time in the history of the French mon- archy, Necker proudly pointed out, that a fin- ance minister had shown himself accountable for his administration and revealed his calcula- tions to the public, claiming a budget surplus of 10.2 million livres.15

As one news pamphlet described it, until then, government had never published an offi- cial budget, leaving the real state of royal fin- ances to the “false speculations” of an unin- formed public. Secretive state finances had made the French public hungry to understand the workings of the French state that taxed them, prosecuted costly wars, and funded the glory of the court at Versailles. It was into this void of information that Necker stepped. His Compte rendu was the key moment when pub- licly accessible accounts became a central

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means of assessing the effectiveness of a gov- ernment.16

The response he chose was precisely the sort of mixture of enlightened gesture and reckless bravado that conservative figures in the mon- archy feared from their Swiss Director of Fin- ances. A brilliant media coup aimed at the very powers threatened by reforms and at a European audience that included the Swiss creditors of the crown whom he wanted to convince that the state’s finances were sound, Necker’s Compte rendu called the bluff of his enemies. If they sought to use numbers against him, he had at his disposal a weapon they did not possess: the abil- ity to reveal the actual accounts of the govern- ment from within. Necker hoped that this “pub- licity” would neutralize his critics by shining light on “these obscure Writings,” the “mystery of the state of Finances.” It was, he bragged, “the first moment in which a great State” re- vealed the truth of its dire finances. Necker was not accountable to the people—there was no real mechanism for this in an absolute mon- archy—yet only this publicity, he insisted, could bring order and confidence. And so, with a dose

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of Calvinist revelation, Necker made the bet that his unveiling the “mystery” of state accounts would gain France good credit with foreign lenders.17

Beyond hoping to sway opinion, Necker was offering a new vision of politics. Claiming that England’s Parliament printed the state of its fin- ances every year and that he was following suit—he clearly had no knowledge of English political culture or of the debates that were ra- ging even as he wrote—Necker said that bal- anced books were the basis of “moral,” “pros- perous,” “happy,” and “powerful” government. He described in detail his management, state revenues, and expenditures, and at the end of his description, he provided his accounts for public opinion to see the justice of his claims. The numbers of his accounts were to represent the virtue of his administration. In short, open good books were open good government. Public prosperity and public accountability were cent- ral to the defense of the state and the power of its sovereign. This was literally revolutionary, for Necker was implying that it was not the king’s personal will that constituted political

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power, but rather the management of state ac- counts, for which he himself took credit.18

The Compte rendu revealed the finances of each major institution and office in the state and its expenditures and revenues. Total revenues were 264,154,000 livres. Out of the total “ordin- ary” expenditures of 253,954,000, the king spent 65.2 million livres on the military, 25.7 million on the court and his household, and 8 million for the comte d’Artois’s household. This was in comparison to 5 million livres for roads and bridges; 1.5 million for Paris police, light- ing, and city cleaning; 900,000 for the homeless poor; and 89,000 for the famed Royal Library. The royal priorities here were painfully clear.

These revelations shocked the public, not just for the gross disparities of expenditures they made plain, but for the very way they demysti- fied the sacred realm of the king’s household and the careful theater of power played out at Versailles. The Maison du Roi was not represen- ted as a royal, legal, personal, or even mystical entity, but rather as a set of shocking numbers. In a particularly daring affront to the crown in an age of famine, Necker took the opportunity

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to critique the king’s dining expenses, claiming that with better management they could be cut by half.19

The pièce de résistance of the Compte rendu was its annex of accounts. Necker provided what appear to be full state accounts, followed by a final tally on a large table on the last page. Necker claimed that all these calculations could be backed up by “verifiable documents,” state accounts signed by those who made them, which he kept in a box and would go on to pro- duce as evidence. At the end of his calculations, Necker declared: “Revenues exceed Expendit- ures by . . . 10,200,000.” All the numbers were there, and they showed a surplus. As would later be revealed and even acknowledged by Necker himself, he omitted about 50 million more in de- ficit military and debt-related spending, which he deemed extraordinary, thus beginning a ven- erable tradition of underreporting, or keeping military spending off the books, out of national interest.20

Ever on the sideline of events (save that of his own downfall), the hapless Louis XVI had clearly not realized what his minister was doing

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in publicizing the accounts. For his part, Necker, sure that he would improve his political stand- ing, did not imagine his numbers would be chal- lenged. He had the Compte rendu published by Panckoucke, publisher of the Encyclopédie, who sensed this was to be a major success, as indeed it proved to be. If Augéard’s print run of 6,000 was considered a success, it is hard to character- ize the phenomenon of the Compte rendu. With- in a month, the 60,000 copies Panckoucke had printed sold out. More than 100,000 copies were sold in 1781 alone, changing the very notion of what constituted a best seller. Thousands more copies were printed in foreign editions and translations. The Compte rendu became one of the most successful works of all time and a me- dia phenomenon. Seditious material had long circulated clandestinely. What Necker did was to redefine the very substance of debate. It was no accident that Necker paired the Compte rendu with a royal declaration of accountability on March 3, 1781, requiring all tax collectors to present their account books and a future budget. Necker’s proposed “Law of Accounting” offered to the king the possibility of putting

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order in both ordinary and extraordinary fin- ances. In the past, debates about good govern- ment had been fought with words and even im- ages and songs. With the Compte rendu, debates would now be waged not only with increasing fury but also with cold numbers of account- ing.21

Necker’s Compte rendu had the appeal of a secret truth. Yet as Necker himself had made clear in his earlier criticisms of the state’s finan- cial institutions, although a truly accurate ac- count of state finances was nearly impossible, his accounts were more accurate than those of his detractors. Many of Necker’s critics accep- ted his numbers but attacked his act of revela- tion, especially that of royal expenditure. His method of exposing royal accounts was seen as undermining the very religion of absolute mon- archy: secrecy. Foreign Minister Vergennes at- tacked the idea of revealing government secrets, seeing the Compte rendu as a direct threat to the personal authority of the king; he, like much of the public, assumed that Necker had been not only truthful, but accurate. In a letter to Louis XVI, Vergennes called the Compte rendu “an

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insult to national character, which is sentiment- al, confident and devoted to its Kings. All is lost in France, Sire, if Your Majesty allows his Min- isters to cite English Administration for which your predecessors have shown a just aver- sion.”22

One particularly reactionary aristocrat, the Marquise de Créquy, made a bilious rant against the Compte rendu that reveals just how threaten- ing the idea of accountability was to the court nobility. Créquy understood that part of the Compte rendu was an act of public theatrics, but the idea that a Protestant banker would reveal royal secrets touched on ideas of privilege based on rank, blood, religion, and nationality. Ac- countability, or the revelation of secrets of state, was a subversive act in itself and showed the qualities of an enlightened “encyclopedist” and “Jew-like” Protestant banker who lowered him- self to the burlesque and base activity of mer- chant accounting. It was the royal minister Maurepas’s fault in the end, Créquy lamented, for leaving state secrets in the hands of a foreign Protestant like Necker.23

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One critic warned that the “illusion” and media sensation created by the Compte rendu had to be “snuffed out,” precisely because Necker’s numbers were a chimera. At first ob- jecting simply to numbers, Necker’s critics soon got in on his act. The only way to fight these bad numbers, they saw, was with “the evidence of numbers.” Here was the model of modern political debate: an arms war of impossibly hard to substantiate numbers. The fact that few could actually verify calculations made numbers a per- fect cover for fraud.24

For the next decade, the unscrupulous courtier Charles Alexandre, Vicomte de Calonne—called “Monsieur Déficit” by his en- emies—would be Necker’s archrival in debates over state accounting and accountability. A protégé of Vergennes himself, Calonne was a royal tax lawyer, or intendant, and as such suffi- ciently acquainted with state finance to attack Necker with counternumbers. The decade-long battle between these two men would take on epic proportions, forming the first public polem- ic about state accounting numbers.

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Calculated critiques like Calonne’s pierced Necker’s political armor, and it is hard to ima- gine that these attacks against a crown minister, no matter how independently he might have ac- ted, did not pique Louis XVI’s royal sense of dignity. In the end, however, the remote king fi- nally ceded to the parties of privileges—the queen, the court, his brother Artois, royal finan- ciers, and the Parlement of Paris—and dis- missed Necker on May 19, 1781. Exiled to the country to fulminate, Necker took this time to write his masterful and best-selling Treatise on the Administration of Finances (1784), thereby cementing his place as the world’s leading fin- ancial writer. His daughter Germaine, by marry- ing the Swedish ambassador, became Madame de Staël, the famed French Romantic writer. Necker’s quitting of the scene did not change the fact that he had let loose the genie of ac- countability into the world of politics.

Over the next six years, attempts at reform were mostly in the ways Necker had suggested. Then in February 1787, Calonne became Controller General of Finances and came face-to-face with

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precisely the same financial problems that Necker had. Meeting with the Assembly of Not- ables at Versailles in yet another attempt to combat the gangrene of French state finances, Calonne sought to explain the reasons for the financial deficit, and deflect blame for it, and he proposed a despised general land tax that in- cluded the nobles. Although not responsible for the debt, he, politically, owned it. Like all those before him who had failed to reform state ac- counting and impose the tax on nobles that was so sorely needed, Calonne fell in 1787, later fleeing to London.

The now reviled Calonne had to rescue his reputation and career. He saw his solution in blaming Necker for the deficit by showing that the calculations of the Compte rendu had been incorrect: Rather than a surplus of 10.2 million livres, there was instead a deficit of 46,329,000, a difference of 56,529,000 from Necker’s ren- dering. Calonne made the same argument about accountability that Necker had: Calculations were the only way to prove the success of an ad- ministration. He claimed that Necker had forced him into doing this “painful revelation,” which

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would break the “armor of illusion” with “in- contestable truth.” “Quelle masse d’erreurs!”25

It is not at all clear that the public was able to judge sums like 10.2 million livres. By 1785, the Affair of the Diamond Necklace, in which Marie Antoinette had been falsely implicated and discredited in the complicated theft and re- sale of jewels, had familiarized the public with sums like 2 million livres. Wages were counted in sous, not livres, and the average laborer earned between fifteen and twenty-five sous a day (around the value of one livre). Skilled ar- tisans earned about double that. Daily bread av- eraged about seven to fifteen sous, anywhere between 50 and 100 percent of a journeyman’s wages. Few could understand the immense sums being discussed, let alone the calculations ac- companying them. Nonetheless, the numbers entered into the everyday parlance of the liter- ate, and soon enough Necker’s 10.2 million livres became a commonly bandied number. What was clear to the general populace, literate and illiterate alike, was that the sums discussed were incredible and scandalous and that they discredited the crown.26

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From 1781 onward, newspapers such as the Gazette de Leyde, the Mercure de France, and the Courrier d’Avignon closely covered the de- bate over Necker’s Compte rendu and the sub- sequent comptes rendus of his enemies. They often discussed numbers and in some cases cri- tiqued accountings. In 1788, the Courrier d’Avignon reviewed various comptes rendus and reproduced extracts of royal accounts and calcu- lations. Although not truly analyzing accounts in any professional or technical way, journalists nonetheless compared accounts and highlighted the differences between the total tallies of Tur- got, Necker, and Calonne. Throughout 1788, comptes rendus and numbers appeared in news- papers, which more and more equated credible calculations with political legitimacy. Clearly, the public was enthralled not just by sedition and slander, but by the power of numbers, of ac- counting.27

In 1788, Necker triumphantly returned to his position as director-general of finance. Allegor- ies now likened him to liberty itself. For obvi- ous reasons, Louis XVI had not wanted his old minister back, but Necker rode back to power

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quite literally on a wave of public acclaim, and Louis XVI became more and more powerless. Crowds thronged the streets to celebrate Neck- er’s triumph. Yet the old problems remained, and Necker once again was tied to these prob- lems and numbers.

On June 23, 1789, rumors that the queen had forced the king to fire Necker brought protesting crowds into the streets of Versailles, pressing against the gilded gates of the chateau. Necker went to the front gates to bask in the approba- tion of the crowd. Some presciently worried that such mass demonstrations posed a danger to au- thority, yet the crowds were not dispersed, and the king began to amass troops in Paris and Ver- sailles. On July 11, 1789, Necker protested the presence of soldiers in the capital. This was one disagreement too many, and the king fired him yet again. Necker, claiming the full support of the Third Estate—the increasingly influential non-noble political representatives who had de- clared a National Assembly at Versailles—was stunned. He alone held back “famine and bank- ruptcy,” he pronounced.

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On the July 14, an angry mob gathered in front of the Bastille, a medieval fortress on the edge of Paris, now a royal prison and weapons magazine. It had been used as a royal prison since the fourteenth century, and although it held only seven privileged prisoners (one was an Irishman who thought he was God), it was a symbol of royal power and repression. “Citizens, there is no time to lose,” yelled Ca- mille Desmoulins, a radical leader of the revolu- tion who would help open the doors to the Ter- ror, only to lose his head on the guillotine by the hand of his friend Robespierre. “The dismissal of Necker is the knell of a Saint Bartholomew [a famous French massacre of 1572] for patriots! This very night all the Swiss and German bat- talions will leave the Champ de Mars to mas- sacre us all; one resource is left; to take arms!” By the end of the day, the royal governor’s head was on a stake, weapons and gunpowder had been commandeered by the mob, hundreds of years of police archives had been thrown into the streets, and the royal flag was lowered. When the Duke de Liancourt announced the news to Louis XVI, the king asked, “But is it a

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revolt?” The duke famously replied, “No Sire, it is a Revolution.”28

As the old regime crumbled, Necker was re- called yet again, returning to Versailles once more through the adoring throngs of the public. But events were now beyond this moderate, who, if anything, now appeared hapless as the juggernaut of revolution started rolling. Necker was a reformer, not a revolutionary, and there would be no reforming the old order. Through the National Assembly, the revolutionaries wanted to wipe away aristocratic privilege and royal fiat. The accounting Necker wished to use to reform could just as easily be used to build a new government. Over the next two heady years, Necker slowly faded from the scene, but accounting reforms and the public discussion of big numbers remained.

Numbers not only remained part of political debate; accounting became central to the lan- guage of the revolutionary constitutions. The English word accountability might derive from a translation of the French term comptabilité in- to accomptability or finally accountability. Whatever the first usage, it was the way the

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English rendered the term in their translations of the French revolutionary constitutions. The French revolutionary Constitution of 1791 legis- lated that all financial and political actions had to be published in the form of comptes rendus (“public accounts”).29

In 1792, the Convention Nationale (now the legislature) organized of a Bureau of Account- ability. The bureau had eight accounting com- missioners and gave an accounting of its own annual expenditures—they spent 499,001 livres, a considerable sum. However, creating the bur- eau was not easy; few officials were expert enough in accounting to take the posts. That same year, Deputy Antoine Burté published a pamphlet (of what was probably a speech to the Convention) titled “Rapid Observations on the Conditions of Eligibility of the Commissars of Accountability.” In it, he discussed how to do accounts, the scarcity of skilled accountants, and the difficulty in training accounting commis- sioners.30

With the abolition of the tax farms in 1790 and the rise of a central state taxation office, there were improvements. Not only did all

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bureaus of government publish their own ac- counts (comptes rendus, or états) but also the ministries of finance and the navy published regular accounts. Every office and agent of the government had to produce financial accounts and receipts for their actions. Through these little account pamphlets filled with numbers, the state revealed its workings and publicized its virtue.31

Far from the scene of momentous events, Necker returned to his roots, passing his last years in his Chateau of Coppet, near Geneva. Madame de Staël, meanwhile, took the family’s moderate mantle and fought ardently against Napoleon. Necker died at age seventy-one in 1804.

The revolution failed to secure representat- ive, accountable government; still, it introduced a culture of financial literacy and accountability into politics that in turn planted the seeds for fu- ture accounting reforms. In creating a language for judging politics through state balance sheets, Necker’s Compte rendu was a precursor to the modern budget and, indeed, to financial newspa- pers. It was emulated across Europe and even in

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America. The Grand Duke of Tuscany and fu- ture emperor of Austria, Pietro Leopoldo, pub- lished his own Rendiconto of state accounts in 1790. Even constitutional England and the nas- cent United States paid close attention to the Compte rendu and to French accounting re- forms. France, which had for so long failed in any sort of state financial accountability, provided an exportable method for building a modern accountable state.

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CHAPTER 10

“THE PRICE OF LIBERTY”

A regular Statement and Account of the Receipts and Expenditures of all public Money shall be pub- lished from time to time.

—UNITED STATES CONSTITUTION, ARTICLE 1,

SECTION 9

Jacques Necker’s Compte rendu not onlyplayed a role in the French Revolution. Hiswritings and accounting reforms provided inspiration to the Founding Fathers of the Un- ited States. State builders and administrators across Europe and the New World were finding new uses for the old methods of accounting.

Those methods would find fertile ground in a young nation whose constitution was based on the ideal of political accountability. Here, in the newly formed United States, there would be a chance to build a government around the prin- ciples of accounting.

Before it was the nation of the Constitution, America was the land of the account book. The noble enterprise, as many saw it to be, began as a commercial venture. The Mayflower Compact of 1620—the undertaking of the Puritans to make a sea voyage to the New World—was made in the form of a commercial contract, signed by investing partners, to share expenses and profits. And contracts went into account books. It should never be forgotten that although they were religiously inspired, the early Americ- an colonial ventures were organized to make a profit. Like the Dutch, French, and English East India Companies, the early colonial ventures in America were chartered companies, with trade monopolies granted by the British Crown, foun- ded to colonize British North America.

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The Massachusetts Bay Company was a private shareholder company, founded by “un- dertakers,” with a charter from King Charles I and officers: a governor, a deputy governor, and a treasurer. Leader of the Boston Puritan pil- grims John White’s project for a “plantation” on the Massachusetts Bay was a colonial business venture as well as an attempt to find safe haven and religious freedom for Puritan Calvinists, who were persecuted in Charles I’s Anglican England. In 1629, in Cambridge, England, the shareholders met to sign the Cambridge Agree- ment. Some shareholders stayed behind, and others, led by John Winthrop and Thomas Dud- ley, made the arduous, two-month Atlantic crossing in a ninety-foot wood and tar boat to the unknown (although already populated) land to found the cities of Boston and New Towne, which would become the new Cambridge, placed on the easiest crossing from Boston, across the “great oyster bank” of the respect- fully named Charles River.

As might be expected, and in the great tradi- tion of the Italians, any multipartner seafaring company depended on the quality of its books:

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those of the home office, those of the boat, and those of the trading post or, in this case, colony. Colonies relied on account books even more than factories did, for how was one to assess a far-flung investment without conducting a per- sonal inspection? Early in the Mayflower settle- ment, the Pilgrim Fathers encountered account- ing problems when their treasurer failed to keep accounts: “Mr. Martin saith he neither can nor will give any accounts; he crieth out unthankful- ness for his pains and care, that we are susspi- tious of him and flings away, and will end in nothing.” In 1629, to calculate what the Mas- sachusetts Bay Company owed to each partner, an audit was made: “But for that there is a great debt owing by the joint stock, it was moved tha some course might be taken for the cleering thereof, before the gouvmt bee transferred; and to this purpose it was first though fit that the ac- compts should bee audited, to see what the debt is.” Indeed, the accounts showed that the North American colonies could produce great wealth but that they were often in debt. The early his- tory of America is, in part—along with religion, colonialism, trade, slavery, education, and

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philosophy—the history of accounting for the management of that debt. From 1636 onward, the Massachusetts Bay Company would proceed in the “audite,” or “taking” of treasurer’s ac- counts. The same was happening in the Dutch colonies. In 1651, the Dutch directors of the North American trading companies, in what is today New York, hired Johannes Dyckman as “Bookkeeper in New Netherland.”1 The founders of the United States were not just reli- gious idealists, merchants, smugglers, philo- sophers, and slavers; they were also accountants interested in accounting for profit, for God, and ultimately for the people of the United States. Until then, no country had ever been founded under the watchful eye of a bookkeeper.

Unlike Britain, however, America was not yet a land of shopkeepers. It was a rural place, of farms and plantations. Among the general population, especially in the early colonial years, double-entry accounting was not common and actual money was scarce (and often a mot- ley mix of guineas, bits, and Spanish dollars, from which the word dollar is derived). Most towns were small, and few residents paid any

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taxes. Some made their money smuggling, and the majority of transactions took place by barter.2

However, the American elite and urban classes did come from the world of the British financial revolution, and whether landowners or merchants, English, Scottish, French, German, Dutch, Swedish, Swiss, and even some Jewish colonists brought with them traditions of mer- chant accounting. Early Puritan merchants were well versed in bookkeeping. In 1653, Robert Keayne, a tailor, speaker of the House of the Massachusetts general court and a military man, wrote about his account books: “the third is bound in white vellum, which I keep constantly with the sum of most of my accounts contracted wherein there is [sic] accounts between myself and others with the accounts balanced on either side and also an account of my adventures by shipping with their returns and also an account of what debts I owe and far they are dis- charged.” In cities, accounting culture flour- ished much as it did in England. In the early 1700s, British-style “writing schools” had emerged in most large towns, advertising

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instruction in “merchant’s accounts.” By the third quarter of the eighteenth century, the colo- nial population had swelled to 2 million, and Philadelphia, with 20,000 inhabitants, was the second biggest city in the British realm. From Bostonian booksellers and Philadelphia traders to the plantation owners of the south, British eighteenth-century bookkeeping was almost uni- versally known.3

A number of British accounting manuals cir- culated in the early United States. Among them, John Mair’s Bookkeeping Methodiz’d was found in many colonial libraries. Accounting was of- ten taught in families with manuals like that of Mair. A copy owned by the Library Company of Philadelphia is an eighth edition with the own- er’s signature, “Sam Mickle’s, 1776,” and those of his heirs, “George Mickle, 1830” and “Joseph Mickle Fox, 1906.” By the 1790s, American ac- counting manuals were appearing in the trade capital, Philadelphia. Thomas Serjeant’s An In- troduction to the Counting House was published there in 1789. But Mair’s book dominated the market, for it advertised double-entry account- ing as a tool for “merchant-accounts” and

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plantation owners. Without it, Mair warned, it would be difficult to use accounting for the management of estates, farms, and, indeed, gov- ernment. For the top and the bottom of society, Mair advertised double entry as a tool for “real business,” colonial nation building, trade, agri- culture, and domestic life and gave examples as specific as “The Produce and Commerce of the Tobacco Colonies.”4

Obadiah Brown, a former ship’s captain—of the Providence, Rhode Island, Brown fam- ily—taught himself accounting by using a Brit- ish accounting manual. Much of his early ac- counting was haphazard and single entry, al- though effective enough. Brown mixed his ac- counts with a personal diary. Joining his family firm, Brown made a fortune in cocoa, rum, molasses, and slaves. Members of the Brown family would become academics in the mid- eighteenth century and, using their wealth from trade, in 1833 helped turn the Baptist College of the English Colony of Rhode Island into Brown University.5

Accounting played a major role in the lives of the founders of the early American republic.

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Merchants such as John Hancock were sent to London to learn accounting as apprentices. Han- cock made errors in his books, but the accounts were extensive and reflected his background in British overseas trade. And he used these skills to make a fortune profiteering during the war. But accounting was not simply a way to get rich. In the case of Benjamin Franklin, it formed his vision of the world and was a central tool of nation and state building.6

In The Protestant Ethic and the Spirit of Capit- alism (1905), the sociologist Max Weber held up Benjamin Franklin as what we now recog- nize as a caricature of the Protestant capitalist strain. Double-entry bookkeeping was at the center of Weber’s work ethic theory, for he con- sidered it “rational.” Weber quoted Franklin’s famous sayings that “time is money” and “credit is money,” and he cited Franklin’s financial maxims on accounting and thrift as his prime examples. Weber concluded that earning money and denying self-gratification were not simply good capitalist tools; they were a holy Calvinist ethic. And he quoted the Bible: “Seest thou a

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man diligent in his business? He shall stand be- fore kings” (Proverbs 22:29).7

At one level, this was Franklin, the most di- ligent and enterprising of men. And he was cer- tainly endowed with staggering talents. His ac- count books show how he organized all levels of his life through accounting. As a polymath, in- ventor, printer, businessman, scientist, musician, politician, author, bibliophile, scholar, journal- ist, philosopher, diplomat, and householder, Franklin clearly saw accounting much like Col- bert in seventeenth-century France: as an organ- izing principle for his disparate interests. He learned accounting as a printer’s apprentice, and it took a major role in his life. He wrote ac- counts for his family business, for his house- hold, for his position of Postmaster General of the British colonies, and for his diplomatic mis- sions representing the fledgling American republic.

In Franklin’s early years, he kept ledgers for his business as a printer in Philadelphia. Frank- lin admired those who knew how to do double- entry accounting, noting it as a great virtue in his Autobiography (1771–1790). He described

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how his friend, the future poet and writer James Ralph, was expert in double entry, “which he thought himself well qualify’d to undertake, as he wrote an excellent Hand, & was a Master of Arithmetic & Accounts.”8

Franklin’s shop book accounts between 1735 and 1739 recorded all sales and transac- tions in meticulous detail. Entries include “an almanac,” “an ounce of inks for Cristefer the Fisherman,” and the debit of sixpence “lent to the Stranger from Boston.” Franklin was im- pressed that the Dutch wife of one of his jour- neymen—who himself could do no account- ing—“born and bred in Holland,” was fluent in accounting and could run a printing shop. Franklin recommended that all women be trained in accounting, not only to help run busi- nesses, but to teach it to their children, which would bring “lasting Advantage and enriching of the Family.”9

Here, then, was an ideal of the Protestant work ethic, learned from the discipline of ac- counting and taught as a family work ethic for women and children. Indeed, for Franklin, ac- counting was central to the order of life. As with

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the Jesuits before him, accounting helped Frank- lin order not just his finances but also his thoughts, writings, and moral well-being. He kept moral account books, in which he tallied his own virtues and failings in columns he “cross’d . . . with thirteen red Lines, marking the Beginning of each Line with the first Letter of one of the Virtues.” Franklin, too, believed in being watchful through accounting in anticipa- tion of God’s judgment.

Even more, Franklin believed that account- ing should be a general tool for institutional management, tailored to the needs of a specific business. When Franklin became Postmaster General of the Royal Post in the Colonies in 1753—a lucrative post—he set out to design a system with which local postmasters could do the complex accounting for the mail. In Instruc- tions Given By Benjamin Franklin, and William Hunter, Esquires, His Majesty’s Deputy Post- Masters General of all his Dominions on the Continent of North America (1753), Franklin outlined how to manage a post office. For post- masters, the care of their letters was para- mount—they had to keep them in “good Order,”

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keep them closed and out of the view of all oth- er private persons. More than that, each letter had to be stamped and taxed, for much corres- pondence was official, and some contained tax- able goods. Even more, packets often contained things like jewelry, and their value had to be ac- counted for. The only way postmasters could or- ganize and manage their offices was by keeping good accounts of all letters and packages. Franklin pointed out that he made the process easier by sending each postmaster forms he printed to facilitate their accounting.10

In a founding text of management and or- ganizational theory, Franklin explained how to keep these complex accounts, in which letters had different values in stamps, taxes, and type of letter, and they had to be accounted for as they came, left, stayed, and were paid for or not. Thus Franklin not only created a manual for keeping these accounts, with printed illustra- tions of how to keep them, but also explained postal double-entry bookkeeping, which was part managerial, part mathematical. In any case, it was one of the most innovative accounting manuals of all time because of its specific

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design for a complex office system, with a de- tailed list of specific expenditures and unpaid letters “On the Debtor Side” and other miscel- laneous and dead letters plus income “On the Creditor Side.” He signed the instructions “B. Franklin.”11

Aware that these complex instructions might be hard to follow, he also made a large broad- side—a foldout poster measuring two feet in diameter and 18.8 inches in height to be put on the walls of post offices—that explained all this in abridged form, with illustrations and a mini- manual of double-entry bookkeeping. Thus all post offices in early America had double-entry manuals posted on their walls, with instructions on how to use them. Franklin was not only mak- ing the post office work in the colonies but also spreading his vision of how to order and manage the world.12

For all Franklin’s espoused work ethic (early to bed, early to rise, etc.), he may have had ul- terior motives in some of his accounting pro- jects. His enthusiasm for teaching women ac- counting had an outcome not necessarily in line with the ethic of delayed gratification. In the

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early years, his wife, Deborah Read Franklin, kept books at the counter of their Philadelphia shop, recording sales transactions. Franklin took Deborah’s shop book and his own transaction journal and transferred the entries into his main ledger in classic form. He kept debit and credit columns, numbered pages, and, as he noted later, before leaving on a political mission to England in 1757, “I have drawn a red Line over all such Accounts in this book, as are either Settled or not likely to be recovered.” With America a fledgling nation, Franklin left Amer- ica as ambassador to France after his wife’s death in 1774, where he stayed for ten years between 1776 and 1785, in great luxury and in the company of some of the most beautiful and sophisticated women of Paris.13

Throughout his many diplomatic missions to Europe, Franklin kept concise books. Once in- stalled in Paris, Franklin set up a foundry and printing press in Passy, a little village to the west of Paris on the Seine, in what is today the sixteenth arrondissement. Here, in 1779, Frank- lin printed pamphlets for the American cause, comic writings, and the first American

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passports. He also created the first American typeface, called “le Franklin,” which he had to ship to America twice to get through the British blockade. Franklin was so happy when he fi- nally made his typeface that he recorded in his “Cash Book” that he threw a lavish party for Independence Day in Passy to celebrate, with “more than a hundred bottles of wine” and a cornucopia of summer delicacies from the French countryside. Fittingly, the feast was held under a portrait of the gourmand war hero Ge- orge Washington. Franklin even printed the in- vitations himself. Franklin certainly felt no need to delay any gratification. It was not Paris that corrupted the great man. It was that good ledgers did not always reflect a moral Protestant life.14

Although it was a pillar of his life, Franklin could grow tired of accounting, and even in politically sensitive situations, he sometimes failed to keep accounts. As ambassador to France, Franklin made numerous accounting er- rors (he accidentally reported a French loan of 4 million as 3 million) and often gave up when major audits proved too taxing. He

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corresponded with Jacques Necker around the very time the Compte rendu was published, but he had to negotiate American loans with the eccentric Pierre-Augustin de Beaumarchais (1732–1799), famed author of The Barber of Seville and The Marriage of Figaro, satirist, watchmaker, inventor, arms dealer, spy, and Louis XV of France’s agent in charge of fund- ing the American Revolution. Franklin com- plained that his fellow genius was not a good accountant. In a letter dated August 12, 1782, to Robert Morris, America’s powerful Superin- tendent of Finances, Franklin described his dif- ficulties in dealing with Beaumarchais and hoped that a commissioner to settle public ac- counts in Europe would have “better success with M. Beaumarchais than I have had. He has often promised solemnly to render an account in two or three days. Years have since elapsed and he has not done it. Indeed, I doubt whether his books have been kept so well as to make it pos- sible.” Franklin recognized that in the realm of politics, accounting did not always work as de- sired. Yet in his own case, he was confident of accounts. He promised Morris that he had “no

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doubt” that with an audit, Congress would ap- prove his books. America was lucky that Frank- lin was so skilled and principled an accountant, given that he managed America’s international finances and loans.15

Not all founders, or indeed Protestants, were professional merchants, financiers, or industrial- ists. Although plantation owners such as Tho- mas Jefferson used extensive accounts to run their plantations and manage their own trade, they were not exactly the sort of thrifty, hard- working Protestants that Weber would later idealize. Jefferson was an aristocratic landowner with pretensions to live in the high style of eighteenth-century French nobles, whom he so admired. Yet accounting was still central to American planters and slave owners’ lives and ethics. Slavery and accounting fit well together, for as Josiah Wedgwood showed, accounts made it easier to turn the labor of a child or a slave into a number in a column. Just as slaves were brought to America chained in rows in boats, so they were accounted for as merchand- ise and sold the same way, in neat columns. The slave-trading Royal African Company kept

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double-entry ledgers. The very nature of inter- national, seaborne trade made double entry ne- cessary for financially successful slave trading, as human assets were ordered and moved through the Atlantic trading routes.16

Rich, learned, and a lover of luxury, science, architecture, books, and fine food, Jefferson kept meticulous account books for sixty years, leaving records of the minute details of his life and his value system. One account book was labeled “Indispensables,” reserved for books and wine. Along with numbers, his account books acted as diaries in which he wrote such details as the price of a tomb for his dead sister and the project of building it, and one for a slave, too: “one half of the burying grounds at Monticello might be appropriate/d . . . to the use of my own family . . . other of strangers, ser- vants, &c, . . . on the grave of a favorite and faithful servant might be a pyramid . . . of the rough rockstone, the pedestal made plain to re- ceive an inscription,” to which he appended his poem, the oddly lyrical 1771 poem, Inscription for an African Slave. A fine violin player, Jef- ferson noted the cost of “fiddle strings,” as well

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as his and his wife’s losses at cards and back- gammon. Accounting revealed how America’s greatest and most influential modern thinker on human liberty and democracy, and a not neces- sarily repentant practitioner of slavery, could coldly calculate human life, as he did in 1817: “bought a horse . . . a light bay, with a star in the forehead and small snip on the nose, right hindfoot white . . . 120 D.; bought a negro wo- man Lucretia, her 2 sons John & Randall, and the child of which she is pregnant, when born, for 180.” Among the last entries in Jefferson’s account books were payments for “shew of horsemanship,” “Dr. Emmet for a book,” “Lee for veal,” and “Isaacs for cheese.”17

A gentleman planter and a slave owner like Jefferson, George Washington gave extra thought to his account books. He was trained in daily accounting and rough double entry—John Mair’s accounting manual, found in his library, shows heavy wear—and his accounts had partic- ular significance as he was responsible for man- aging the expenses of the War of Independence, a heavy and difficult task of both military and financial management, and later, with the aid of

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Alexander Hamilton, the first presidency of the United States. Rare for an early American, Washington was responsible for the manage- ment of great sums, for the army and govern- ment as well as for his wife Martha’s extensive estates and, of course, his many slaves. The Library of Congress’s collection contains Wash- ington’s account books, both professional and personal, from 1750 to 1794. Like those of Jef- ferson, they are a vivid window into his life of public and military service, landownership and slavery, and luxury.18

As good an accountant as he was, Washing- ton often struggled with his accounts. From August 1775 to September 1783, he received a total income of £80,167 but was dismayed that he was unable to calculate what part of this sum equaled profit on his enterprises. But Washing- ton was skilled enough to calculate “cash lost, stolen, or paid away” and balanced his books when he could. His militia and Revolutionary War accounts reveal these same practices. Indeed, Washington’s own staff and soldiers ad- mired the managerial skills that helped him de- feat the British.19

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But Washington’s accounts also reveal something else: Washington recorded his exor- bitant personal expenses and almost compulsive spending on luxury goods in the midst of the war. His lawyer, Edmund Pendleton, wrote Washington’s 1775 declaration, refusing a $500 a month salary as commander in chief of the Continental Army:

As to pay, Sir, I beg leave to Assure the Congress that as pecuniary consideration could have tempted me to have accepted this Arduous employment (at the ex- pense of my domestic ease and happi- ness). I do not wish to make any Proffit from it. I will keep an exact Account of my expenses. Those I doubt not they will discharge, and that is all I desire.20

In 1783, when his enemies accused him of profiting from the war, Washington took the ex- traordinary measure of handing his Revolution- ary War Expense Account 1775–1783 to state auditors (and through their hands, he assumed,

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to the public). Washington calculated the ac- counts of his personal expenses during the war, for which he requested a reimbursement of $160,704, the equivalent of millions today. The accounts are, for the most part, meticulous. At the very end, Washington wrote a personal note explaining that he had not felt it necessary to publish the accounts of his personal expendit- ures during the war, but with the “embarrassed situation of our Public Affairs,” he now found himself “obliged” to do so. He noted that his “disbursements” fell “a good deal short of my Receipts” and that he had covered much of the expenditures himself. The government audit agreed, finding that the U.S. government still owed General Washington a little less than one dollar to cover his expenses.21

Washington’s act of rendering his account books public was a daring, although perhaps politically necessary, move. Many of the tens of thousands of dollars Washington spent during the Revolutionary War were on luxuries. The pay of army generals was $166 a month, and Washington, out of a sense of honor, had for- gone $40,000 in salary over the course of the

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war, a risky venture. Washington could not have known he would win the war. Had he lost, the British might have hanged him. He therefore spent accordingly: thousands on Madeira wine, fine tablecloths, the best English horse-drawn chariots, luxurious clothes and thread, and grand dinners. Between July 24 and August 6, 1776, in New York City, before the Battle of Long Is- land, his accounts show he went on a feasting spree, hiring a French chef and dining on pi- geons, veal, squash, eggs, dozens of very ex- pensive limes, ducks, hurtleberries, and his end- less casks of Madeira, on which he regularly spent five times the monthly salary of one of his generals. He spent $27,665.30—a massive por- tion of his war budget—on Martha Washing- ton’s visits to his winter quarters. Not surpris- ingly, Washington gained twenty pounds during the war.22

As self-indulgent as Washington was, he managed to do something neither Necker nor Walpole dared. He revealed his true accounts and, with them, his princely expenditures, all without compromising his power. He also did something few others have ever done: He won a

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war to found a nation. This surely made his ac- counts seem less outrageous. On April 30, 1789, little more than a month before the outbreak of the French Revolution, he was elected unanim- ously by the Electoral College as the first pres- ident of the United States, a post he might have kept for life, but which, luxury-lover though he was, he did not and stayed in, devoted to the re- public, for only two terms.

It was a good thing that America’s founders were literate in accounting, for the young nation was born into war and debt. By 1776, little gold or silver specie remained in circulation. The $241.5 million in paper currency issued by Con- gress in 1781 was worth two cents on the dollar. Congress then began to borrow money through domestic loans and IOUs for food and military supplies. The individual states were more than $200 million in debt. Congress had to turn to loans, ironically from a bankrupt France, where Franklin used his considerable influence to bor- row nearly $8 million. These loans were more serious than the domestic ones because they had

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to be paid back at face value and not in worth- less paper Continental dollars.23

By 1780, the public debt threatened to liter- ally gobble up the young nation. Many right- fully worried that if the United States could not pay back its debt to France, then France could claim large tracts of U.S. territory. For the first time, public debt threatened the very existence of a nation. Congress turned to America’s lead- ing international trader, Philadelphia business- man Robert Morris.

Born in Liverpool in 1734, Morris was the epitome of the eighteenth-century international merchant. When he was thirteen, his father moved to Maryland to work as a tobacco factor. Morris was sent to Philadelphia to apprentice in a commercial firm, which meant he was learn- ing the basics of accounting and finance on the shop room floor. He made his fortune in ship- ping, land, mills, privateering, securities, slaves, and sugar, and he invested in Mississippi slave plantations. Even as the U.S. economy faltered during the war and its currency plunged, Mor- ris’s fortunes rose, and his worth was said to be in the hundreds of thousands of pounds, rivaling

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Josiah Wedgwood’s. Morris excelled in com- plex international financial transactions. The nearly bankrupt U.S. government was sorely in need of such skills.

When the Continental Army ran out of mu- nitions and even uniforms, Morris helped fund the Revolutionary War. But mostly, Morris provided the service of his deep financial know- ledge based on a firm idea: If the United States were to pay back its debt and obtain much needed loans for the military, it would have to show good management in its books. This may sound familiar. As Philadelphia’s leading mer- chant, Morris was a merchant in the British tra- dition, but he was also an innovative financier and, as such, a reader and admirer of Jacques Necker.

In 1776, Congress had established the Treas- ury with an auditor general and a team of “com- petent” assistants and clerks. All accounts of public expenditure were audited twice, by two different offices. A copy of the receipt went to the comptroller, who managed day-to-day oper- ations for the Treasury. In 1779, a Treasury Board was founded: two members of Congress

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and two outside members. The auditor general kept accounts and records for the board.24

Immediately, there were complaints that this process did not work. As the auditor general himself noted, “The machine is so clogged, as to defeat in a great measure the intention of having the public accounts speedily settled.” In 1780, a Congressional committee reported that the “De- mon of Discord pervaded the whole Depart- ment.” It concluded that the Treasury Board be disbanded and run by one individual. In 1780, the Virginian delegate Joseph Jones declared, “Our finances want a Necker to arrange and re- form them, Morris is I believe the best qualified of any our country affords for the arduous un- dertaking.” On February 7, 1781, Congress ap- pointed Morris as the first American superin- tendent of finances. Washington had no illu- sions that his wealthy friend could “by any ma- gic art . . . do more than recover us by degrees from the labyrinth into which our finances are plunged.”25

Although America’s situation was grave, Morris knew of a place with finances even more labyrinthine and dire than those of the United

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States. Morris studied Jacques Necker’s ac- counting reforms in France and how Necker proposed to raise revenues by centralizing tax collection and teaching double entry to tax col- lectors and treasurers. By 1781, Necker had published the Compte rendu, and Morris was now titled after Necker (and indeed Colbert) as the American superintendent of finance. Morris then wrote to Necker, asking for advice and ex- pressing his “ardent wish . . . to tread in the footsteps of so disinterested and successful a Financier as Mr. Necker.” Like Necker, Morris had been attacked by figures such as Thomas Paine as a corrupt “financier.” But the govern- ment needed Morris and gave the superintendent “Absolute Power” to manage his team of ac- countants.26

Morris followed Necker’s example. In 1782, he published A general View of Receipts and Expenditures of Public Monies, by Authority from the Superintendent of Finance, from the Time of his entering on the Administration of the Finances, to the 31st December, 1781 (Phil- adelphia: Register’s Office, 1782). America began its days indebted to France to pay for its

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war with England. The entries concerned re- ceipts, much of which came from French loans, and expenditures, which were almost entirely military provisioning. Morris concluded that the “Balance remaining in the public Treasury the 31st of December” was $852,650.59.

Morris’s compte rendu differed from Neck- er’s in that America’s budget was tiny in com- parison with that of France. Even more, Morris did not know in 1781 that Necker’s numbers were off by more than 25 million livres of unaccounted-for debt. And Necker would never have the chance to implement the financial re- forms laid out in his Treatise on the Administra- tion of French Finances (1784), which would further inspire Morris and politicians such as Silas Deane and Alexander Hamilton.

Morris’s job was to produce plausible finan- cial statements not only to manage state monies but also to restore public credit to obtain loans for war. Under Morris, the organization of the American financial administration happened precisely so that it could obtain debt. For this, Morris would have to rebuild the auditing sys- tem of the Treasury. Morris’s reforms echoed

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Necker’s hopes and the later achievements of the French Revolutionary government. He trained his clerks so that “every account ought to be first stated in one certain form, so that a person once acquainted with that form, could go through the public Accounts with equal Facil- ity.” All clerks and auditors would have to be “checked,” but to do this, there had to be a clear, central ledger. Thus the logic of double entry worked its way into the organization of the American administration.27

Following Necker’s reforms and even French administrative terminology, Morris ap- pointed Continental receivers to collect taxes. As Necker had recommended, Morris required each receiver to publish every month “in one of the News papers of the state” the names and re- ceipts from each taxpayer. This way, all could verify the accounts. The publication of tax re- ceipts, he wrote in 1782, would stimulate curi- osity about which counties had paid their taxes and which had not. Along with a system of ac- counts, Morris was trying to create a culture of political and financial accountability and trans- parency. This was no small thing. Morris felt it

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was “proper and necessary that, in a free Coun- try the People should be as fully informed of the Administration of their Affairs as the Nature of things will admit.”28

Morris himself published further compte rendus, or operating statements, for the follow- ing year, this time with a breakdown of state tax receipts of $422,161.63. Statements would be sent to the Treasury, Congress, Washington, and Franklin in France. Morris had made good on his promise. He was bringing in revenue and could thus obtain more debt. But like Necker, he also needed to silence his critics, and so his pub- lished accounts became political tools. He re- published state financial sheets, directed at state legislators, to remind them of their own dire debt and the need to service it.29

When Congress audited Morris in 1783, it found that he had kept good, “regular” accounts. However, Morris had just built up the adminis- tration of the Treasury and the taxation arm of the government. The next step was to build a political system around these reforms, as neither taxation nor state finance had yet been fully centralized in 1782. That would take the

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Federalist movement, which, in part, was based on the simple but incredibly elusive concept that to govern a nation, its executive or representat- ives needed a well-kept, central account ledger.

Robert Morris was a good accountant and financial manager, but he was no philosopher. The challenge at hand for the U.S. government on the eve of writing the Constitution was to es- tablish a philosophical and political framework to enshrine Morris’s reforms so that public cred- it could be maintained on a large, national scale. This would allow the United States to protect its interests in the hostile world of international trade and empires. It was, therefore, lucky for Morris and those who thought like him that he received a letter requesting work from Alexan- der Hamilton (1755–1804), a brilliant young of- ficer and war hero on Washington’s staff.

Born on the Caribbean island of Nevis, Al- exander Hamilton had a turbulent family up- bringing. He was born out of wedlock, and his mother died in 1768, when he was thirteen. No other founder, not even Franklin, was forced to work so early. Recognized for his prodigious talent and energy, Hamilton was frustrated with

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his job as apprentice accountant in St. Croix, and at the age of twelve he wrote to a friend, “My Ambition is prevalent that contemn the grov’ling and condition of a Clerk, or the like and would willingly risk my life tho’ not my Character to exalt my station.” He wished “there was a war.”30

At the age of fifteen, Hamilton set sail to New York with only a bundle of letters of intro- duction, but one introduced him into the house of William Livingston in Elizabethtown, New Jersey, where he attended the College of New Jersey, now Princeton, and later, in 1773, King’s College, now Columbia University in New York City. Hamilton was a keen reader of the classics and such Enlightenment philosoph- ers as Hobbes, Locke, Montesquieu, Blackstone, and Hume. His mix of accounting and interna- tional trade expertise and philosophical interest would, after the Revolutionary War, drive Hamilton to run the Treasury and formulate the federal plan of finance that transformed Amer- ica from a series of colonies into a nation with a national bank, mint, and a healthily funded pub- lic debt.31

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Hamilton was short and strikingly hand- some, and his heroism at the Battle of Prin- ceton—he fired a cannon directly at Princeton University’s now revered Nassau Hall, sup- posedly decapitating a statue of George II—piqued the interest of Washington, who made the “little lion” a member of his staff. It was from this relatively high position that Hamilton wrote to Robert Morris of his ambi- tions to help build the American financial sys- tem. Hamilton shared with Morris an admiration of the centralized financial administration of the French. France had found prosperity, he wrote, due to the “abilities and indefatigable endeavors of the great COLBERT.” Hamilton had no pa- tience for laissez-faire, as the very existence of the United States hung in the balance of books. America must take foreign loans, he insisted. And for that, there was no way it could follow a “hands off” economic policy, as the country suffered from a negative trade balance and a costly war. The American government needed to centralize its financial system or risk disap- pearing.32

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In his now famous 1780 letter to the New York lawyer and politician James Duane, Hamilton laid out his vision for federalist gov- ernment, based on a centralized financial and auditing system, like the one Morris was strug- gling to build. Congress needed power over the states to raise money to wage war. Congress, he insisted, “should have complete sovereignty” not only in all that related to war, national de- fense, and diplomacy. And for this, it needed the means to pay for it.

Thinking perhaps of Colbert and Necker, Hamilton insisted that the state be run by a series of powerful ministers, “as those in France,” who would be experts—as he would later insist in the Federalist Papers, 35—in their respective fields, like finance. Their power ex- tended to the nation’s “general account of rev- enues and expences.” Hamilton understood that the power of the state was reduced to a central ledger. Power, he claimed, “holds the purse strings absolutely.” Central financial control would, he maintained, “give reality to its author- ity.”33

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In 1782, Congress chartered the Bank of North America. In 1789, when Washington sought to appoint Morris the first secretary of the Treasury, he declined, suggesting Hamilton in his place. It was in this office in 1790 that Hamilton wrote his extensive Report Relative to a Provision for the Support of Public Credit, in which he insisted that public debt was “the price of liberty.” Some considered him the greatest genius in American politics, but Madison and Jefferson vehemently opposed Hamilton’s em- brace of debt for war and state building. Yet seventeen years after his arrival in America as a penniless accountant clerk, Hamilton had helped design and implement the American financial system, not only on the idea of private property but also on effective taxation and the concept of a central state account ledger. Article 1, Section 9 of the Constitution stipulated that “No money shall be drawn from the Treasury, but in Con- sequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.”34

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In hindsight, one might conclude that good state accounting, political accountability, and ef- fective collection of taxes were elusive goals, even with the grand designs of great planners and worriers like Hamilton. But even if Article 1, Section 9 looks much like basic fourteenth- century northern Italian or Dutch administrative practice, in late-eighteenth-century America, truly innovative things began to happen. The federal government and various politicians pub- lished numerous versions of state accounts, in particular in Pennsylvania. In 1791, the House of Representatives of the Commonwealth of Pennsylvania published a detailed account of state finances. Tucked in the tables, calcula- tions, and claims of surplus is a truly revolution- ary statement. The authors note: “We also think it would be an advantage to the public and indi- viduals, if a set of Books were kept in the Register-General’s Office, where accounts should be kept” for access to all citizens. All ac- counts would be kept in the same office, in dol- lars, with strict timetables, audits, and open books whose calculations all citizens could veri- fy with their own eyes. In the 1795 Accounts of

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Pennsylvania, State Comptroller John Nich- olson claimed that citizens were more likely to pay taxes, and even enjoy paying taxes, when they are “faithfully accounted for.” This would build credit and protect property, business, and American democracy. It was a noble dream.35

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CHAPTER 11

RAILROADED

The professional accountant is an investigator, a looker for leaks, a dissector and a detective in the highest acceptation of the term. . . . He is the foe of deceit and the champion of honesty.

—THE BOOKKEEPER, 1896

By the early nineteenth century, England,France, the United States, Prussia, Itali-an states like the Grand Duchy of Tuscany, Austria, and other countries had cre- ated clear, accountable state financial systems. Ever leaders in reform, the British would contin- ue to centralize by giving the Bank of England

responsibility for its own administration in 1848, and further centralizing reforms were made until 1862. States produced budgets and planned for the future, which often meant large amounts of military spending. After five hun- dred years of fits and starts, with the rise of pro- fessional accounting and of increasing govern- ment involvement with accounting standards and reforms, it appeared that the age of the mod- ern, accountable state had dawned.

The nineteenth and early twentieth centuries were a time of iron, steel, empire, and capital. But it was also the age of gilded robber barons, Dickensian poverty, financial distress, colonial mass murder, and wars of startling deadliness. The Industrial Revolution would eventually bring unparalleled living standards and popular democracy, but also the guns, trains, and metic- ulous administrations that coldly planned mass death and mutilation in the Congo and from the Marne to Auschwitz. Ever-present and Zelig- like, accounting was there at the scene of tri- umph and of crime. In hindsight, it is obvious that as accounting became more complex, so did the possibility for fraud. Thus two faces of

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accounting emerged in modern consciousness. Some thinkers began to mistrust accounting, seeing it as a tool for exploitation and fraud; others held it up as a model of modern rational- ity. This was truest in Britain and America, one a world empire, the other a transcontinental powerhouse.

In spite of all the reforms of the eighteenth cen- tury, in Britain in the 1820s and 1830s, there were public outcries against the corruption of Parliament. In 1819, more than 60,000 people protested in Manchester about food prices and gerrymandered, rigged elections. They were met with a military cavalry charge that killed fifteen and injured hundreds. Whig reformers com- plained that Parliament was “in the pocket” of great landowners. In 1821, the reforming Anglican clergyman Sydney Smith proclaimed, “The country belongs to the Duke of Rutland, Lord Lonsdale, the Duke of Newcastle, and about twenty other holders of boroughs. They are our masters!” Working men and now wo- men were demanding the vote. Britain was

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faced with the specter of revolution. The gov- ernment had to act.1

Whig Prime Minister Earl Grey—re- membered now for the tea that bears his name—sought to reform not only the British voting system but also state accounting. Politic- al corruption could be cleaned up only if state accounts were clear. After all the reforms of the eighteenth century, a parliamentary commission in 1822 noted that it was not only “impossible to strike a Balance between Income and Expendit- ure” but also impossible to manage debt and major government projects or to understand “er- rors.” A reformed state would need a “simple, intelligible” central account.2

This report should make readers pause. After hundreds of years of reform and advances in accounting, the home to the Industrial Re- volution, Britain, still could not balance its books. And so the wheels of reform again began to turn. Earl Grey hired one of the most ex- traordinary minds in Britain to figure out how to do it. Dr. John Bowring (1792–1872) was a dis- ciple and friend of the utilitarian philosopher, Jeremy Bentham, who, on his death, made

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Bowring his literary executor. It was a fitting role, for Bowring, a Unitarian, was not only considered the most skilled linguist in Bri- tain—it was claimed he could speak at least a hundred languages—he was also a political eco- nomist with deep expertise in accounting. In 1831, the Commission on Public Accounts gave Bowring the mission to go to France and Hol- land to examine how they kept their government books.

Bowring found Holland’s financial adminis- tration opaque and damaged by the Napoleonic wars. France, which had come out of decades of Napoleonic empire and restoration monarchy, interested him most. Bowring was given re- markable access to the accounts of Britain’s old foe. What sparked Bowring’s attention was France’s centralized system, which allowed French bureaucrats to have a “unified” account of all the state’s finances. Bowring reported back to the House of Commons that Jacques Laffitte, formerly head of the Banque de France and now prime minister to the new King Louis Philippe, had assured him that the French ac- counts were so good that he believed the present

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system neared perfection and that the “ma- chinery” worked so well that not only did the French government always know the exact state of its finances but also it provided security against all fraud. The prime minister personally, and “by hand,” drew up the public balances of the treasury, and the government was able to show how under the preceding minister of fin- ance, the Count Chabrol, France had saved £800,000 a year in personnel costs and £14.8 million in payments on the national debt by bringing “harmony and order” to the day-to-day operations of the government. Through double entry, Chabrol was able to produce a monthly balance sheet and an annual return to the Com- mission des Comptes, the legislature, and the public. Bowring attested to personally witness- ing the system and how “an uninterrupted chain of operation and inspection thus descended from the highest to the lowest of authorities, while uniform returns ascended from the lowest to the highest.” The whole of the “books of Treasury” of all the administrations were admirably cent- ralized. He would note in a later report that this system even made it possible to “perfectly

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audit” the military. Bowring would go on to be governor of Hong Kong. Empires and industry were expanding, and those, like Bowring, who mastered the administrative account books had every reason to believe they could master the world.3

Of all the advances of the Industrial Revolution, the railroad was the most revolutionary, for it not only transformed the world—peasants who had never gone out of sight of their village’s church steeples could now travel to capital cities in a matter of hours—but also transformed fin- ancial accounting and government regulation. If Bowring thought governments had solved the problems of managing their own affairs, he was wrong. The advent of railroads not only brought great industrial innovation but also brought new and quicker avenues of financial complexity and corruption.

By 1803, the British inventor and industrial- ist Richard Trevithick built the first high- pressure, steam-powered carriage. He and his competitors would develop his “Puffing Devil” into the steam-powered rail engine. From

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Merthyr Tydfil, Wales, to Paris, Cologne, and Philadelphia, inventors rushed to create railway steam-engine patents. Oliver Evans, the Phil- adelphia designer of the high-pressure steam en- gine, saw how the railroad would transform ex- periences of space and time: “The time will come when people will travel in stages moved by steam engines from one city to another, al- most as fast as birds can fly, 15 or 20 miles an hour. . . . A carriage will start from Washington in the morning, the passengers will breakfast at Baltimore, dine at Philadelphia, and sup in New York the same day.”4

Railroads transformed culture and the hu- man perception of time and space, as coasts, factories, ports, warehouses, and military bar- racks were linked, and remote towns had access to an enormous national rail system connected by managerial systems of timetables (a term in- vented for railroads), wireless communication, and interlocking account books. The concept of miles-per-hour came with the railroads. By 1840, the United Kingdom had six thousand miles of track, and the European continent and the United States each had seven thousand. By

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the 1870s, the United States had 51,000 miles, as much as Britain, Europe, and the rest of the world combined. America would become the center of world industry.5

The problem was that this unprecedented growth needed to be funded by investors, and there was simply not enough American capital to fund investment in American railroads. In the 1850s, British investors stepped in to buy rail- road securities on the New York Stock Ex- change. By 1869, $350 million of capital stock was listed on the NYSE for thirty-eight railroad companies. This massive capital influx, spent on the most complex industrial undertaking in hu- man history, required accounting methods that allowed companies to coordinate high volumes of swift traffic and trade. From tracks, transcon- tinental landholdings, coal supplies, stations, ticket sales, and personnel of all sorts to on- board restaurants and voluminous freight, all had to be accounted for and managed. Teams of accountants from each division of the railroads would send their audits to the central accounting office. Rather than fixed ledgers, the loose-leaf notebook was adopted, and special account

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books, journals, and vouchers were mass-pro- duced to cut down on duplicate work and manuscript copying.6

Railroad engineers and accountants had to calculate the price of a ticket in relation to the proportional use of the entire rail system. In 1844, the French railroad engineer Adolph Julli- en used averages and ratios to establish the real cost of running a single train. He took into ac- count the price of operating each carriage of the train as well as the cost of each passenger per kilometer. To these operational costs, he added administrative and debt interest costs to estab- lish the fair price of a ticket.7

By 1860, it was common to find audit re- ports from various divisions of railroad compan- ies in shareholder reports. An 1857 annual re- port from the Boston & Worcester Railroad in- cluded a four-page auditor’s report that ex- plained both accounts and how they were made: “Each of the departments is in charge of an effi- cient head, and in their respective offices it is ascertained which of the several agents on the road account for all the tickets or the freight bills with which they stand charged.” Also

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included was an explanatory letter recommend- ing that, based on analyses of the accounts, im- provements be made in areas such as verifying ticket sales and in managing the risks of shorter railroad lines, which had the same costs but less possibility for profit.8

With the new demands of railroad manage- ment came innovation. Benjamin Franklin had famously said, “Time is Money.” This was more than an abstract idea for railroads that had to make trains run on time while working out cost accounting for assets that were always in move- ment and in need of constant repair, from steam engines to tracks. Managing the railroad meant auditing, recording, and calculating hundreds of daily financial transactions and standardizing time itself into zones to measure the movement of trains. Whereas the largest textile mills typic- ally had four sets of accounts, by 1857 the Pennsylvania Railroad had 144 sets of account- ing records, which were compiled and often printed monthly and then tabulated for the annu- al report.9

Like nations unto themselves, railroad com- panies had internal comptroller’s offices whose

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duty it was to calculate profit and loss and the new concept of the “operating ratio.” Even with statistics, the problem was figuring out how much revenue was needed to pay for operating costs and still make a profit. Herein lay the problem of depreciation. How was a railroad to account for the depreciation of a steam engine and the obsolescence of tracks? An 1839 report from the Reading Railroad calculated that re- pairs and depreciation of an engine along with its fuel were 25 percent of a total cost of $8,000. Money would have to be available for constant repairs and the replacement of machines and matériel. Managers started charging these costs to the operating budget, but this procedure did not recognize that these costs were not one-time necessities of operation, but built-in, recurring expenses. An auditor or a stockholder could not see the real cost of depreciation if it was hidden as single costs charged to the operating budget. This meant that without a depreciation account statement, investors had no idea of the real costs over time of maintaining a railroad.10

As capital poured into railroads, vast profits were made by the robber barons Morgan,

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Vanderbilt, Gould, Rockefeller, Drew, and Fisk, among others. This vast power had malign ef- fects on public reporting and on government fin- ancial management—the state could not tax en- tities whose financial reports were inaccessible and indecipherable. Not only did the great in- dustrialists of the age manipulate their stock through opaque public reporting but also in- vestors could not fully understand the true fin- ancial workings of the railroads. Even the steamship and railroad entrepreneur Daniel Drew stated, “To speculate in Wall Street when you are not an insider is like buying cows by candlelight.” Not only was there no oversight requiring the railroads to make accurate report- ing to both shareholders and the public but also Gould, Drew, and Fisk corrupted the New York and California legislatures by permitting them to profit on public land, make insider trades, and create monopolies. In 1867, Mark Twain wrote to a San Francisco newspaper: “A railroad is like a lie—you have to keep building it to make it stand.” Oversight could not keep up with either industry or its increasingly complex ac- counting methods. Increasingly, railroads were

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associated not with rational statistics, but rather with the fraud of gilded excess.11

Many of the financial scandals of the age arose from faulty balance sheets, and not just those from the overly complex railroads. The authority of a balance sheet could be used as both objective proof and false evidence. In 1855, the Irish financier and MP John Sadleir sold 19,000 falsified shares in the Royal Swedish Railroad Company; then he and his brother James produced a falsified balance sheet for Tipperary Bank, the balance that promised a dividend of 6 percent invested. As directors of the bank, the Sadleirs used bogus accounting to hide £247,320 of their own debt to the bank, which they could not pay back. By 1856, Tip- perary Bank was insolvent, and James Sadleir was presented with his false balance sheets and forced to sign them, admitting his and his broth- er’s fraud and bankruptcy. Soon after, John Sadleir committed suicide behind Jack Straw’s Castle Hotel on Hempstead Heath and was found with a jug of poison and a jar of “Oil of Bitter Almonds” by his side. Sadleir would come to symbolize the craven, sallow-faced

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financial swindler of the Victorian era. Charles Dickens would base his character Mr. Merdle, the failed fraudster of his novel Little Dorrit, on the man he called that “precious rascality, John Sadleir.”12

As capitalism expanded across continents and empires, government followed in slow but methodical pursuit. The massive scale of rail- road management produced streams of financial information and potentially crippling financial scandals and crises, and government would have to expand to regulate the gargantuan companies. The railroads had laid bare the risks and even impossibilities of a laissez-faire economy. If railroads collapsed or swallowed investors, cap- italism—and indeed governments and na- tions—could not function. Oversight was needed, and accountants now stepped up as the official regulators of modern capitalism. Government regulators and private accounting companies developed around the accounting in- formation produced by railroads, and the rail- road companies, in turn, had to tailor their

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accounts to either respond to or hide from gov- ernment regulators.

Governments did not necessarily have the means to audit giant industrial corporations. Private accountants developed to work as middle agents between private companies and the state. In 1854, Scotland took steps to organ- ize an official framework for recognizing Chartered Accountants who would have the proper training and ethical reputation to audit and stamp books, and England followed suit. New York began financial auditing require- ments in 1849, and the American Association of Public Accountants was established in 1887. That same year, the government created the In- terstate Commerce Commission to regulate the railroads.13

America had become the biggest and most complex economy in the world, which, with the British Empire, might explain why so much ac- counting innovation happened in the Anglo- Saxon world. However, then as now, where there was industry and complex trade, there was, by necessity, modern accounting. Chartered accountants began stamping and

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validating balance sheets. By 1899, France, Ger- many, Italy, Holland, Sweden, and Belgium all had professional accounting associations. Not surprisingly, in Italy, the Florentines led the drive with a National Congress of Accountants in 1876. In Holland, the Nederlands Institut van Accountants was founded in 1895. These chartered, government-regulated groups led to national accounting schools, textbooks, profes- sional journals, and regulations about private and state accounting standards.14

But this was not the positivistic science for which some had hoped. Accountants and gov- ernment regulators still did not have the author- ity to make companies report, and there was no effective legislation to force audits. Even more, many classically trained elites resisted rules based on quantification. The relationships between corporations, the state, and professional accounting associations remained loosely defined. Sparked by financial fraud and failure, the British Parliament passed the Bankruptcy Act of 1831, which gave accountants a leading role as “Official Assignees” in managing bank- ruptcies, auctions, liquidations, and debt trials.

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In 1844, it passed the Joint Stock Companies Act, which aimed to regulate the finances of hundreds of companies. Trained accountants began trying to audit companies, but the job was arguably too big without an enormous bureau- cracy of actuaries. The English baron, politician, and stockbroker Sir William Quilter testified to a parliamentary committee in 1849 that audits were based on personal judgment, not “dry arithmetical duty.” Attempting to predict earn- ings using probability was still in its infancy and, as today, was a speculative science. Without compliance, regulation could not ef- fectively function.15

Accountants needed authority, as well as large auditing teams. By the 1840s, major ac- counting firms appeared across Britain. Deloitte, Price Waterhouse, Ernst & Young, Touche, and many others sprang up in Edinburgh, the Mid- lands, and London. Price Waterhouse—today the biggest auditing firm in the world in the form of PricewaterhouseCoopers—was founded when Samuel Lowell Price (1821–1887), the son of a Bristol potter, teamed with William Hopkins Holyland and Edwin Waterhouse, the

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University College–educated son of “somewhat austere” but wealthy Quaker mill owners, to cre- ate the partnership of Price Waterhouse & Co. Holyland and Waterhouse held a 25 percent share, and Price held 50 percent. As became the custom in accounting firms, partners had to in- vest personal capital in the firm.

Founded on principles of accounting, Amer- ica still did not have an adequately developed accounting profession to handle its industrial ex- pansion. In the 1870s, America was filled with English and Scottish accountants pouring over company records from Charleston to Rochester. Price Waterhouse & Co. would distinguish itself by its early success in the American market. September 11, 1890, the firm sent Lewis Davies Jones to open a New York office at 45 Broad- way to handle work in North, Central, and South America. In the 1890s, J. P. Morgan began a series of huge corporate consolidations, buying some thirty companies to merge into American Steel and Wire, as well as five farm machinery companies that would become International Harvester. Morgan wanted audits of the com- panies he purchased, and Price Waterhouse got

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the job, making more profit in 1897 than it had in the previous five years combined. With this base, Price Waterhouse & Co. would become the leader of the American accounting in- dustry.16

But early professional accountants still struggled in the wild and unregulated American market. The incapacity of governments to regu- late railroads inspired the pioneering financial analyst John Moody. The founder of what are today Moody’s Analytics and Moody’s Investor Services, he began as a crusader for public fin- ancial information and came to symbolize the move for financial accountability. In addition, he saw a market in extracting and analyzing in- accurate accounts. Highlighting the persistent problem of holding the railroads accountable, he published How to Analyze Railroad Reports (1912), which became the basis for his recurring Moody’s Investment Analysis. In his Railroad Reports, Moody stated that the stockholder is like a partner, and to invest successfully, the stockholder had to understand true earnings po- tential. Therefore, a uniform method analyzing “property in motion . . . annihilating time and

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space” would be based on statistics. “It is not so easy to realize the financial significance of the aggregate motion and wear and tear which are ceaselessly going on, daily, throughout the year and decade, without beginning and without end.” His major conclusion was that depreci- ation was a necessary concept to measure ex- penses and fair value over time.17

Arguably the most important reform was the insistence that depreciation be calculated separ- ately from operating costs, as a constant set of necessary expenses rather than a one-time pay- ment. The question that accountants strove to ask was: “What is profit?” With depreciation (the costs of maintenance over time), it was a very tricky question. An asset that brought in revenue could hide long-term costs, and eventu- ally, it could eat up profit. In 1880, Charles E. Sprague created an “algebra of accounts,” based on the notion that accounting is a “history of values.” His equation, Assets = Liabilities + Proprietorship (A = L + P), took into account the depreciations and risks in valuing capital. In other words, capital, equity, or proprietor- ship—what one actually owns—is one’s assets

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minus various liabilities, such as debt, necessary expenditures, and depreciation. Through Sprague’s equations, it was possible to calculate transactions and determine net wealth, or one’s holdings minus all liabilities. This allowed ac- countants to calculate profit and fair values in complex data sets like railroad accounts, in which an untrained eye could not separate equity and liability from all the moving parts. At the end of the 1800s, depreciation became cent- ral to accounting theory, as accountants like Fre- derick W. Child insisted that special accounts be created not only to measure depreciation but also to pay for it. In his view, cash reserves were necessary to balance out (or pay for) depreci- ation costs and therefore had to be listed.18

Yet with all these advances and reforms, government regulators still could not obtain ac- curate financial reports. Once again, accounting appeared like Ariadne’s thread in a maze of fin- ancial and political accountability, only to dis- appear the moment reformers tried to seize it. A general refusal of large companies to open their accounts persisted. The Commercial and Finan- cial Chronicle of 1867 noted that “information

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upon the finances of the roads is suppressed and accounts are falsified.” Like the Medici, modern corporations kept “private ledgers” with lock and key that only a few trusted partners would ever see. The respected banker Henry Clews suggested officially trained and certified ac- countants would help businesses by producing conclusive, public accounts. But with railroads and companies like Westinghouse Electric and Manufacturing neither publishing annual finan- cial statements nor even holding shareholder meetings, a 1900 government report pointed out that “the chief evil of large corporations is a lack of responsibility of the directors to the stockholders” in publishing balance sheets. J. P. Morgan—whose holding company owned the Titanic—complained that President Theodore Roosevelt’s trust-busting reforms would make it so that “we’d all do business with glass pock- ets.” And although Morgan helped found the Federal Reserve to ward off financial crises, the only thing he revealed through glass was his le- gendary book collection, fit for a Medici.19

There was a great mistrust of accounting in the hands of financiers, industrialists, and

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politicians. Indeed, trained originally as an ac- countant and auditor, John D. Rockefeller, the richest man in the world, would be revered but also referred to in pejorative terms as “that bloodless, Baptist bookkeeper.” Gone were the great paintings of accountants as glorious pat- rons, dramatically fallen sinners, or smiling cap- tains of finance and industry. Instead, dour por- traits of professionals in black suits would come to define accountants until this day as serious, even dull arbiters of financial numbers. Their role was ambiguous: They could aid capitalism and government or, through cooked books, im- pede them both.20

Yet accountants themselves were making a stand for the integrity of their profession and its role in fighting the corruption of the Gilded Age. In 1896, an editorial in The Book-Keeper enthused about the great reforming powers of accounting: “The professional accountant is an investigator, a looker for leaks, a dissector and a detective in the highest acceptation of the term. . . . He is a reader of hieroglyphics, however writ- ten, for every erasure, altercation [sic], interlin- ing, dot, dash or character may have meaning. . .

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. He is the foe of deceit and the champion of honesty.”21

The bookkeeper as a financial Sherlock Holmes, bringing light and reason to the myster- ies of finance, became a powerful idea among education reformers and the influential pioneers of the new profession of accounting. From a prestigious family, Charles Waldo Haskins—the nephew of Ralph Waldo Emerson—was among the first Chartered Public Accountants. An eru- dite and learned philosopher of accounting, he wrote works on how to do both financial and domestic accounting. Haskins’s Business Edu- cation and Accountancy (1904) bemoaned “men of business” who derided “men of education.” He believed that through accounting, business- men had to unite with “men of science” to cre- ate a method of business administration. Haskins thought that from the ancient world to his own time, accounting provided a rationalist, professional tradition of business for the edu- cated “entrepreneur.”22

Perhaps influenced by his family’s cultural tradition, which valued women’s education, Haskins placed women firmly in his vision of a

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society managed through accounting. Women would not run businesses, in his eyes, but rather households, and to do this, they, too, would draw on the science of accounting. In his learned How to Keep Household Accounts: A Manual of Family Accounts (1903), he used a long history of accounting to prove that ac- counting applied as much to “domestic” life as it did to “finance and administration.” He cited the French Renaissance philosopher Montaigne to defend the idea that men as well as women should learn the “science” of managing house- holds. Thus the scientific management of house- hold accounts created a great chain of rational administration, from federal and municipal gov- ernment to businesses to households. Economic utilitarianism could be systematized through business schools (in particular at New York University, Haskins’s own institution) and home economics courses. It now seemed that Americ- ans trained in accounting could stand against the menaces of fraud and ignorance.23

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CHAPTER 12

THE DICKENS DILEMMA

Whatever was required to be done, the Circumlocution Office was beforehand with all the pub- lic departments in the art of per- ceiving—HOW NOT TO DO IT.

—CHARLES DICKENS, LITTLE DORRIT (1855–1857)

Not everyone, however, was convincedof the rationality of accounting. Giventhe extent of economic fraud and dis- tress that accompanied industrialization, it is not surprising that nineteenth-century observers of the world of finance were skeptical about ac- counting’s power to do good and about the very

possibility of both personal and political ac- countability. The accountant could be respect- able, but fraud was rife and potent. The old di- lemma remained: Accounting offered neither a sure path to reason and order nor a convincing model of morality or happiness hoped for by in- dustrialists such as Josiah Wedgwood and philo- sophers such as Jeremy Bentham. Great writers of the nineteenth century would struggle with the dilemma of whether accounting was an in- strument of good or of corruption.

In his 1828 novel L’Interdiction (The Ban), the French author Honoré de Balzac showed that accounting was best suited to measure the “misery of the human heart.” Balzac described how the Parisian magistrate Popinot not only looked into financial fraud but also developed an accounting system to deal with life in the twelfth arrondissement of Paris, just above the Place de la Bastille: “All the miseries of the neighborhood were numbered, and filed in a book where each misfortune had its own ac- count, in the style of a merchant who recorded his various debtors.” His system measured

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neither finances, moral rights, wrongs, nor even happiness. In the tradition of Colbert, it was a tool of policing.1

A precursor to Sherlock Holmes, exposing frauds and extraordinary crimes, Popinot had to manage the details of the lives of his jurisdic- tion’s miserable constituents so that they did not bubble up into the world of high society. The af- fairs of the heart—the nuanced shades of “the Human Comedy,” as Balzac called it—could be of great use to a judge who had to regulate and manipulate the often dark affairs of the streets of Paris. Popinot did not try to balance out sin. Ac- counting did not bring happiness. Popinot con- sidered social evils part of the operation of everyday life. Like costs, he simply tried to manage them.

Of all the authors of the nineteenth century, Charles Dickens had the most vivid view of ac- countants and accountability. In Dickens’s world, the accountant had been reduced to a good-hearted but hapless clerk, a malicious swindler, or a nightmarish bureaucrat. Account- ants could be good men like Bob Cratchit, the father of Tiny Tim in A Christmas Carol (1843),

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who loyally kept the books of the counting house or bank of the miser Ebenezer Scrooge. Both Scrooge and his ghostly partner in bank- ing, Jacob Marley, had trained as accountants. Where Cratchit filled out his books without question, took his meager pay, and accepted his suffering with decency and Christian generosity, Jacob Marley was damned for his financial deal- ings. He came to warn Scrooge of the dangers of becoming a prisoner of account books and greed. Marley’s ghost appeared to Scrooge, bound by a chain: “It was long, and wound about him like a tail; and it was made (for Scrooge observed it closely) of cash-boxes, keys, padlocks, ledgers, deeds, and heavy purses wrought in steel.” Not just money, but the ledgers and deeds of accounting had ensnared the wily banker and imprisoned his soul. Scrooge risked the same were he not to make amends, in the logic of Pacioli, paying to the poor on Christmas to balance his accounts with a moral, Christian God.2

Dickens saw two roads for accounting. There were the Scrooges of the world, and then there was the good, honest clerk like Bob

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Cratchit, or like Mr. Micawber, in David Cop- perfield, who exposed his employer, Uriah Heep, as a swindler. Micawber made the now famous financial truism that discarded the philo- sophical elegance of Bentham but retained his simple message: “Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual in- come twenty pounds, annual expenditure twenty pounds ought and six, result misery.” Micawber was speaking with Dickens’s personal experi- ence, as the author’s own father, John Dickens, was himself an accountant, a clerk in the naval paymaster’s office. And the Dickens family knew misery. In 1821, John Dickens lost his post and, overwhelmed by debts, was arrested and sent to the Marshalsea Debtor’s Prison in Southwark. Charles Dickens was only twelve and, until his grandfather died and left his father a big enough inheritance to get out of jail, Dick- ens grew up there, scavenging for jobs among the dregs of London.

Dickens made Marshalsea Prison the setting for Little Dorrit (1855–1857), a novel about the absurdity of finance, debts, and his father’s own

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predicament. Thrown in prison for debts, Willi- am Dorrit, like Dickens’s father, could not work to pay them back. In the book, a family friend, Arthur Clenham—who suspects his mother has something to do with the misfortune of the Dor- rits—goes to the Circumlocution Office to in- quire about the debts. Based on the British Treasury, the office shows no resemblance to the proud, rational machine of administration about which John Bowring bragged. Rather than a bulwark of utility, Dickens’s fictional proto- Orwellian ministry was an archival maze into which all went, but “nothing came out.” Direc- ted by the ever-absent Tite Barnacle, this was where statesmen made their reputations by tak- ing in the “bamboozling air of how not to do it.” Those charged with the accounts of the nation made sure all accounts were turned into incom- prehensible bundles.3

For Dickens, the willfully opaque account- ing and management of the Victorian treasury pointlessly ruined honest men like Dorrit and opened the door for swindlers like Sadleir, whom Dickens immortalized as Mr. Merdle, who ruins Arthur Clenham and then, true to life,

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commits suicide. Only luck could save Dick- ens’s accountant father and the Dorrit family. And with no mode of government or financial accountability, only ruin could bring men like Sadleir some form of justice.

The logic and metaphors of accounting per- meated not just literature but also philosophy. Accounting was central to the project of Henry David Thoreau (1817–1862), the American crit- ic of industry and finance. Thoreau and his fel- low Transcendentalists were Harvard-educated Unitarian idealists who fought industrial devel- opment, resisted taxes, believed in civil dis- obedience, and opposed slavery. Fascinated by the study of nature, Thoreau was a pioneering environmentalist. He was famous for his work Walden, or Life in the Woods (1854), in which he called for a return to nature. “Men labor un- der a mistake,” he warned, “and dig their graves as soon as they are born.” Mixed with a Puritan critique of modern Rationalism and inspired by Romanticism, Thoreau called for spiritual purity through meditation and self-sufficiency through communing with nature. “Digging in the dirt”

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was better, he said, than building a railroad around the world.4

As an experiment in “home economics,” he lived two years on Walden Pond in Concord, Massachusetts. Part of Thoreau’s process of finding a path to purity was to account for that which was absolutely “necessary of life” and that which wasn’t. Thoreau outlined his ac- counts in single entry, detailing “outgoes” on his farm and all his living expenses, and earnings from selling his farm produce. He calculated he had earned $13.34, the “expense of food . . . though I had lived there more than two years—not counting potatoes, a little green corn, and some peas, which I had raised.” Although the accounts in Walden are simple, Thoreau’s personal papers contain a packet of account cal- culations, revealing that he worked on his ac- counts in earnest before putting them in print. In the end, Thoreau was accounting backward, away from the profit logic of industrialists like Wedgwood, and instead calculating the bare minimum needed for an ascetic, spiritual life in nature.5

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Brought up by Transcendentalist parents with close contacts to Emerson and Thoreau, who gave her lessons as a child, Louisa May Al- cott (1832–1888) also saw the dilemmas of ac- counting. In Little Women (1868), Alcott illus- trated how keeping accounts was a necessary tool of home management but could bring stress into the marriage of a poor couple: “Till now she had done well, been prudent and exact, kept her little account books neatly, and showed them to him monthly, without fear. But that au- tumn the serpent got into Meg’s paradise, and tempted her, not with apples but with dress.” When Meg’s husband, John, brought out the books that revealed her spending, she felt real fear. Their joint accounting was a precursor to the arrival of an unwelcome and revealing bill.6

Numbers and mathematics increasingly played a role in all aspects of industrialized life. Probab- ility had set the basis for insurance companies, and statistics had become part of modern society and a basis of how to judge science and society. The French philosopher Auguste Comte’s work on social statistics was part of attempts to

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subject not just nature to the will of humanity but also social life and industry to numerical regulation. From maps, biology, human behavi- or, and railroads to the probabilities of life and death and the management of time itself, all now came under the purview of the men of numbers. The spread of science into all aspects of life brought great advantages in industry, technology, and medicine, but it was also used for more morally ambiguous purposes.7

Whereas Jeremy Bentham had used a double-entry model to try to calculate happi- ness, Thomas Malthus used the analogy of a nu- merical balance in his Essay on the Principle of Population (1798). In a pessimistic parallel to Bentham, Malthus also believed in two sides balancing each other out. In a biological reckon- ing, human subsistence requirements and the fatalities of vice would balance human popula- tion in a natural system of checks and balances, by which “the superior power of population is repressed, and the actual population kept equal to the means of subsistence, by misery and vice.” An accountant of mortality, Malthus used the stark medieval terms of balance and

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reckoning in the new language of the laws of nature and population statistics. Before Balzac and Dickens, Malthus grappled with the concept of balancing human survival with “misery and vice” but with a soulless modern echo of Dante.8

Malthus was not alone in seeing the very es- sence of life and death through the analogy of balanced books. In 1859, Charles Darwin—a reader of Malthus—wrote The Origin of the Species. The word species comes from Aris- totle’s Greek term for the classification of anim- als, but specie was also a medieval term for money. For Darwin, there was a link between his categories and lists of species that showed the course of evolution and nature’s fine but vi- olent system of balance, on one hand, and the world of accounting on the other. Darwin’s notebooks of observations from the Galápagos Islands are some of the most famous in history. Darwin, it should be noted, was Josiah Wedg- wood’s grandson.9

In 1873, Darwin’s cousin, the explorer, polymath, and scientist Francis Galton (1822–1911), sent a number of members of the

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Royal Society a questionnaire about their daily habits. Among Galton’s interests were geo- graphy, statistics, and, like his cousin, the idea of inherited traits. Galton was the grandson not of Wedgwood, but of his best friend, Erasmus Darwin, whose Quaker off spring made their fortune as gun manufacturers. In this case, Galton wanted to see if there were daily activit- ies or inherited habits that explained the intel- lectual prowess of members of the society as compared with their fathers. And so Darwin filled out his cousin’s questionnaire. In the left column, he listed his own traits, and on the right, those of his father. It contained questions like “temperament,” to which Darwin responded with admirable candor, “Somewhat nervous.” For his father, he respectfully listed “sanguine.” He listed his height, hair and eye colors, polit- ics, and religion. For the question “studious,” he claimed that he was “very studious,” but in the column for his father he was again frank: “Not very studious or mentally receptive, except for facts in conversation—great collector of anec- dotes.” It was a notable moment in the history of

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evolution: Darwin the son had balanced his fac- ulties with those of his father.10

It should come as no surprise that Galton was a pioneer of eugenics and the even more sinister anthropometric studies that sought to improve the perceived quality of superior, literally “well-born” groups of human popula- tion through genetic and social selection. It was the basis of the nightmarish modern oxymoron of scientific racism, which would have cata- strophic effects in the twentieth century. One of Galton’s most pointed questions revealed the origins of Darwin’s own method. In the line “Special Talents?” Darwin answered, “None, except for business as evinced by keeping ac- counts, replies to correspondence, and investing money very well. Very methodical in my habits.” In hindsight, this seems like an under- statement. For his father, Darwin responded, “Practical business—made a large fortune and incurred no losses.”

Accounting was central to the life of Josiah Wedgwood, and he taught it to his sons and daughters. Accounting remained important in the Wedgwood-Darwin family. Its methods of

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comparative lists and balanced formularies re- mained the model of how to think and balance life for both Darwin and his cousin Francis Galton. Darwin himself admitted that he was “methodical in his habits.” He kept detailed ac- count books for all his activities, both in busi- ness and managing his household affairs, break- ing each one down under its own topic head- ings: “Science, Gardens, Personal, Household (which included servants’ salaries).” As was common to Victorian roles of men and women, Darwin’s wife, Emma, managed the details of the domestic accounts, keeping books for food, clothes, servants, entertaining and furniture, tax- is, piano tuning and sheet music, concert tickets, and children’s education. The biggest expendit- ure of the household of the discoverer of biolo- gical evolution was meat: In 1867, the Darwins spent £250 on it, as opposed to £213 on cloth- ing.11

Charles’s son Francis Darwin wrote, “In money and business matters he [Charles Dar- win] was remarkably careful and exact. He kept accounts with great care, classifying them, and balancing at the end of the year like a merchant.

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I remember the quick way in which he would reach out for this account-book to enter each cheque paid, as though he were in a hurry to get it entered before he had forgotten it.” The habits of old Josiah Wedgwood had been passed down to a new generation that took its notebooks and accounts with equal seriousness. And like Wedgwood, Darwin had great success in busi- ness, mostly from investment in ventures like his grandfather’s beloved canals and in railroad stock. Although he suffered from a number of crashes, the wily investor was good enough at analyzing his investments that in the mid-1860s, he sold his railway stock and invested in gov- ernment bonds. The books show that Darwin began married life with a marriage bond of £10,000, £573 in the bank, and £36 in petty cash. A year before his death in 1881, when his brother drew up a will showing capital holdings of £282,000, Charles’s son William ribbed his father, “Did you ever expect to be worth over ¼ of a million?”12

Like merchants and British diary writers be- fore him, Darwin also kept a journal in which he tallied his personal life, balancing sick days with

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healthy ones and hours spent on work. He tried to measure the utility of social institutions, as early in his life when he wrote, “Marry, Not Marry. This is the question.” Darwin was even more calculating than his grandfather, who was clearly a more passionate man. Darwin even tal- lied the hours he and his wife spent playing games. Natural scientist that he was, he could not help drawing conclusions from his personal observations. In the Descent of Man (1871), he echoed Malthus and even the tone of Wedg- wood when he stated that “all ought to refrain from marriage who cannot avoid abject poverty for their children.” Like his cousin Galton, Dar- win believed that wealth brought scientific, in- dustrial, and artistic progress. “Well-instructed men,” he thought, could carry out the necessary “intellectual work.” Galton went one step fur- ther: He believed his family members’ long tra- dition of achievement showed them to be of a superior, industrious race. Biological science, accounting, and utilitarian values were leading to a new and not necessarily Christian or even Dickensian approach to valuing life.13

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A generation later, the Polish writer Joseph Conrad saw the role of accounting as hiding hu- man crime and suffering. In his novel Heart of Darkness (1899), a grim critique of colonial at- rocities, “the company” is decadent and steeped in murder and death in its African plantations, and its accountant is always nattily dressed, well informed, and with an aversion to error. Only the trained accountant could keep up the veneer of civilization in the killing grounds of the jungle. “Thus this man had verily accomplished something. And he was devoted to his books, which were in apple-pie order.” The protagonist Marlow respected this paragon of order at the very heart of darkness. The accountant was able to turn decrepitude and death into neat and tidy numbers to be sent back to the main office. Seen through the accountant’s numbers, Conrad’s classic imperialist character Kurtz, and his nightmarish operation of slave labor, looked clean and efficient.14

The problem of financial success represented by numbers outweighing human rights plagued the Industrial Revolution into its later stages. From

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an established Philadelphia family of May- flower stock, Frederick Winslow Taylor (1856–1915) chose to be an apprentice pattern- maker and machine mechanic at the Phil- adelphia Hydraulic Works and then, in 1871, for the Midvale Steel Company. Taylor is now known for Taylorism, his “scientific manage- ment” approach to industrial and labor effi- ciency. In many ways, Taylor can be seen as the Josiah Wedgwood of the age of steel. He fo- cused on tight management of mechanical and labor costs in relation to time. Central to Taylor’s model was detailed cost accounting based on a monthly closing of books and de- tailed balance sheets and income statements. Taylor claimed that these were the “features in which my system of accounting differs from or- dinary commercial and manufacturing account- ing, and, so far as I know, no other system has as yet attempted to accomplish the above.”15

Taylor not only organized a new system of how costs were reported and information circu- lated in a corporation but also moved the ac- counting office into the planning room so that industrial and management strategy could be

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made directly from account analysis. Each part of the manufacturing process produced cards listing costs. These cost cards were then gathered and analyzed in the cost department, with each cost classified and totaled so that every part of the production chain could be ana- lyzed. To guarantee accurate cost assessment, he created a specific costs office that then reported to the accounting office. Profit, he concluded, was based on accurate determination of costs, which was based on accurate assessments of the costs of labor, matériel, and the time needed for labor to make production. Efficiency played out into profits as it made up for the laziness and ig- norance of workers. Following Taylor’s logic, John Dewey believed that Jeremy Bentham’s calculus showed that workers equated work with pain and therefore were intrinsically lazy. Taylorism made up for this loss in the calculus.

Taylor’s methods were successful on many levels. Not only was he able to make enormous profits at Bethlehem Steel by increasing produc- tion but also he became the first management consultant, and his acolytes came up with theor- ies to manage railroads and workers’

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psychology. Harvard Business School was foun- ded in part by Taylor’s inspiration, as was the storied consulting firm McKinsey & Co., started by University of Chicago accountant James O. McKinsey.

America developed a fetish for efficiency and speed, and President Herbert Hoover advoc- ated the idea that work should be done “as quickly as possible.” Henry Ford took inspira- tion from Taylor and his methods (and his desire to do away with unions—Taylor believed his methods linking pay to production made them unnecessary), as did industrialists around the world. They were able to mass-produce, and this brought staggering wealth but also social dis- cord and eventual chaos. Taylorized workers of- ten went on strike, complaining of inhumane conditions, as happened at the Watertown, Mas- sachusetts, Arsenal in 1912. They also main- tained that in the quest for higher production, Taylor suppressed data and evidence that re- vealed the suffering of workers and undermined his theories.16

Lenin was interested in Taylor’s work, as was Stalin. Hitler gave Ford a medal and

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admired Taylor. Albert Speer proclaimed, “When Hitler appointed me his Minister of Armaments, I threw out the military chiefs and turned to the professionals, industrialists, and engineers. Then I borrowed the ideas of Walter Rathenau, the great Jewish chief of the German economy during the last war: Standardization of parts, the division of labor, and the maximum use of the assembly line.” It was a dark irony: Rathenau was the German Jewish pioneer of Taylorism.17

Hitler may have liked the idea of rational- ized mass production and the reduction of work- ers into obedient cogs in the machine, but he did not like the idea of financial accountability. In the end, the Deutsche Reichsban (railway) exec- utives did away with detailed cost accounting as ideology trumped profit. In spite of the entreat- ies of managers, Walter Speiß, the head of the Reichsban, rejected cost accounting based on the idea that the railways were a public utility that could not be based on profit, but rather had to be measured against the political objectives of the Reich. On January 1, 1936, the officers in charge of cost accounting were reassigned to

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other duties, and accounting data collection was scaled back. As in the time of Philip II, Necker, and the British Imperial Navy, war—now on an ever-greater scale—was an extraordinary ex- penditure that could not follow the rationales of returns on investments or clear accounting. The military juggernaut would move forward until war itself provided a terrible reckoning.18

At the beginning of the twentieth century, accountants had regained much of the respectab- ility that Dickens had taken away from them. Like Charles Waldo Haskins, the pioneer of ac- counting education and standards, they were servants of rationality and public, secular in- quisitors who sought to understand and manage the mysterious accounts of business and finance. Interestingly, although anti-Semites painted Jews as unscrupulous international financiers and businessmen, accountants remained sym- bols of national public service and the common good. Their role as the silent arbiters of the modern economy was solidified in the new ac- counting companies. By the 1920s, in America, now the largest industrialized democratic nation on earth, public-minded accountants and

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democratically minded politicians were working to make both industry and government more transparent and rational. Industry, accounting, and government had evolved and seemed con- fident that they no longer had a dilemma. Haskins and those who followed him developed equations, methods, manuals, schools, profes- sional institutions, and even laws and govern- ment auditing agencies, all for what appeared to be a modern art of how to do it.

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CHAPTER 13

JUDGMENT DAY

God would have us pay the debt we owe. Don’t dwell upon the form of punishment: consider what comes after that; at worst it cannot last beyond the final Judgment.

—DANTE, PURGATORIO, X

In late October 1900, Arthur Lowes Dickin-son arrived in New York from London tohead the American office of Price Water- house & Co. From a distinguished family of painters and philosophers, with a Cambridge de- gree in mathematics, Dickinson was a methodic- al man devoted to British accounting traditions

of ethical independence and public service. Under Dickinson’s watch, PW, as it became known, prepared the 1902 financial statement for U.S. Steel, which Scientific American lauded as “the most complete . . . report ever issued by any great American corporation.” Through his work setting up offices in Chicago and St. Louis, Dickinson became a leader in the Illinois Association of Accountants. He worked tire- lessly to standardize audits for the Federal Trade Commission and wrote influential accounting pamphlets such as Accounting Practice and Procedure (1913).1

The model of a gentleman accountant, Dickinson was knighted by King George V in 1919, after returning to Britain to work in the London office of Price Waterhouse & Co. and then for the British government during World War I. Dickinson saw the accountant as impar- tial referee between business and government, dedicated to numbers and order. It was a stance not always easy to maintain, particularly in the rough-and-tumble of the New World. Dickinson found American business unpredictable, fast- paced, and unregulated. “Annual audits which in

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England are always the backbone of a business are few in number,” he complained, “and the largest of them being dependent on the caprice of a few individuals cannot be considered cer- tain.”2

Dickinson soon discovered that American clients did not know “good from bad” audits. This meant that Price Waterhouse’s U. S. busi- ness would have to engage in “speculative” audits based on incomplete books, a practice considered unethical in Britain. Dickinson was forced to adopt unorthodox methods, like mod- ern advertising, and to compete for accounts. Worse, Americans did not want “the bare state- ment of facts,” but rather advice on how to run their businesses, something he felt that account- ants—empirical calculators—were not meant to be dispensing. Nonetheless, Dickinson focused on his quest to provide the finest audits possible. By the late 1920s, PW was the biggest auditing company in the United States and, indeed, as Fortune magazine would note, “the foremost in the world,” representing 146 of the 700 compan- ies on the New York Stock Exchange. With venerable firms like Charles Waldo Haskins’s

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homegrown Haskins and Sells, as well as other British firms like Deloitte now working on American soil and the flourishing of business schools, it appeared, from Dickinson’s perspect- ive, that reason and order had arrived in the Wild West of American business.3

Yet Dickinson’s dream of an orderly world of business, well governed by rational, private auditors, did not come to pass. Throughout the twentieth and twenty-first centuries, modern ac- counting firms have served, at best, as impartial referees and skilled financial analysts. In many cases, though, they have been hapless in expos- ing rogue firms and irresponsible politicians. At worst, they have acted as skilled enablers of fin- ancial fraud. As modern finance became more complex, lurching from one crisis to the next with reform and financial accountability ever harder to achieve, so the role of accountants be- came more fragile and even ambiguous.

If, in the early 1920s, Arthur Lowes Dickinson could feel proud that he had established profes- sional British accounting in the United States, he did not foresee the great crisis of

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accountability that would soon lead to the Great Depression and a brutal day of reckoning for the accounting profession itself. In 1926, the Har- vard economics professor William Z. Ripley published in the Atlantic Monthly a widely read article, “Stop, Look, Listen! The Shareholder’s Right to Adequate Information.” According to Ripley, the world of well-kept account books touted by figures like Haskins and Dickinson was an illusion. Business, he warned, was “still too largely carried out in twilight.” He was in- credulous that advertising had trumped clear fin- ancial statements. “On my table is a great pile of recent official corporate pamphlets. The premier concern on the list is the Royal Baking Powder Company, which fails to register in this collec- tion at all, in as much as it has never issued a balance sheet or financial statement of any kind whatsoever for more than a quarter of a cen- tury.” For corporations like the Singer Manufac- turing Company, the National Biscuit Company, and the Gillette Safety Razor Company, “such newfangled gewgaws as income accounts or de- preciation simply do not exist,” and accrual (or liabilities) was completely ignored.4

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Ripley predicted that a lack of corporate transparency would undermine the American economy. To make sound investments, the pub- lic needed more information, as “corporate ob- scuration has long outlived its day.” The stock market could function only if corporations dis- closed their true value. There were, he charged, no rules to govern corporate reporting and bal- ance sheets. In spite of companies such as Price Waterhouse, many family firms kept especially poor accounts, and big companies simply did not report their earnings. American business, in- sisted Ripley, was still a jungle.

George O. May, now senior partner of Price Waterhouse & Co. USA, responded to Ripley, insisting that audits were an imperfect art. Any company can prepare false books, which, he in- sisted, were very hard to verify. “No amount of regulation will make a dishonestly managed company a satisfactory investment,” he claimed. Yet try as he did to defend the work done by ac- counting firms, May conceded that he, too, was concerned about the lack of financial regulation and the accuracy of audits based on poor report- ing. He recommended vigilance at the firm and

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insisted that each auditor provide a certificate stating that the report was “fairly presented, in accordance with the accepted principles of ac- counting.”5

During the 1920s, the New York Stock Ex- change emerged as the major world financial entity. Trading grew exponentially, with the Dow Jones Industrials Index climbing from 95.51 in 1922 to 340 after January 1929. Yet the growth of the Roaring Twenties would be re- vealed just as Ripley had warned—as but so much glossy advertising on the false balance sheets of American corporations. Months later, between October 24 and 29, the stock exchange lost more than 30 percent of its value. At its low point, American gross domestic product dropped 30 percent, wholesale prices dropped 32 percent, nine thousand banks failed, and un- employment spiked to 25 percent. By 1933, the New York Stock Exchange had lost 89 percent of all stock value. This was not simply a conver- gence of poor economic performance. Never had an economy so rich and so sophisticated, based largely on publicly traded stock, been al- lowed to remain so opaque. Ripley was right;

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the account books were rotten. Bad accounting did not cause the Great Depression, but it ex- acerbated it. Months after the crash began, Wall Street traders knew perfectly well that the stock they were selling was worthless. “If there must be madness,” the economist John Kenneth Gal- braith lamented, “something may be said for having it on a heroic scale.” Those in the soup lines, however, would not have agreed.6

In response to the crash, in 1933 Congress enacted the Glass-Steagall Act to separate the activities of investment and commercial banking and prevent investment banks from putting de- positors at risk by making risky and often diffi- cult to regulate trades. It would also facilitate the auditing of their assets and liabilities. Spurred by the reforming zeal of the former New York District Attorney Ferdinand Pecora (1882–1971), who had unearthed J. P. Morgan’s list of preferred stocks that he shared with priv- ileged investors, including former U.S. Presid- ent Calvin Coolidge, the Roosevelt administra- tion enshrined these reforms with the establish- ment of the Securities and Exchange Commis- sion in 1934, chaired by Joseph P. Kennedy,

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founder of the political dynasty and, more to the point, a known master of insider trading. The SEC was to standardize accounting and report- ing for publicly traded companies. Roosevelt did not believe he could stop fraud and misre- porting, but he believed that the SEC could pre- vent “malicious misinformation” being given to stockholders, limit insider trading, and ban the preferred stock lists that had helped destabilize the market.7

The Securities Act of 1933 gave a new over- sight commission the authority to require more complete balance sheets and earnings state- ments, “appraisals” or “valuations of assets and liabilities,” calculations of “depreciation” and “depletion,” and detailed, consolidated audits of all branches of firms. Armed with a “Chief Ac- countant” in 1935, the SEC set the rules and regulations governing financial reporting by companies listed on the stock exchange. But even then, leaders of the audit firms worried that the reforms put too much onus on them, as op- posed to on the corporations, which could still doctor the books they gave to accountants. The auditing firms wanted a certificate attached to

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each audit that stipulated: “We have made an examination of your accounts for the purpose of expressing an opinion in connection with such statements, which have been prepared by you.”8

Leading partners in U.S. auditing firms wor- ried that the government would take too large a role in regulating financial markets and stifle financial independence and innovation. There was a concern on the part of the auditing com- panies—which had since the mid-nineteenth century provided the U.S. government with its audits and standards—that compulsory audits would replace the role of the public accountant with a government auditor potentially hostile to financial firms. These arguments, however, lost relevance in the chaotic aftermath of 1929, with confidence in the crippled financial sector at an all-time low. Realizing regulation was inevit- able, a leading partner at Price Waterhouse, Ge- orge O. May, hoped that helping to reform and regulate the market would continue to ensure the trusted, independent role of auditors. Still re- spected, private accountants could lead the regu- latory charge of the government. And so, volun- teer accountants designed the SEC filing forms

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for financial statements and wrote the official guide for auditing. May himself helped write the fundamental rules of the generally accepted ac- counting principles, still known today as GAAP.9

In the years following the Depression, the ripples of standards reform spread worldwide. In 1949, the Conferencia Interamericana de Contabilidad met to create standards in South and Central America. In 1951, Austria, Belgi- um, France, Germany, Italy, Luxemburg, the Netherlands, Portugal, Spain, and Switzerland created the Union Européenne des Experts Comptables; Denmark, Ireland, Norway, Sweden, and the United Kingdom joined in 1963. The 1957 Treaty of Rome created the European Economic Community (EEC) and, with it, the International Accounting Standards Committee (IASC). That same year, the Far East Conference of Accountants was formed. Postwar nations were creating a global account- ing framework to manage the new global eco- nomy. By the 1960s, Price Waterhouse & Co. would call for common standards that could be

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used for assessing “true and fair value” of the foreign subsidiaries of American and British companies. Global trade brought a need for what accountants called “harmony.” Sir Henry (later Lord) Benson (1909–1995), a leader of the IASC (which, in 2001, became the IASB, the International Accounting Standards Board), a British war munitions expert and president of the Institute of Chartered Accountants of Eng- land, continued the push for GAAP, which gradually became accepted by international ac- counting bodies.10

The period between 1946 and 1961 has been called a golden age for accountants, with trust in the industry widespread and robust. Clear audit- ing standards and regulations accompanied eco- nomic expansion in the Western economies and Japan. Yet something in the culture of account- ing had changed since the nineteenth century. The rise of massive government institutions, bureaus, laws, and tax codes had perhaps inevit- ably made accounting more complex. The list of acronyms in the preceding paragraphs attests to the depersonalized character of twentieth-cen- tury accounting. It now was a subject only for

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the expertly informed, inscrutable even to the best educated citizen. Accountants now became synonymous not only with professional success but also with the dehumanizing large-scale num- ber crunching of the mainframe computer age.

Like postwar economic growth, the golden age of accounting did not last, and the role of the accountant as a leading, even gentlemanly, social figure and neutral arbiter of business and regulation soon enough began to erode. Com- petition between the auditing firms became fierce in the mid-1950s. Peat Marwick outpaced Price Waterhouse & Co. in revenues, and Andersen & Co., founded in 1913 by Arthur Andersen, the son of Norwegian immigrants and trained by Price Waterhouse & Co., brought a new, distinctly American culture to accounting. Shocked by the mayhem of Chicago business in the prohibition age, Arthur Andersen had looked to bring order to a corrupt city dominated by figures like Jake “Greasy Thumb” Guzik, Al Capone’s notorious bookkeeper, whose account books provided the tax evasion evidence that was Capone’s ultimate downfall. Andersen was meticulous about ethics, insisting that auditors

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answer first and foremost to investors. “To pre- serve the integrity of his reports,” Andersen in- sisted, “the accountant must insist upon absolute independence of judgment and action.” He said that there was “not enough money in the city of Chicago” to make him sign off on books he thought were inaccurate or false, even if that en- tailed losing a major account.11

Discipline and high standards, Andersen be- lieved, came through thorough training. He looked to build a utopia of accounting based on what he claimed were the simple principles of his Norwegian mother: “Think straight, talk straight.” Andersen’s ideals of moral rectitude, discipline, and fierce competitiveness would be the basis for a new business model. Instead of tapping the ranks of the Ivy League and other competitive universities, Andersen looked for Midwestern strivers he could train himself. He created his own accounting university on the 55,000-acre former campus of St. Dominic Col- lege in St. Charles, outside Chicago. At its peak, it had a 500-member permanent staff, 1,800 fulltime residential students, and 68,000 part- time students who would pass through the

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campus annually. In this perfect world of ac- counting, “green bean” recruits lived and trained on campus, in close quarters with partners who instilled a cultlike conformity, with a strict regi- men of shirts, ties, and hats—felt from Labor Day to Memorial Day and straw after—that hung on specified hooks. Sometimes referred to as “Androids,” all Andersen employees, wheth- er from Chicago, London, or Kuala Lumpur, were to be trained to fit the same model of clean-cut standards, competitiveness, and hier- archical loyalty. This model remained un- changed even beyond the 1970s. In the 1990s, one new recruit described beginning the Ander- sen training process: “It is year Zero with the Khmer Rouge. You have just been born.”12

From the beginning, Arthur Andersen broke from the very British traditions of Price Water- house & Co. So long as it was done with strict integrity, Andersen believed, accountants should also act as consultants on the “advisability of in- vestment in a new enterprise or the extension of an old business.” Cost-accounting models could be used to redesign entire businesses; such was the direction the industry was moving in. And

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with competition now fierce among the Big Eight auditing firms—Price Waterhouse & Co.; Deloitte, Haskins and Sells; Peat Marwick Mitchell; Arthur Andersen; Touche Ross; Coop- ers & Lybrand; Ernst and Whinney; and Arthur Young & Co.—all now had to stretch their reach into consulting, thus blurring the lines of independence, as they received massive consult- ing contracts from the very companies they were supposed to independently audit.13

It was only a matter of time before these conflicts caught up with members of the Big Eight. In the 1970s, a slew of accounting scan- dals rocked the industry, as imaginative book- keeping allowed companies like the railroad Penn Central to post a $4 million profit right be- fore going bankrupt. Against the social turmoil of the Vietnam War, accountants and Androids were the definition of square and so hardly pop- ular cultural figures. By 1971, under the Nixon administration, inflation rose to 5 percent. Prices jumped 38.2 percent between 1971 and 1976. Many critics blamed accountants for failing to agree on “inflation accounting techniques.” Fairly or not, accountants were blamed when

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companies cooked their books by overstating profits, understating depreciation, or inaccur- ately gauging the monetary values, which were fluctuating violently. In the tumult of inflation, accountants were seen as unable or unwilling to give objective and independent audits.14

Inflation undermined the very idea of how to measure value and, hence, the old certainties of accounting. When inflation undermined the value of currency, then depreciation, or historic- al value—based on a calculation starting from an original purchase price and evolving over time—did not always reflect the true value of assets or, in accounting-speak, the difference between replacement costs and original pur- chase value. Companies were able to hide in- come and manipulate values by misstating the values of depreciation and appreciation.

Looking for a way to manage corporate ac- counting tricks, accountants devised the concept of “impairment recognition,” by which they sought to take into account false reporting in or- der to establish true corporate asset values. They used a “market-to-market” method to assess the “fair value” of corporate assets. This means a

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company is valued by its price on the current market, not on calculations of depreciation based on a historical or original purchase price. “Fair value” accounting was also based on the idea that the value of a dollar is not always the same. Today’s dollars would have to be calcu- lated in terms of what a dollar used to be worth, using a general price index. This means the past dollar amount is changed to its current “real” purchasing power. But not all accountants agreed that fair value was the best tool, as it, too, could be manipulated. With the idea of value now uncertain, accounting had become more speculative, and account books, harder to accurately audit.

Most damaging, the public would not only be lost in these arguments, it would simply ig- nore them, as trust in auditing and balance sheets continued to ebb in the constant flow of accounting scandals and arcane economic de- bates. Herman Bevis, then head of Price Water- house & Co., complained that there was an “ex- pectation gap” between what the public wanted of auditing companies and what they could actu- ally do. The problem was not just the

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confidence of the public. By 1966, auditing firms had become liable for the frauds commit- ted by the companies they audited through the Federal Rules Procedure and application of the standard of the 1931 Ultramares case, which deemed an auditor responsible to single stock- holders. If a company submitted false books or misstatements, and the accounting firm failed to recognize it or did not report fraud, both the company and the auditor faced legal action.15

By 1974, the Big Eight firms had come un- der a hail of two hundred lawsuits. In 1976, Congress stepped in with a committee led by Montana’s powerful senior senator, Democrat Lee Metcalf. The Metcalf Report was damning. Auditing firms, it stated, had “over-delegated” authority to the very firms they were supposed to audit, demonstrating “an alarming lack of in- dependence.” The Metcalf Committee con- demned the SEC as well for having “seriously failed to protect the public interest and to fulfill its public mandate”; it insisted that the SEC reg- ulate the accounting firms to guarantee compli- ance with standards of independence when both auditing and consulting for firms. No longer

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would auditing companies be entrusted to make their own rules. Bad accounting had become an affair of state, and the U.S. government, which for two hundred years had left accounting stand- ards and rules to companies, now took over, with Congress exercising oversight of account- ing practices and standards.16

But the knife of accountability cut both ways. If the government was now the chief aud- itor, who would audit the government? In the 1960s and 1970s, the U.S. government slowly began to open its own books to scrutiny. Con- gress had argued with President Lyndon John- son over the budget of the Vietnam War, and with the economic havoc caused by inflation in the 1970s, a consensus emerged that a nonpar- tisan state accounting office was needed to settle political arguments over public finance. When President Richard Nixon demanded that Con- gress raise the debt ceiling by $250 billion in 1972, Congress responded to conflicts over spending priorities by creating a Joint Study Committee on Budget Control—to give Con- gress a greater role in budget and debt de- cisions—to counterbalance the President’s

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Office of Management and Budget. President Nixon signed into law the creation of the non- partisan Congressional Budget Office (CBO), which would be responsible for providing data to Congress for fiscal analysis—from taxation to spending—and for forecasting state finance and budgeting. In turn, the old credit rating firms—Moody’s, Standard and Poor’s, and Fitch—initially designed to analyze railroad stocks, were authorized by the SEC to become Nationally Recognized Statistical Ratings Or- ganizations (NRSROs) and officially rate bond investment securities for private companies and the state.17

In the late 1980s, ratings agencies aggress- ively analyzed countries’ creditworthiness in or- der to rate the value of their currency, as well as government debt bonds (the capacity of a coun- try to successfully pay its debts), moving from three rated countries to fifty. Before 1985, most countries received a AAA bond rating, but that changed in the early 1990s, when government debt and currency value became ever more com- plex and difficult to assess. The ratings agencies and their critics recognized that assessing

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sovereign debt (government bonds issued by a government to sell to foreign investors) to de- termine a country’s credit rating was highly speculative. Nonetheless, ratings companies maintained a sacrosanct status.18

The reputations of auditing companies were damaged, however, by the perceived conflict of interest in their active role in corporate consult- ing. The Metcalf Report had criticized the con- sulting services of the auditing companies, call- ing them “particularly incompatible with the re- sponsibility of independent auditors and should be prohibited by federal standards of conduct.” Auditing companies continued to provide this service, insisting it was compatible with their roles as independent auditors of the same com- panies for which they consulted, often for fees ranging in the tens of millions of dollars. In 1981, the journalist Mark Stevens wrote a sav- age critique of what was happening “ behind the pinstripe curtain,” as he called it, of the Big Eight, accusing them of having “a lock” on the massive auditing accounts, and in spite of the Metcalf Report, he called the industry “derelict in its duties.” Accounting was a damaged brand,

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yet the big accounting firms remained the only ones with the expertise for audits on such a massive scale. As mistrusted by the public as they were valued by corporations, the Big Eight dominated the auditing industry.19

In 1989, Ernst & Whinney merged with Ar- thur Young to form Ernst and Young, and Deloitte, Haskins & Sells merged with Touche Ross to become Deloitte & Touche (there were different mergers in the United Kingdom); the Big Eight became the Big Six. In 1991, Stevens wrote yet another attack on the profession, The Big Six: The Selling Out of America’s Top Ac- counting Firms. Unchecked, he argued, the Big Six “behemoths” were lining their pockets by working as consultants for the companies they also audited. A good audit meant higher corpor- ate value, which, in turn, could mean a payoff for the consulting arms of the accounting firms. According to Stevens, the accountants were even robbing the bankers by providing mislead- ing audits. Wall Street, he went on to charge, sustained a naïve faith in auditing firms to look after anyone’s interest except their own.20

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Less strident critics, too, began to question the integrity of the large auditing firms. For in- stance, a financial analyst and bureau chief for BusinessWeek, Richard Melcher, asked in a 1998 piece for the magazine, “Where Are the Accountants?” Rather than fulfilling their roles as impartial referees, Melcher charged auditors allowed their clients too much leeway in risky although legal accounting tactics.21

Melcher critiqued the fact that more than 50 percent of all income of auditing firms now came from consulting, which was beginning to outweigh the value of their accounting business. With many top-level corporate managers com- ing from the ranks of firms like Andersen, and with massive, cozy double contracts for consult- ing and auditing, “suddenly, environmental or other legal liabilities are minimized, or invent- ory depreciation gets stretched out, or a big push is made to drum up end-of-quarter sales.” The SEC, he hoped, would take notice. Senior part- ners at Andersen actually discussed Melcher’s article in a meeting and even expressed some concern about their own reliance on consulting. But no steps were taken to ensure independence,

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let alone examine company ethics and risk tak- ing.22

Most accountants stuck to the rules, terrified of the constant flow of litigation stemming from poor audits. Yet the public by now had come to distrust accountants. It was not hard to see why. Corporate clients were clearly less interested in audits than they were in consultants promising ever-greater profits. The consulting business boomed. And the worst was yet to come.23

In the 1999, with little public or investor protest, the U.S. government, in the name of economic freedom, replaced the Glass-Steagall Act with the Gramm-Leach-Bliley Act, which allowed the consolidation of commercial banks, investment banks, securities firms, and insur- ance companies. It enabled banks to take depos- its and make loans, as well as underwrite and sell securities (such as pools of mortgages). Signing the act into law on November 12, Pres- ident Clinton recognized that it made “the most important legislative changes to the structure of the U.S. financial system since the 1930s.” He claimed that repealing Glass-Steagall and allow- ing the “affiliation” between banks and

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securities firms would spark competition, “en- hance the stability of our financial services sys- tem,” and help it to “compete in global financial markets.” Clinton insisted that the bill contained “important safety and soundness protections.” But the safeguards for accounting and corporate accountability of the Great Depression were falling away with an “irrationally exuberant” confidence that the boom of the age would last forever with lighter regulation and ever more complex financial products.24

Meanwhile, by the 1990s, the Big Six em- ployed literally hundreds of thousands of ac- countants around the world. The problem was that the audit market was saturated, with little possibility for growth, and profits dropped. Companies now wanted what Arthur Andersen had first proposed—that auditors use their unique quantitative insights for consulting pur- poses. So strong were their reputations as busi- ness fixers that at Andersen, for instance, Andersen Consulting soon eclipsed Andersen Auditing and, in doing so, became a lead player in the disastrous corporate frauds of the 1990s. Visitors to the Andersen headquarters in

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Chicago were struck by the fact that Andersen Auditing had drab offices, yet Andersen Con- sulting operated out of plush, well-furnished digs. Although other auditing companies also made huge fees in consulting, Andersen let the consulting tail wag the whole company. Doing so made sense purely as a matter of profits. Between 1992 and 2001, profits—70 percent of which were from consulting—more than tripled. Andersen would consult for high-profile “new economy” firms like Waste Management, WorldCom, and, most notoriously, the Texas energy firm Enron, while also acting as their auditor. All of these companies inflated their stock value by using false accounting state- ments. Eventually, all, even the once-venerable Andersen, went bankrupt. Andersen & Co. was indicted in Texas in 2002 for producing false financial statements for Enron, and the SEC found fraudulent Andersen audits for companies such as Waste Management and WorldCom.25

Andersen was sunk by the sheer massive- ness of the Enron fraud along with its clear complicity in inflating the company’s stock price—when it fell, shareholders lost $11

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billion. So infamous were Andersen’s false audits that President George W. Bush joked about them at the 2002 annual Alfalfa Club din- ner in Washington, DC. The president claimed he had good news and bad news from Saddam Hussein: “The good news is he is willing to let us inspect his biological and chemical warfare installations. The bad news is that he insists Ar- thur Andersen do the inspections.”26

What is tragically ironic in the Enron case is that certain basic Andersen audits actually worked. In 2001, well-trained, midlevel auditors made smoking-gun reports about questionable Enron transactions and false accounts. Yet, faced with the loss of $100 million in annual consulting fees, top management ignored the audits. The account was just too big to lose. With evidence building that Andersen had covered up its knowledge of Enron’s malfeas- ance, the partner in charge of the Enron account, David Duncan, was terrified of being charged with violating securities laws and ordered his office staff into an orgy of document shredding. It was wishful thinking. The fraud was so large, the collusion of Andersen with Enron so

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criminal, that Enron’s collapse quickly brought down Andersen, too. Duncan would turn state’s witness against his company, and to this day, neither he nor any other Andersen employee has served jail time for cooking the books in one of America’s worst and most costly financial frauds. Today, Andersen employs a skeleton staff of two hundred to manage its continuing litigation, down from 85,000 worldwide.27

In response to Enron and a cascade of other corporate accounting scandals and bankruptcies (among them giants like Tyco International, Adelphia, and Peregrine Systems), President George W. Bush signed the 2002 Sarbanes-Ox- ley Act, which set up the Public Company Ac- counting Oversight Board, an attempt to guaran- tee auditor independence and corporate gov- ernance and to clarify the rules of corporate auditing and financial disclosure. This was a pure corporate accountability law. “The era of low standards and false profits is over,” Presid- ent Bush said. “No boardroom in America is above or beyond the law.” The day of reckoning had come, he intoned, at least for the account- ants: “Free markets are not a jungle in which

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only the unscrupulous survive, or a financial free-for-all guided only by greed. . . . For the sake of our free economy, those who break the law—break the rules of fairness, those who are dishonest, however wealthy or successful they may be—must pay a price.”28

Supported by leaders from both political parties, the legislation was seen as so essential and effective that similar laws were sub- sequently passed in Australia, France, Germany, Italy, Israel, India, Japan, South Africa, and Tur- key. In New York, it was hoped that the law would bring confidence to the American stock market after the debacles of Enron and WorldCom. However, a consequence of strict accounting regulation was that weaker account- ing firms faced ever more Goliath-like banks and companies that, with their own high-paid teams of internal creative bookkeepers and lob- byists, could remain one step ahead of the auditors.

This would be an issue in the financial crisis of 2008, when unsound and overvalued mort- gage securities bundles (CDOs) caused a world financial meltdown. The New York Federal

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Reserve, the New York offices of the SEC, and the Big Four firms—PricewaterhouseCoopers (PwC), Deloitte Touche Tohmatsu Ltd., Ernst & Young, and KPMG, with nearly 700,000 em- ployees—were only blocks away from Bear Stearns and Lehmann Brothers, whose collapse led to the federal emergency bailout of most re- maining investment banks through the comic- ally titled Troubled Asset Relief Program (TARP). The auditing firms had warned the banks and regulators that CDOs were Class 3 assets (Class 1 being cash) and that their values were speculative and highly risky. Yet they had no power, and possibly no will, to make the case that the CDOs could lead to a financial crisis. In spite of the proximity of regulators, auditors, and bankers, few seemed aware of the impend- ing crash.

Highlighting the weak position of the audit- ing companies, in the immediate aftermath of the collapse, the investment banks blamed the Big Four for causing the crash, insisting that their new, risk-averse low assessments of the CDOs’ values fed the flames of crisis by under- mining confidence in their value. Caught

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between a public that suspected the accounting firms of failing to provide correct audits and the corporate and finance leaders who accused them of undervaluing assets, the Big Four continued to tread lightly out of fear that any accounting or legal misstep could lead to Andersen-style litig- ation and the implosion of the accounting in- dustry. Indeed, regulators in Britain had begun to worry that the monopoly of the Big Four was itself a risk to the industry. Much like the invest- ment banks, all firms’ large accounts have be- come interconnected through the complex tentacles of finance. The collapse of one of the Big Four firms could bring down the other three. It would seem, then, that the Big Four are too big to fail but too weak to effectively audit their corporate clients.29

Dickens would have appreciated the conun- drum. To stop fraud at auditing companies, the U.S. and British governments worked to clip their wings, only to find that without effective auditors, it is impossible to oversee finance and industry, let alone government. In spite of the hundreds of thousands of auditors working for accounting firms, the SEC, and the Department

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of Justice (not to mention European regulatory bodies), no one, as yet, has gone to jail for the 2008 financial crisis. Identifying those who have committed financial crimes, or criminally negligent oversight, and actually sending them to jail—part of the jobs of auditors and govern- ment regulators, but something the United States and Europe inexplicably have not elected to do in the years following the 2008 crash—is the sort of aggressive response that might spur reforms and, in their wake, better financial prac- tices. Eric Holder, U.S. Attorney General, has gone on record saying that the size and import- ance of major investment banks “has an inhibit- ing influence” on prosecuting financial malfeas- ance. He has expressed fears that sustained legal action against financial institutions—beyond fines—could destabilize the financial system.30

In spite of laws, regulations, and an active financial press, powerful forces are aligned against financial transparency. By the sheer complexity and scale of their operations, banks, corporations, and government bodies have rendered themselves unauditable. How many ac- countants, really, would it take to truly audit

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Goldman Sachs, were this indeed a realistic task? Ten thousand? Forty thousand? It might not even be possible. The fact is that govern- ment and the auditing companies cannot, for the moment, keep up with the ever-mutating, bacteria-like financial tools and tricks of bank- ing. At the same time, it is unclear that govern- ments can effectively audit themselves. The world financial system is threatened by disaster from bad municipal and government accounting, as countries like Greece and major cities like Detroit go bankrupt because of poor planning but also poor bookkeeping. Government ac- countants too often calculate that states and cit- ies can pay for pensions. There has been little outcry about bad government accounting by a public unfamiliar with the risks of long-term municipal and government obligations. And despite recent threats by the Department of Justice to pursue financial crimes and the fines meted out to major banks, there have no reckon- ings on Wall Street or in government. And without one, there can be little incentive for true reform.31

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CONCLUSION

From the Renaissance to the nineteenthcentury, great artists and philosopherspainted and discussed accountants and their complex role in society. But great artists don’t paint accountants anymore. It is not sur- prising. In the wake of fiascoes like Enron, ac- countants have come to be perceived not only as boring but also as venal and inexpert. Few polit- ical and financial commentators discuss ac- countants or accounting. Due to their dour im- age and the indecipherable aspects of their pro- fession, accountants have become separated from everyday culture. Our financial world has no artist at the level of Charles Dickens to bring alive the complicated world of financial ac- counting with a brilliantly multilayered social

and moral analysis. Yet over the course of the last century, even as they have disappeared from cultural awareness and imagination, accountants have become ever more numerous and ever more skilled in the large-scale number crunch- ing necessary to make and untangle financial operations, and ever more essential to the pro- cess of accountability.

As we have seen, this follows a pattern: From Renaissance Italy and the great monarch- ies of Spain and France to the commercial soci- eties of Holland, Britain, and America, account- ing arrives on the scene with great effect, only to retreat into dangerous obscurity. Even in the most financially literate cultures, finance, as Dickens so eloquently wrote, is “splendid, massive, overpowering, and impracticable.” Indeed, Dickens felt that accounting was so bey- ond human control that only luck could extricate his characters from the labyrinth created by numbers and paperwork.1

Considering that there have been centuries of struggles over financial accountability, our own recent inability to effectively audit and hold companies and governments accountable

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seems incomprehensible. And yet, our predica- ment follows a historical pattern: No sooner is an accounting reform made than we find a way to resist it. Indeed, the rise of technology has made the task of accountability even more daunting, as regulators and even auditors come up against labyrinthine big numbers and finan- cial logarithms, high-speed trading, and com- plex financial products such as bundled mortgages.

As governments struggle with the paradox of the power and frailty of the Big Four ac- counting firms, their own account books are in increasing disarray. Risky mortgage bundles are still difficult to value and pose a threat to bank- ing and the stock market. American municipalit- ies have gone bankrupt, and parts of Europe teeter on the brink of insolvency. The Interna- tional Accounting Standards Board has charac- terized municipal and government accounting as being in a stage of “primitive anarchy.” All countries, rich and poor, hide the true costs of their pension benefits and health care, as well as of infrastructure, off their balance sheets. Credit rating agencies (Moody’s, Fitch, and Standard

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and Poor’s) have downgraded leading industrial nations—the United States, France, and, more dramatically, Italy, Spain, and Greece—not without scandal or error. In a vicious cycle of mistrust, many critics, in turn, cast doubt on the integrity and skill of rating agencies as well as on the Big Four.2

Why, one may ask, don’t democratic gov- ernments do more to stabilize the world of fin- ance, from the most sophisticated leveraging of Wall Street to the dime-a-dozen mortgages of Main Street? One reason is that the public is as disengaged from these hard questions as it is un- knowledgeable in even the most basic principles of accounting or political economy. The other is that government and the auditing companies cannot keep up with the ever-mutating, bacteria- like financial tools and tricks of banking.

Citizens and investors, in turn, cannot have confidence in multinational businesses or, in- deed, their governments, when their own audit- ing firms and public agencies seem so powerless to obtain accurate numbers. To foster serious and constructive policy debate, the International Monetary Fund’s Timothy Irwin has suggested

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that governments publish balance sheets with their net worth, revealing their assets, liabilities, and budgets up to fifty years into the future. Others have simply called for corporations to publish clearer balance sheets. These seem to be simple prescriptions, but are they possible? None of these proposals addresses the historical difficulties of transparent accounting. And none of these proposals addresses the challenges posed by the rise of China. Its economy blankets a huge percentage of world manufacturing and finance in what is essentially a closed society. The Economist magazine refuses even to list Chinese state-generated economic statistics, which it has called an untrustworthy, “aberrant abacus” for an inherently unaccountable super- power. Other nations and markets, while argu- ably more open, suffer still from a troubling lack of transparency. Beyond economic cycles, then, failure seems to be built into a world fin- ancial system that is opaque not at all by acci- dent, but rather by multiple designs.3

If there is any historical lesson to be learned here, it is that those societies that managed to harness accounting as part of their general

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cultures flourished. Republican Italian city- states like Genoa and Florence, Golden Age Holland, and eighteenth- and nineteenth-century Britain and America (to name just those places discussed in this book) all integrated accounting into their educational curriculum, religious and moral thought, art, philosophy, and political theory.

In Holland, for example, accountability was not simply an idea one learned or the work ethic of one religious or ethnic group. It was embed- ded into all facets of culture. One would learn accounting at school and practice it in business, civil, and domestic life and, at the same time, read religious texts about accountability and view masterworks of art that placed warnings about accounting and financial hubris on the backdrop of scenes or messages from the Bible. Politicians discussed the importance of account- ing and accountability, and political pamphlets called for audits using religious language. Among educated citizens, there was an expecta- tion that those in power, from municipal admin- istrators to educators to princes, knew account- ing and had a sense of just how essential

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financial accountability was to their republican system.

Today, economics has too often been re- duced to complex number crunching and theor- ies about human behavioral patterns or econom- ic cycles. And yet, economics was born as not just a mathematical field of inquiry but as a his- torical study of culture. The French economist Jean-Baptiste Say called economics the “simple exposition of the every day life of wealth,” and Max Weber insisted on studying both “economy and society.” Indeed, those societies that avoided disastrous financial reckonings did so by putting finances in a meaningful cultural context.

Perhaps the salvation of our stumbling, hy- perfinancial societies lies not only in the person- al, disciplined accounting of Josiah Wedgwood or in the historical and moral approaches of eco- nomic thinkers like Adam Smith or, indeed, in the analysis of modern-day number crunchers, but also in the old lessons of paintings such as Jan Provost’s Death and the Miser, which illus- trates so powerfully the importance of book- keeping and financial management by

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grounding it in piety, ethics, civic politics, and art. By separating finance into its own sphere, we have lowered our financial and political as- pirations. Once, we asked those who thought about and practiced finance to consider the numbers of accounting as an integral part of so- ciety and culture, even elevating the mundane numbers of account books to the analysis of reli- gion and great literature. It is this cultural ambi- tion that we will need to recapture if we are to face down our future reckonings.4

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ACKNOWLEDGMENTS

Aprofound thanks to David A. Bell, whoworked on this book with me at everystage and without whose help, I could not have done it.

For helping me to conceptualize this book, thanks go to Rob McQuilkin, Sophus Reinert, John Pollack, Ted Rabb, Peter Burke, Anthony Grafton, Will Deringer, Dan Edelstein, Keith Baker, Peter B. Miller, Jim Green, Matt Kadane, Sean Macaulay, Peter Stallybrass, and Alex Stirling.

A special thanks goes to Istvan Hont who is much missed.

Many thanks also to Alessandro Arienzo, Enzo Baldini, Alastair Bellany, Ann Blair, Robert Bloomfield, Gianfranco Borelli, John

Brewer, Janet Browne, Joyce Chaplin, Paul Cheney, Bill Connell, Bill Deverell, Jan de Vries, Kate Epstein, Lynn Farrington, Moti Feingold, Steve Ferguson, Boris Fishman, Rob Fredona, Wantje Fritschy, Beth Garrett, Oscar Gelderblom, Peter Gordon, Orsola Gori, Amy Graves Monroe, Karen Halttunen, Colin Hamilton, Deb Harkness, Randolph Head, Carla Hesse, Steve Hindle, Blair Hoxby, Lynn Hunt, Matt Jones, Richard Kagan, Bruce Kahan, Béla Kapossy, Julius Kirshner, Christopher Krebs, Tom Lacqueur, Inger Leemans, Marie-Laure Legay, Alex Lippincott, James Livesey, Mark Lotto, Peter Mancall, Alex Marr, John McCormick, Siobhan McElduff, Michael McKeon, Darrin McMahon, Ken Merchant, Wijnand Mijnhardt, Peter N. Miller, Ken Mills, Tony Molho, Craig Muldrew, John Najemy, Christopher Napier, Diego Navarro Bonilla, Vanessa Ogle, Derek Parsons, Renato Pasta, Nathan Perl-Rosenthal, Steve Pincus, John Po- cock, Maarten Prak, Paolo Quattrone, Daniel Raff, Jack Rakove, Diogo Ramada-Curto, Orest Ranum, Neil Safier, Maurie Samuels, Margaret Schotte, Vanessa Schwartz, Catherine Secretan,

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Richard Serjeantson, Andy Shankman, Christina Shideler, Michael Sonenscher, Nomi Stolzen- berg, Naomi Taback, University of Michigan Press, Charles van den Heuvel, Ellen Wayland- Smith, Caroline Weber, Carl Wennerlind, and Isser Wolloch.

Especial thanks and credit are due to my clairvoyant editor Lara Heimert, for her un- wavering faith in this book, and to her crack team at Basic Books, Katy O’Donnell, Michele Jacob, Cassie Nelson, and, in particular, Roger Labrie, as well as copyeditor Joy Matkowski and production editor Melody Negron.

I am deeply indebted to my indefatigable agent, Rob McQuilkin, and his sterling literary agency, Lippincott, Massie, McQuilkin.

I’m grateful for funding from the John Si- mon Guggenheim Memorial Foundation and the John D. and Katherine P. MacArthur Founda- tion and for the funding and unparalleled sup- port of the Dornsife College of Arts and Letters and the Department of History of the University of Southern California.

Thanks also for sustained support and sustenance from Bibou Restaurant in

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Philadelphia, the Choay-Lescar family in Paris, and the Bartoli family in Florence.

This project would not have been possible without great libraries and librarians. Thanks go to the University of Pennsylvania Rare Books Collection, the Rutgers University Libraries, the Library Company of Philadelphia, the Biblio- thèque Nationale de France, the Firestone Library Collection of Rare Books at Princeton University, the Archivio di Stato di Firenze, the Huntington Library, and the University of Southern California Libraries.

The ideas in this book were fleshed out in conferences at the Columbia University Eight- eenth Century Seminar, University of Buffalo Early Modern Seminar, Yale University French Studies Seminar, TEDx New Wall Street, the Maison Française de Columbia University, the Harvard Business School Seminar on New Per- spectives on Political Economy, the Wharton School Economic History Seminar, the Stanford Humanities Center, the USC-Cambridge University CRASSH seminar on material cul- ture, the Cambridge University Economic His- tory Seminar, the Borchard Foundation, the

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Huygens Institute in the Hague, the Descartes Centre in Utrecht, the Felix Meritis Foundation in Amsterdam, the Other Canon Foundation in Oslo, the University of California Berkeley Seminar on the Enlightenment 2.0, the Rutgers University Seminar on Political Polemics in Early Modern Britain and Europe, the Journal of Interdisciplinary History, the Fondazione Luigi Firpo, the University Federico II di Na- poli, the Early Modern Studies Institute and the Center for Law, History and Culture at the University of Southern California, and the Cal- tech/Huntington Library conference on Debates over Early Modern Taxonomies. Also thanks and gratitude go to the students of my under- graduate seminar on accounting, politics, and ethics at the University of Southern California, who helped me think through this book.

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NOTES

Introduction 1. Louise Story and Eric Dash, “Lehman

Channeled Risks Through ‘Alter Ego’ Firm,” New York Times, April 12, 2010.

2. Alain Desrosières, The Politics of Large Num- bers: A History of Statistical Reasoning, trans. Ca- mille Nash (Cambridge, MA: Harvard University Press, 1998), 177; Keith Thomas, “Numeracy in Early Modern England,” Transactions of the Royal Historical Society 37 (1987): 103–132. On eighteenth-century North America, see Patricia Cline Cohen, A Calculating People: The Spread of Numer- acy in Early America (Chicago: University of Chica- go Press, 1982); Daniel Defoe, chapter 20 in The Complete English Tradesman (Edinburgh, 1839); Ceri Sullivan, The Rhetoric of Credit: Merchants in Early Modern Writing (Madison, NJ: Associated University Presses, 2002), 12–17.

3. Domenico Manzoni, Quaderno doppio col suo giornale (Venice: 1540), sig. ii verso. Paul F. Grend- ler, Schooling in Renaissance Italy: Literacy and Learning 1300–1600 (Baltimore: Johns Hopkins University Press, 1989), 322.

4. A. C. Littleton, Accounting Evolution to 1900 (New York: American Institute Publishing, 1933), 25.

5. Max Weber, General Economic History, trans. Frank Hyneman Knight (New York: Free Press, 1950), 275.

6. Werner Sombart, Der Moderne Kapitalismus, 6th ed. (Leipzig, 1924), 118. The translation is from J. A. Aho, Confession and Bookkeeping: The Reli- gious, Moral, and Rhetorical Roots of Modern Ac- counting (Albany: State University of New York Press, 2005), 8. Also see Joseph A. Schumpeter, His- tory of Economic Analysis, ed. Elizabeth Boody Schumpeter (New York: Oxford University Press, 1954), 156. Schumpeter cited in Yuri Bondi, “Schum- peter’s Economic Theory and the Dynamic Account- ing View of the Firm: Neglected Pages from the The- ory of Economic Development,” Economy and Soci- ety 37, no. 4 (2008): 528.

Chapter 1 1. Suetonius, The Twelve Caesars, trans. Robert

Graves (Harmondsworth, UK: Penguin Books, 1982),

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69; Res gestae divi Augusti, trans. P. A. Brunt and J. M. Moore (Oxford: Oxford University Press, 1973), stanza 17.

2. Salvador Carmona and Mahmous Ezzamel, “Ancient Accounting,” in The Routledge Companion to Accounting History, ed. John Richard Edwards and Stephen P. Walker (Oxford: Routledge, 2009), 79.

3. Ibid., 14; Max Weber, The Theory of Social and Economic Organizations, trans. and ed. A. M. Henderson and Talcott Parsons (New York: Free Press, 1947), 191–192; also see Aho, Confession and Bookkeeping, 8.

4. Littleton, Accounting Evolution, 83; Richard Brown, A History of Accounting and Accountants (Edinburgh: T. C. & E. C. Jack, 1905), 17.

5. Augustus Boeckh, The Public Economy of Athens (London: John W. Parker, 1842), 185–189, 194; Aristotle, The Athenian Constitution, trans. P. J. Rhodes (London: Penguin Books, 1984), 93–94.

6. Boecke, The Public Economy of Athens, 194. 7. Brown, A History of Accounting and Account-

ants, 30. 8. David Oldroyd, “The Role of Accounting in

Public Expenditure and Monetary Policy in the First Century AD Roman Empire,” Accounting Historians Journal 22, no. 2 (1995): 121–122.

9. Ibid., 31.

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10. Cicero, The Orations of Marcus Tullius Cicero (Philippics), trans. C. D. Yonge (London: Henry J. Bohn, 1852), 2:34.

11. Oldroyd, “The Role of Accounting,” 123. 12. Res gestae divi Augusti, stanzas 15–16;

Oldroyd, “The Role of Accounting,” 125. 13. Oldroyd, “The Role of Accounting,” 124. 14. Moses I. Finley, The Ancient Economy

(Berkeley: University of California Press, 1973), 19. 15. Edward Gibbon, History of the Decline and

Fall of the Roman Empire, 4th ed. (London: W. and T. Cadell, 1781), 1: chap. XVII, 55.

16. M. T. Clanchy, From Memory to Written Re- cord: England 1066–1307 (London: Blackwell, 1979); F. E. L. Carter and D. E. Greenway, Dialogus de Scaccario (The Course of the Exchequer), and Constitutio Domus Regis (The Establishment of the Royal Household) (London: Charles Johnson, 1950), 64.

17. Clanchy, From Memory to Written Record, 2–92.

18. Robert-Henri Bautier, “Chancellerie et culture au moyen age,” in Chartes, sceaux et chancelleries: Études de diplomatique et de sigillographie médié- vales, ed. Robert-Henri Bautier (Paris: École des Chartes, 1990), 1:47–75; Brown, A History of Ac- counting and Accountants, 53–121.

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19. Brown, A History of Accounting and Account- ants, 54.

20. Thomas Madox, The Anqituities and the His- tory of the Exchequer of the Kings of England (Lon- don: Matthews and Knaplock, 1711); Clanchy, From Memory to Written Record, 78.

21. John W. Durham, “The Introduction of ‘Arab- ic’ Numerals in European Accounting,” Accounting Historians Journal 19, no. 2 (1992): 26.

22. Quentin Skinner, The Foundations of Modern Political Thought (Cambridge: Cambridge University Press, 1978), 1:3.

23. Quotations from Grendler, Schooling in Renaissance Italy, 307; Ingrid D. Rowland, The Cul- ture of the High Renaissance: Ancients and Moderns in Sixteenth-Century Rome (Cambridge: Cambridge University Press, 1998), 110–113.

24. Grendler, Schooling in Renaissance Italy, 307. 25. Ibid., 308. 26. Carte Strozziane, 2a serie, n. 84 bis, Archivio

di Stato, Florence. Also see Geoffrey A. Lee, “The Coming of Age of Double Entry: The Giovanni Farolfi Ledger of 1299–1300,” Accounting Historians Journal 4, no. 2 (1977): 80. On Italian origins of double-entry bookkeeping, see Federigo Melis, Storia della ragioneria (Bologna: Cesare Zuffi, 1950); Fe- derigo Melis, Documenti per la storia economica dei secoli XIII–XVI (Firenze: Olschki, 1972); Raymond

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de Roover, “The Development of Accounting Prior to Luca Pacioli According to the Account-Books of Me- dieval Merchants,” in Studies in the History of Ac- counting, ed. A. C. Littleton and B. S. Yamey (Lon- don: Sweet & Maxwell, 1956), 114–174; Raymond de Roover, “The Development of Accounting Prior to Luca Pacioli,” in Business, Banking and Economic Thought in Late Medieval and Early Modern Europe: Selected Studies of Raymond de Roover, ed. Julius Kirschner (Chicago: University of Chicago Press, 1974), 119–180; Pietro Santini, “Frammenti di un libro di banchieri fiorentini scritto in volgare nel 1211,” Giornale storico della litteratura italiana 10 (1887): 161–177; Geoffrey Alan Lee, “The Oldest European Account Book: A Florentine Bank Ledger of 1211,” Nottingham Medieval Studies 16, no. 1 (1972): 28–60; Geoffrey Alan Lee, “The Develop- ment of Italian Bookkeeping 1211–1300,” Abacus 9, no. 2 (1973): 137–155.

27. De Roover, “The Development of Accounting Prior to Luca Pacioli,” 124, 122.

28. Edward Peragallo, Origin and Evolution of Double Entry Bookkeeping: A Study of Italian Practice from the Fourteenth Century (New York: American Institute Publishing Company, 1938), 4–5; Brown, Accounting and Accountants, 99; Alvaro Martinelli, “The Ledger of Cristianus Lomellinus and

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Dominicus De Garibaldo, Stewards of the City of Genoa (1340–41),” Abacus 19, no. 2 (1983): 90–91.

29. For an analysis and reproduction of the Gen- oese pepper account see Alvaro Martinelli, “The Ledger of Cristianus Lomellinus and Dominicus De Garibaldo, Stewards of the City of Genoa (1340–41),” Abacus 19, no. 2 (1983): 90–91.

30. Ibid., 85. 31. Ibid., 86.

Chapter 2 1. Quotation from Iris Origo, The Merchant of

Prato: Daily Life in a Medieval Italian City (London: Penguin Books, 1992), 66.

2. Ibid., 66, 259, 194. 3. Raymond de Roover, The Rise and Decline of

the Medici Bank 1397–1494 (Cambridge, MA: Har- vard University Press, 1963), 2–3; Ludovica Sebre- gondi and Tim Parks, eds., Money and Beauty: Bankers, Botticelli and the Bonfire of the Vanities (Florence: Giunti Editore, 2011), 121.

4. Origo, The Merchant of Prato, 194; De Roover, The Rise and Decline of the Medici Bank 1397–1494, 38, 194.

5. Origo, The Merchant of Prato, 259, 276; Tim Parks, Medici Money: Banking, Metaphysics and Art

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in Fifteenth-Century Florence (New York: W. W. Norton, 2006), 32–33.

6. Pierre Jouanique, “Three Medieval Merchants: Francesco di Marco Datini, Jacques Coeur, and Bene- detto Cotrugli,” Accounting, Business and Financial History 6, no. 3 (1996): 263–264.

7. Origo, The Merchant of Prato, 149. 8. Ibid., 115–116, 258. 9. Ibid., 257, 280. 10. Ibid., 119. 11. Ibid., 103, 117, 137. 12. Ibid., 115, 137, 122. 13. Basil S. Yamey, Art and Accounting (New

Haven, CT: Yale University Press, 1989), 16. 14. Richard K. Marshall, The Local Merchants of

Prato: Small Entrepreneurs in the Late Medieval Economy (Baltimore: Johns Hopkins University Press, 1999), 66–69.

15. Sebregondi and Parks, eds., Money and Beauty, 147; Dante, The Inferno, trans. Robert Pinsky (New York: Farrar, Straus and Giroux, 1995), Canto XVII, vv. 55–57.

16. Origo, The Merchant of Prato, 151. 17. Yamey, Art and Accounting, 68. 18. Matthew 25:14–30 (Revised Standard

Version).

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19. Augustine, Sermon 30 on the New Testament, New Advent Catholic Encyclopedia, www.newadvent.org/fathers/160330.htm, stanza 2.

20. Giovanni Boccaccio, “First Day,” in The De- cameron, trans. J. M. Rigg (London: A. H. Bullen, 1903), 12.

21. Dante, “Purgatory,” in The Divine Comedy, trans. Allen Mandelbaum (Berkeley: University of California Press, 1981), 2:10.105–111.

22. Jean Delumeau, Sin and Fear: The Emer- gence of a Western Guilt Culture 13th–18th Centur- ies, trans. Eric Nicholson (New York: St. Martin’s Press, 1990), 189–197.

23. Robert W. Schaffern, The Penitent’s Treas- ury: Indulgences in Latin Christendom, 1175–1375 (Scranton, PA: University of Scranton Press, 2007), 45.

24. Ibid., 80–81. 25. Anthony Molho, “Cosimo de’ Medici: Pater

Patriae or Padrino?” in The Italian Renaissance: The Essential Readings, ed. Paula Findlen (Malden, MA: Wiley-Blackwell, 2002), 69–86.

26. Origo, The Merchant of Prato, 154. 27. Ibid., 315, 323. 28. Ibid., 342–346.

Chapter 3

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1. Roover, The Rise and Decline of the Medici Bank 1397—1494, 47.

2. Quotation from Coluccio Salutati, Invectiva contra Atonium Luscum, quoted in Curt S. Gutkind, Cosimo de’ Medici: Pater Patriae, 1389–1464 (Ox- ford: Clarendon Press, 1938), 1.

3. Ronald Witt, “What Did Giovanni Read and Write? Literacy in Early Renaissance Florence,” I Tatti Studies 6 (1995): 87–88; Richard Goldthwaite, The Economy of Renaissance Florence (Baltimore: Johns Hopkins University Press, 2009), 354.

4. Lauro Martines, The Social World of the Florentine Humanists 1390–1460 (Princeton, NJ: Princeton University Press, 1963), 320–336.

5. Machiavelli, The Discourses, trans. Leslie J. Walker (London: Penguin Books, 1983), 1:192.

6. Anthony Molho, Firenze nel quattrocento (Rome: Edizioni di Storia e Letteratura, 2006), 58.

7. De Roover, The Rise and Decline of the Medici Bank 1397–1494, 53–76.

8. Ibid., 120. 9. Ibid., 69–70, 227, 265. 10. Nicolai Rubenstein, The Government of

Florence under the Medici 1434–1494 (Oxford: Ox- ford University Press, 1998); Parks, Medici Money, 98.

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11. Goldthwaite, The Economy of Renaissance Florence, 355; Gutkind, Cosimo de’ Medici, 196–199; Parks, Medici Money, 39.

12. Goldthwaite, The Economy of Renaissance Florence, 355.

13. For Cosimo’s personal account book, see Cosimo de’ Medici, “Calcolo della Fattoria del Mu- gello,” 1448, filza 104, page 6 recto, Mediceo Avanti il Principato, Archivio di Stato di Firenze.

14. Goldthwaite, The Economy of Renaissance Florence, 355, 460–461.

15. Raymond de Roover, Money, Banking and Credit in Medieval Bruges (Cambridge, MA: Medi- eval Academy of America, 1948), 35.

16. Ibid., 34, 37. 17. Ibid., 57–58; Federico Arcelli, Il banchiere

del Papa: Antonio della Casa, mercante e banchiere a Roma, 1438–1440 (Soveria Manelli, Italy: Rubbet- tino Editore, 2001), 79.

18. Plato, The Republic, trans. Benjamin Jowett (Oxford: Oxford University Press, 1892), book VII.

19. De Roover, The Rise and Decline of the Medici Bank 1397–1494, 75.

20. Francesco Sassetti, “Memorandum of My Last Wishes, 1488,” reproduced in Aby Warburg, “Francesco Sassetti’s Last Injunctions to His Sons,” in The Renewal of Pagan Antiquity: Contributions to the Cultural History of the European Renaissance,

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ed. Gertrude Bing (Los Angeles: Getty Research In- stitute, 1999), 451–465. Warburg reproduces and translated Marsilio Ficino’s Epistle to Giovanni Ru- cellai, 255–258.

21. Giovanni Pico della Mirandola, On the Dig- nity of Man, trans. Charles Glenn Wallis, Paul J. W. Miller, and Douglas Carmichael (Indianapolis, IN: Hackett, 1998), stanza 212.

22. De Roover, The Rise and Decline of the Medici Bank, 71; de Roover, Money, Banking and Credit in Medieval Bruges, 86; Florence Edler de Roover, “Francesco Sassetti and the Downfall of the Medici Banking House,” Bulletin of the Business His- torical Society 17, no. 4 (1943): 66.

23. De Roover, The Rise and Decline of the Medici Bank, 97.

24. Cited in Miles Ungar, Magnifico: The Bril- liant Life and Violent Times of Lorenzo de’ Medici (New York: Simon and Shuster, 2008), 58.

25. Quotation is from Ungar, Magnifico, 58; Ma- chiavelli citation is from de Roover, The Rise and De- cline of the Medici Bank, 364.

26. Giorgio Vasari, The Lives of the Artists, trans. Julia Conaway Bonadella and Peter Bonadella (Ox- ford: Oxford University Press, 1991), 212; Ficino cited by Warburg, “Francesco Sassetti’s Last Injunc- tions to His Sons,” 233.

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27. Quotation from Warburg, “Francesco Sas- setti’s Last Injunctions to His Sons,” 237–238.

28. Ibid.; de Roover, Money, Banking and Credit in Medieval Bruges, 88; de Roover, The Rise and De- cline of the Medici Bank, 363; Edler de Roover, “Francesco Sassetti and the Downfall of the Medici Banking House,” 76.

29. De Roover, Money, Banking and Credit in Medieval Bruges, 87; de Roover, The Rise and De- cline of the Medici Bank, 87, 93.

30. The balance sheet is reproduced and discussed in de Roover, “Francesco Sassetti and the Downfall of the Medici Banking House,” 72–74; Warburg, “Francesco Sassetti’s Last Injunctions to His Sons,” 237.

Chapter 4 1. Grendler, Schooling in Renaissance Italy,

321–323. 2. Anthony Grafton, Leon Battista Alberti: Master

Builder of the Renaissance (London: Allen Lane/Pen- guin Press, 2000), 154; Yamey, Art and Accounting, 130.

3. Yamey, Art and Accounting, 130. 4. Quotation from Louis Goldberg in Journey into

Accounting Thought, ed. Stewart A. Leech (London: Routledge, 2001), 217.

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5. Pacioli’s text is reproduced in John B. Geijs- beek, Ancient Double-Entry Bookkeeping: Luca Paci- oli’s Treatise 1494 (Denver, 1914), 33.

6. Ibid., 39. 7. Ibid.; Brown, A History of Accounting and Ac-

countants, 40, 111. 8. Grendler, Schooling in Renaissance Italy, 321. 9. Pacioli citations from Geijsbeek, Ancient

Double-Entry Bookkeeping, 27, 37. 10. Ibid., 41, 51–53. 11. Ibid., 41, 75. 12. Bruce G. Carruthers and Wendy Nelson Espe-

land, “Accounting for Rationality: Double-Entry Bookkeeping and the Rhetoric of Economic Rational- ity,” American Journal of Sociology 97, no. 1 (1991): 30–67; Mary Poovey, A History of the Modern Fact: Problems of Knowledge in the Sciences of Wealth and Society (Chicago: University of Chicago Press, 1998), 31.

13. Ingrid D. Rowland, The Culture of the High Renaissance: Ancients and Moderns in Sixteenth- Century Rome (Cambridge: Cambridge University Press, 1998), 73–80.

14. Domenico Manzoni, Quaderno doppio col suo giornale [Double entry books and their journal] (Venice: Comin de Tridino, 1540); Raymond de Roover, “Aux origines d’une technique intellectuelle: La formation et l’expansion de la comptabilité à

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partie double,” Annales d’histoire économique et so- ciale 9, no. 44 (1937): 279–280; M. F. Bywater and B. S. Yamey, Historic Accounting Literature: A Com- panion Guide (London: Scolar Press, 1982), 41; Basil S. Yamey, “Fifteenth and Sixteenth Century Manuscripts on the Art of Bookkeeping,” Journal of Accounting Research 5, no. 1 (1967): 53; Bywater and Yamey, Historic Accounting Literature, 42.

15. Brown, A History of Accounting and Account- ants, 120.

16. Baldesar Castiglione, The Book of the Courtier, trans. and ed. George Bull (London: Pen- guin Books, 1976), 10.

17. Ibid., 39. 18. Peter Burke, The Fortunes of the Courtier:

The European Reception of Castiglione’s Cortegiano (Cambridge: Polity Press, 1995), 39.

19. Paolo Quattrone, “Accounting for God: Ac- counting and Accountability Practices in the Society of Jesus (Italy, XVI–XVII Centuries),” Accounting Organizations and Society 29, no. 7 (2004): 664.

20. Philippe Desan, L’imaginaire économiqe de la Renaissance (Paris: Presses Université de Paris-Sor- bonne, 2002), 85.

21. Yamey, Art and Accounting, 45. 22. Ibid., 47. 23. Ibid., 53.

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24. A. W. Lovett, “Juan de Ovando and the Coun- cil of Finance (1573–1575),” Historical Journal 15, no. 1 (1972): 1–2.

25. Rafael Donoso-Anes, Una Contribución a la Historia de la Contabilidad. Análisis de las Práticas Contables Desarrolladas por la Tesorería de la Casa de la Contratación de la Indias en Sevilla, 1503–1717 (Seville: Universidad de Sevilla, 1996), 122.

26. Rafael Donoso Anes, “The Casa de la Con- tratación de Indias and the Application of the Double Entry Bookkeeping to the Sale of Precious Metals in Spain 1557–83,” Accounting, Business and Financial History 4, no. 1 (1994): 84; Rafael Donoso Anes, “Accounting for the Estates of Deceased Travellers: An Example of Early Spanish Double-Entry Book- keeping,” Accounting History 7, no. 1 (2002): 80–81.

27. Donoso Anes, “Accounting for the Estates of Deceased Travellers,” 84.

28. Donoso Anes, Una Contribución a la Historia de la Contabilidad, 122. See the reproduction of the Reales Ordenancas y Pragmáticas 1527–1567 (Val- laolid: Editorial Lex Nova, 1987), 176–177.

29. Ramon Carande, Carlos V y sus banqueros. Los caminos del oro y de la plata (Deuda exterior y tesoros ultramarinos) (Madrid: Sociedad de Estudios y Publicaciones, 1967), 15f.

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30. Geoffrey Parker, The Grand Strategy of Philip II (New Haven, CT: Yale University Press, 1998), 21, 50; José Luis Rodríguez de Diego and Francisco Javi- er Alvarez Pinedo, Los Archivos de Simancas (Mad- rid: Lunwerg Editores, 1993); José Luis Rodríguez de Diego, ed., Instrucción para el gobierno del archivo de Simancas (año 1588) (Madrid: Dirección General de Bellas Artes y Archivos, 1989); José Luis Rodríguez de Diego, “La formación del Archivo de Simancas en el siglo xvi. Función y orden interno,” in El libro antiguo español IV, ed. López Vidriero and Cátedra (Salamanca: Ediciones Universidad de Sala- manca, 1998), 519–557; David C. Goodman, Power and Penury: Government, Technology and Science in Philip II’s Spain (Cambridge: Cambridge University Press, 1988), chap. 4.

31. Quotation from Stafford Poole, Juan de Ovando: Governing the Spanish Empire in the Reign of Philip II (Norman: University of Oklahoma Press, 2004), 162.

32. A. W. Lovett, “The Castillian Bankruptcy of 1575,” Historical Journal 23, no. 4 (1980): 900.

33. Lovett, “Juan de Ovando and the Council of Finance (1573–1575),” 4, 7.

34. Ibid., 9–11. 35. Ibid., 12; Antonio Calabria, The Cost of Em-

pire: The Finances of the Kingdom of Naples in the

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Time of the Spanish Rule (Cambridge: Cambridge University Press, 1991), 44–45.

36. Lovett, “Juan de Ovando and the Council of Finance (1573–1575),” 12, 19.

37. Ibid., 15. 38. Ibid., 17. 39. Ibid., 19. 40. Ibid. 41. Marie-Laure Legay, ed., Dictionnaire his-

torique de la comptabilité publique 1500–1850 (Rennes: Presses Universitaires de Rennes, 2010), 394–396.

42. Esteban Hernández-Esteve, “The Life of Bar- tolomé Salvador de Solórzano: Some Further Evid- ence,” Accounting Historians Journal 1 (1989): 92.

43. Ibid.; Legay, Dictionnaire historique de la comptabilité publique 1500–1850, 395.

44. Esteban Hernández-Esteve, “Pedro Luis de Torregrosa, primer contador del libro de Caxa de Felipe II: Introducción de la contabilidad por partida doble en la Real Hacienda de Castilla (1592),” Rev- ista de Historia Económica 3, no. 2 (1985): 237.

45. Quotation from Jack Lynch, The Hispanic World in Crisis and Change, 1598–1700 (Oxford: Oxford University Press, 1992), 18; Miguel de Cer- vantes Saavedra, The History of don Quixote de la Mancha, trans. anon. (London: James Burns, 1847), 137.

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Chapter 5 1. Fernand Braudel, Civilisation materielle,

économie et capitalisme XVe–XVIIIe siècle (Paris: Armand Colin, 1979), 2:41; Jacob Soll, “Accounting for Government: Holland and the Rise of Political Economy in Seventeenth Century Europe,” Journal of Interdisciplinary History 40, no. 2 (2009): 215–238.

2. Wantje Fritschy, “Three Centuries of Urban and Provincial Public Debt: Amsterdam and Hol- land,” in Urban Public Debts: Urban Government and the Market for Annuities in Western Europe (14th–18th Centuries), ed. M. Boone, K. Davids and P. Janssens (Turnhout, Belgium: Brepols, 2003), 75; James D. Tracy, A Financial Revolution in the Habs- burg Netherlands: Renten and Renteniers in the County of Holland, 1515–1565 (Berkeley: University of California Press, 1985), 221.

3. Provincial tax collectors paid bond interest (4 percent) at the moment taxes were collected, and the central state never taxed these returns above 1 per- cent. Wantje Fritschy, “The Efficiency of Taxation in Holland,” in The Political Economy of the Dutch Re- public, ed. Oscar Gelderblom (London: Ashgate, 2009), 56, 88; Wantje Fritschy, “ ‘A Financial Re- volution’ Reconsidered: Public Finance in Holland During the Dutch Revolt 1568–1648,” Economic His- tory Review 56, no. 1 (2003): 78.

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4. Quotation from Henry Kamen, Philip of Spain (New Haven, CT: Yale University Press, 1997), 267.

5. Woodruff D. Smith, “The Function of Com- mercial Centers in the Modernization of European Capitalism: Amsterdam as an Information Exchange in the Seventeenth Century,” Journal of Economic History 44, no. 4 (1984): 986.

6. Poem quotation from Robert Colinson, Idea ra- tionaria, or the Perfect Accomptant (Edinburgh: David Lindsay, 1683), in B. S. Yamey, “Scientific Bookkeeping and the Rise of Capitalism,” Economic History Review 1, no. 2–3 (1949): 102; Lodewijk J. Wagenaar, “Les mécanismes de la prospérité,” in Am- sterdam XVIIe siècle. Marchands et philosophes: les bénéfices de la tolerance, ed. Henri Méchoulan (Paris: Editions Autrement, 1993), 59–81; Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Amherst, NY: Prometheus Books, 1991), 4: chap. 3, part 1; Jan de Vries and Ad van der Woude, The First Modern Economy: Success, Fail- ure, and Perseverance of the Dutch Economy, 1500–1815 (Cambridge: Cambridge University Press, 1997), 129–131.

7. Caspar Barlaeus, Marie de Medicis entrant dans l’Amsterdam; ou Histoire de la reception faicte à la Reyne Mère du Roy très-Chrestien, par les Bourgmaistres et Bourgeoisie de la Ville d’Amsterdam (Amsterdam: Jean & Corneille Blaeu,

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1638), 57; Simon Schama, The Embarrassment of Riches: An Interpretation of Dutch Culture in the Golden Age, 2nd ed. (New York: Vintage, 1997), 301; Clé Lesger, The Rise of the Amsterdam Market and Information Exchange: Merchants, Commercial Expansion and Change in the Spatial Economy of the Low Countries c. 1550–1630, trans. J. C. Grayson (London: Ashgate, 2006), 183–214.

8. Michel Morineau, “Or brésilien et gazettes hol- landaises,” Revue d’Histoire Moderne et Contempo- raine 25, no. 1 (1978): 3–30; Jan de Vries, “The Eco- nomic Crisis of the Seventeenth Century After Fifty Years,” Journal of Interdisciplinary History 40, no. 2 (2009): 151–194.

9. Oscar Gelderblom, “The Governance of Early Modern Trade: The Case of Hans Thijs, 1556–1611,” Enterprise and Society 4, no. 4 (2003): 606–639; Harold John Cook, Matters of Exchange: Commerce, Medicine, and Science in the Dutch Golden Age (New Haven, CT: Yale University Press, 2007), 20–21; Peter Burke, A Social History of Knowledge from Gutenberg to Diderot (Cambridge: Polity Press, 2000), 164.

10. Karel Davids, “The Bookkeepers Tale: Learn- ing Merchant Skills in the Northern Netherlands in the Sixteenth Century,” in Education and Learning in the Netherlands 1400–1600. Essays in Honour of Hilde de Ridder-Symeons, ed. Koen Goodriaan, Jaap

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van Moolenbroek, and Ad Tervoort (Leiden: Brill, 2004), 235–241.

11. Raymond de Roover, “Aux origins d’une technique intellectuelle. La formation et l’expansion de la comptabilité à partie double,” Annales d’histoire économique et sociale 9, no. 45 (1937): 285; M. F. Bywater and B. S. Yamey, Historic Accounting Liter- ature: A Companion Guide (London: Scolar Press, 1982), 46; Yamey, “Bookkeeping and the Rise of Capitalism,” 106.

12. Yamey, “Bookkeeping and the Rise of Capit- alism,” 237; Bywater and Yamey, Historic Account- ing Literature, 54–55, 80.

13. Quotation from Yamey, Art and Accounting, 115. It appears that this image derives from a corres- ponding hieroglyphic in Francesco Colonna’s Hypn- erotomachia Poliphili (Venice: Aldus Manutius, 1499).

14. O. ten Have, “Simon Stevin of Bruges,” in Studies in the History of Accounting, ed. A. C. Littleton and B. S. Yamey (New York: Arno Press, 1978), 236; J. T. Devreese and G. Vanden Berghe, “Magic Is No Magic,” the Wonderful World of Simon Stevin (Boston: Southampton, 2008), 201–212.

15. Bywater and Yamey, Historic Accounting Lit- erature, 87.

16. Ibid., 16, 120; Ten Have, “Simon Stevin of Bruges,” 242, 244; Geijsbeek, Ancient Double-Entry

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Bookkeeping, 114; Kees Zandvliet, Maurits Prins van Oranje [Exhibition catalogue Rijksmuseum] (Amster- dam: Rijksmuseum Amsterdam/Waanders Uitgevers Zwolle, 2000), 276–277.

17. Quotations from Barlaeus, Marie de Medicis entrant dans l’Amsterdam, 16, 59–63.

18. J. Matthijs de Jongh, “Shareholder Activism at the Dutch East India Company in 1622: Redde Rationem Villicationis Tuae! Give an Account of Your Stewardship!” (paper presented at the Confer- ence on the Origins and History of Shareholder Ad- vocacy, Yale School of Management, Millstein Center for Corporate Governance and Performance, November 6–7, 2009), 1–56; A Translation of the Charter of the Dutch East India Company (Verenigde Oostindische Compagnie, or VOC), trans. Peter Reynders (Canberra: Map Division of the Australasi- an Hydrographic Society, 2009).

19. A Translation of the Charter of the Dutch East India Company, 3.

20. Jeffrey Robertson and Warwick Funnell, “The Dutch East India Company and Accounting for Social Capital at the Dawn of Modern Capitalism 1602–1623,” Accounting Organizations and Society 37, no. 5 (2012): 342–360.

21. Schama, The Embarrassment of Riches, 338–339; De Jongh, “Shareholder Activism at the Dutch East India Company in 1622,” 16.

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22. Kristof Glamann, Dutch Asiatic Trade 1620–1740 (The Hague: Martinus Nijhof, 1981), 245.

23. De Jongh, “Shareholder Activism at the Dutch East India Company in 1622,” 22.

24. Ibid., 22–23, 31. 25. Glamann, Dutch Asiatic Trade 1620–1740,

252. 26. Ibid., 253–254. 27. Quotations from ibid., 253–256. 28. Ibid., 257–261. 29. Pieter de la Court and Jan de Witt, The True

Interest and Political Maxims of the Republic of Hol- land (London: John Campbell, 1746), 4–6, 49–50. On new attitudes of merchant virtue, see J. G. A. Pocock, The Machiavellian Moment: Florentine Political Thought and the Atlantic Republican Tradition (Prin- ceton, NJ: Princeton University Press, 1975), 478.

30. Antonin Lefèvre Pontalis, Vingt années de république parlementaire au dix-septième siècle. Jan de Witt, Grand Pensionnaire de Hollande (Paris: E. Plon, Nourrit & Cie, 1884), 1:313–318; Herbert H. Rowen, John de Witt, Grand Pensionary of Holland 1625–1672 (Princeton, NJ: Princeton University Press, 1978), 391–398, esp. 393.

31. Pontalis, Jan de Witt, 1:88–89; Jan de Witt, Elementa curvarum linearum liber primus, trans. and ed. Albert W. Grootendorst and Miente Bakker (New York: Springer Verlag, 2000), 1.

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Chapter 6 1. Louis XIV, Mémoires for the Instruction of the

Dauphin, trans. and ed. Paul Sonnino (New York: Free Press, 1970), 64.

2. Jacob Soll, The Information Master: Jean-Bap- tiste Colbert’s Secret State Information System (Ann Arbor: University of Michigan Press, 2009), 3–15; Daniel Dessert, Colbert ou le serpent venimeux (Paris: Éditions Complexe, 2000), 44. For biograph- ies of Colbert, see Inès Murat, Colbert, trans. Robert Francis Cook and Jeannie Van Asselt (Charlottesville: University Press of Virginia, 1984); and Jean Meyer, Colbert (Paris: Hachette, 1981). For the finest work on Colbert’s government, see Daniel Dessert and Jean-Louis Journet, “Le lobby Colbert: un Royaume, ou une affaire de famille?” Annales. Histoire, Sciences sociales 30, no. 6 (1975): 1303–1336; Colbert 1619–1683 (Paris: Ministère de la Culture, 1983); Douglas Clark Baxter, Servants of the Sword: French Intendants of the Army 1630–1670 (Urbana: University of Illinois Press, 1976).

3. Dessert, Colbert ou le serpent venimeux, 43. 4. François de Dainville, L’éducation des jésuites

XVI–XVIII siècles, ed. Marie-Madeleine Compère (Paris: Éditions de Minuit, 1978), 315–322.

5. Dessert, Colbert ou le serpent venimeux, 44–45.

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6. Pierre Jeannin, Merchants of the Sixteenth Cen- tury, trans. Paul Fittingoff (New York: Harper and Row, 1972), 91–103.

7. Colbert to Le Tellier, June 23, 1650, in Jean- Baptiste Colbert, Lettres, instructions et mémoires, ed. Pierre Clement (Paris: Imprimerie Impériale, 1865), 1:14; David Parrott, Richelieu’s Army: War, Government and Society in France 1624–1642 (Cam- bridge: Cambridge University Press, 2001), 370–375; Murat, Colbert, 8.

8. Jean Villain, Mazarin, homme d’argent (Paris: Club du Livre d’Histoire, 1956); Gabriel-Jules, comte de Cosnac, Mazarin et Colbert (Paris: Plon, 1892), vol. 1; Murat, Colbert, 22–25.

9. Quotations are from Colbert to Mazarin, September 31, 1651, in Colbert, Lettres, 1:132–141 at 132; and Colbert to Mazarin, September 14, 1652, in Cosnac, Mazarin et Colbert, 1:324. On Mazarin’s fin- ances, see Dessert, Colbert ou le serpent venimeux, 52; J. A Bergin, “Cardinal Mazarin and His Bene- fices,” French History 1, no. 1 (1987): 3–26.

10. Colbert to Mazarin, September 14, 1652, in Cosnac, Mazarin et Colbert, 1:324; Daniel Dessert, Argent, pouvoir, et société au Grand Siècle (Paris: Fayard, 1984), 294.

11. Mazarin to Colbert, July 27, 1654, in Cosnac, Mazarin et Colbert, 1:324.

12. Smith, Wealth of Nations, 446.

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13. Marie de Rabutin-Chantal de Sévigné, Lettres, ed. M. Suard (Paris: Firmin Didot, 1846), 59.

14. Ibid., 63. 15. Dessert, Argent, pouvoir et société au grand

Siècle, 210–237, 300; Murat, Colbert, 61–63; Jean- Baptiste Colbert, “Arrestation de Fouquet; Mésures préparatoires,” 1661, in Colbert, Lettres, 2:cxcvi.

16. Pierre-Adolphe Chéruel, ed., Mémoires sur la vie publique et privée de Fouquet, Surintendant des finances. D’après ses lettres et des pièces inédites conservées à la Bibliothèque Impériale (Paris: Char- pentier Éditeur, 1862), 1:489.

17. Dessert, Colbert ou le serpent venimeux, 34; Colbert, Lettres, 7:cxcvi.

18. Colbert, “Mémoires sur les affaires de fin- ances de France pour servir à l’histoire,” 1663, in Colbert, Lettres, 2:1, section 2, 17–68. See Dessert’s analysis of this text in his Colbert ou le serpent venimeux, 17–37.

19. Colbert, “Mémoires sur les affaires de fin- ances de France pour servir à l’histoire,” 19–20, 30–32, 50–51.

20. Ibid., 40–45. 21. Ibid., 44–45. 22. Quotations from Louis XIV, Instructions of

the Dauphin, 29; Louis to Ann of Austria, 1661, cited by Murat, Colbert, 69; Colbert, Lettres, 2:1, ccxxvi–cclvii; Louis XIV, marginal notes on letter,

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May 24, 1670, Colbert to Louis XIV, May 22, 1670, ccxxviii; Colbert to Louis XIV, May 24, 1673, with Louis’s undated marginal responses in parentheses, ccxxxii. Also see Richard Bonney, “Vindication of the Fronde? The Cost of Louis XIV’s Versailles Building Programme,” French History 21, no. 2 (2006): 212.

23. For Colbert’s administrative folios, see Charles de La Roncière and Paul M. Bondois, Cata- logue des Manuscrits de la Collection des Mélanges Colbert (Paris: Éditions Ernest Leroux, 1920), 1–100.

24. Colbert, “Mémoire pour l’instruction du Dauphin,” manuscript in Colbert’s hand, 1665, in Colbert, Lettres, 2:1, ccvx and ccxvii.

25. Colbert, Lettres, Colbert to Louis XIV, “Au Roi. Pour le Conseil Royal,” 2:1, cci.

26. Bnf Ms. Fr. 6769-91. The figures from the notebook for the year 1680 are reproduced in the Lettres, 2:2, 771–782; “Receuil de Finances de Col- bert,” Bnf. Ms. Fr. 7753. On the history of the per- sonal agenda and notebook, see Peter Stallybrass, Ro- ger Chartier, J. Franklin Mowrey, and Heather Wolfe, “Hamlet’s Tables and the Technologies of Writing in Renaissance England,” Shakespeare Quarterly 55, no. 4 (2004): 379–419.

27. Jean-Baptiste Colbert, “Abrégé des finances 1665,” Bnf. Ms. Fr. 6771, fols. 4-verso–7-recto; “Abrégé des finances 1671,” Bnf. Ms. Fr. 6777, final

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“table.” Colbert, Lettres, 2:2, 771–783 contains all the figures from the agenda of 1680, yet with no men- tion of their remarkable decoration.

28. Clément, in Colbert, Lettres, 7:xxxviii. 29. Claude Le Pelletier, “Mémoire présenté au

Roi par M. Le Pelletier, après avoir quitté les fin- ances, par lequel il rend compte de son administra- tion,” June 1691, in Arthur André Gabriel Michel de Boislisle and Pierre de Brotonne, eds., Correspond- ance des Contrôleurs Généraux des Finances (Paris: Imprimérie Nationale, 1874), 1:544; Lionel Rothkrug, Opposition to Louis XIV: The Political and Social Origins of the French Enlightenment (Princeton, NJ: Princeton University Press, 1965), 212–213.

Chapter 7 1. J. E. D. Binney, British Public Finance and Ad-

ministration 1774–92 (Oxford: Oxford University Press, 1958), 5.

2. Quotations from Paul Seaward, “Parliament and the Idea of Political Accountability in Early Modern Britain,” in Realities of Representation: State Building in Early Modern Europe and European America, ed. Maija Jansson (New York: Palgrave Macmillan, 2007), 55–56.

3. Samuel Pepys, Diary, Thuirs 21 December 1665; Sunday 4 March 1665/6; and Friday 2 March

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1665/6. The Diary of Samuel Pepys Online: www.pepysdiary.com.

4. Henry Roseveare, The Treasury, 1660–1870: The Foundations of Control (London: Allen and Un- win, 1973), 1, 21–28.

5. William Peter Deringer, “Calculated Values: The Politics and Epistemology of Economic Numbers in Britain, 1688–1738” (PhD diss., Princeton University, 2012), 79; Raymond Astbury, “The Rene- wal of the Licensing Act in 1693 and Its Lapse in 1695,” The Library 5, no. 4 (1978): 311; Charles Davenant, Discourses on the Publick Revenues (Lon- don: James Knapton, 1698), 1:266, 14–15.

6. The Mercator 36, August 13–15, 1713, quoted in Deringer, “Calculated Values,” 222.

7. Angus Vine, “Francis Bacon’s Composition Books,” Transactions of the Cambridge Bibliograph- ical Society 14, no. 1 (2008): 1–31; Margaret C. Ja- cob, Scientific Culture and the Making of the Indus- trial West (Oxford: Oxford University Press, 1997), 29–33; Thomas Hobbes, Leviathan, ed. Richard Tuck (Cambridge: Cambridge University Press, 1996), chap. 4, p. 29; chap 5., p. 31.

8. William Coxe, Memoirs of the Life and Admin- istration of Sir Robert Walpole (London: Longman, Hurst, Reese, Orme and Brown, 1816), 1:2.

9. Robert Walpole, A State of the Five and Thirty Millions Mention’d in the Report of a Committee of

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the House of Commons (London: E. Baldwin, 1712), 2.

10. Ibid., 4–5; Hubert Hall, “The Sources for the History of Sir Robert Walpole’s Financial Adminis- tration,” Transactions of the Royal Historical Society 4, no. 1 (1910): 34.

11. John Brewer, The Sinews of Power: War, Money and the English State 1688–1783 (New York: Alfred A. Knopf, 1989), 116–117.

12. Jeremy Black, Robert Walpole and the Nature of Politics in Early Eighteenth Century England (New York: St. Martin’s Press, 1990), 27.

13. Norris Arthur Brisco, The Economic Policy of Robert Walpole (New York: Columbia University Press, 1907), 43–45; Richard Dale, The First Crash: Lessons from the South Sea Bubble (Princeton, NJ: Princeton University Press, 2004), 74.

14. Dale, The First Crash, 130. For an alternative view on French industrial growth in the eighteenth century, see Jeff Horn, The Path Not Taken: French Industrialization in the Age of Revolution (Cambridge, MA: MIT Press, 2008).

15. Dale, The First Crash, 82. Deringer, “Calcu- lated Values,” 39–47.

16. Quotations from Deringer, “Calculated Val- ues,” 85–88; Archibald Hutcheson, A Collection of Calculations and Remarks Relating to the South Sea Scheme & Stock, Which have been already Published

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with an Addition of Some Others, which have not been made Publick ‘till Now (London, 1720).

17. Deringer, “Calculated Values,” 84. 18. J. H. Plumb, Sir Robert Walpole: The Making

of a Statesman (Boston: Houghton Mifflin, 1956), 1:306–319.

19. Ibid., 1:302. 20. Deringer, “Calculated Values,” 145; Quota-

tions from John Trenchard, An Examination and Ex- planation of the South Sea Company’s Scheme for Taking in the Publick Debts. Shewing, That it is Not Encouraging to Those Who Shall Become Proprietors of the Company, at Any Advanced Price. And That it is Against the Interest of Those Proprietors Who Shall Remain with Their Stock Till They are Paid Off by the Government, That the Company Should Make Annually Great Dividend Than Their Profits Will Warrant. With Some National Considerations and Useful Observations (London, 1720), 8, 16–17, 25–26.

21. Edward Pearce, The Great Man: Sir Robert Walpole: Scoundrel, Genius and Britain’s First Prime Minister (London: Jonathan Cape, 2007), 427.

22. Quotations from Helen Paul, “Limiting the Witch-Hunt: Recovering from the South Sea Bubble,” Past, Present and Policy Conference 3–4 (2011): 2 and John Richard Edwards, “Teaching ‘merchants accompts’ in Britain During the Early

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Modern Period,” Cardiff Business School Working Paper Series in Accounting and Finance A2009/2 (2009), 20; Deringer, “Calculated Values,” 146.

23. Paul, “Limiting the Witch-Hunt,” 7; Pearce, The Great Man, 95; John Carswell, The South Sea Bubble (Stanford, CA: Stanford University Press, 1960), 260–261.

24. Plumb, Sir Robert Walpole, 1:332. 25. Deringer, “Calculated Values,” 149; Carswell,

The South Sea Bubble, 237; Paul, “Limiting the Witch-Hunt,” 3.

26. Thomas Gordon, Cato’s Letters (Saturday, January 19, 1723), Liberty Fund, ht- tp://oll.libertyfund.org/index, IV: no. 112.

27. Brisco, The Economic Policy of Robert Wal- pole, 61; Black, Robert Walpole, 27.

28. Brisco, The Economic Policy of Robert Wal- pole, 62–65; Black, Robert Walpole, 29.

29. Samuel Johnson, London (1738), ed. Jack Lynch, http://andromeda.rutgers.edu/~jlynch/Texts/ london.html; Henry Fielding, Shamela, ed. Jack Lynch, http://andromeda.rutgers.edu/~jlynch/Texts/ shamela.html.

Chapter 8

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1. Eric Hobsbawm, Industry and Empire: The Birth of the Industrial Revolution (New York: Free Press, 1998), xi.

2. Roger North, The Gentleman Accomptant (London, 1714), i recto–v recto, 1–2; Binney, British Public Finance and Administration, 256.

3. Edwards, “Teaching ‘merchants accompts’ in Britain During the Early Modern Period,” 1, 13–17; N. A. Hans, New Trends in Education in the Eight- eenth Century (London: Routledge & Keegan Paul, 1951), 66–69, 92–93.

4. Edwards, “Teaching ‘merchants accompts’ in Britain During the Early Modern Period,” 25–27.

5. Margaret C. Jacob, “Commerce, Industry and the Laws of Newtonian Science: Weber Revisited and Revised,” Canadian Journal of History 35, no. 2 (2000): 272–292; Jan de Vries, “The Industrial Re- volution and the Industrious Revolution,” Journal of Economic History 54, no. 2 (1994): 249–270.

6. Edwards, “Teaching ‘merchants accompts’ in Britain During the Early Modern Period,” 19.

7. Quotations from Richard Bentley, Sermons Preached at Boyle’s Lecture, ed. Alexander Dyce (London: Francis Macpherson, 1838), 227–228; Mar- garet Jacob, The Newtonians and the English Revolu- tion 1689–1720 (Ithaca, NY: Cornell University Press, 1976), 160; Deborah Harkness, “Accounting for Science: How a Merchant Kept His Books in

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Elizabethan London,” in Self-Perception and Early Modern Capitalists, ed. Margaret Jacob and Cather- ine Secretan (London: Palgrave Macmillan, 2008), 214–215.

8. Matthew Kadane, The Watchful Clothier: The Life of an Eighteenth-Century Protestant Capitalist (New Haven, CT: Yale University Press, 2013), 45; Adam Smyth, Autobiography in Early Modern Bri- tain (Cambridge: Cambridge University Press, 2010), chap. 2.

9. Kadane, The Watchful Clothier, 162, 169.. 10. Wedgwood to Bentley, October 26, 1762, in

Josiah Wedgwood, Correspondence of Josiah Wedg- wood, ed. Katherine Eufemia Farrer (Cambridge: Cambridge University Press, 2010), 1:6.

11. Ibid. Quotations are in the same volume, from Wedgwood to Bentley, October 1, 1769, 1:297; Wedgwood to Bentley, September 3, 1770, 1:375; Wedgwood to John Wedgwood, June 4, 1766, 1:87; Wedgwood to his brother, John Wedgwood, March 1765, 1:39. Also see Sidney Pollard, The Genesis of Modern Management: A Study of the Industrial Re- volution in Great Britain (London: Edward Arnold, 1965), 211.

12. Yamey, Art and Accounting, 36. 13. Pollard, The Genesis of Modern Management,

210. 14. Ibid., 222–223.

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15. James Watt Papers, James Watt to his father, July 21, 1755, MS 4/11 letters to father, 1754–1774, Birmingham City Library.

16. A. E. Musson and Eric Robinson, Science and Technology in the Industrial Revolution (Manchester, UK: Manchester University Press, 1969), 210–211; Pollard, The Genesis of Modern Management, 214, 229, 231.

17. Quotation from Josiah Wedgwood to Thomas Bentley, August 2, 1770, in Wedgwood, Correspond- ence, 1:357. Also see Brian Dolan, Josiah Wedg- wood: Entrepreneur to the Enlightenment (London: Harper Perennial, 2005), 288; Nancy F. Koehn, “Josi- ah Wedgwood and the First Industrial Revolution,” in Creating Modern Capitalism: How Entrepreneurs, Companies, and Countries Triumphed in Three In- dustrial Revolutions, ed. Thomas K. McCraw (Cam- bridge, MA: Harvard University Press, 1997), 40.

18. Wedgwood to Bentley, September 27, 1769, in Wedgwood, Correspondence, 1:291; Koehn, “Josi- ah Wedgwood and the First Industrial Revolution,” 45.

19. Quoted in Neil McKendrick, “Josiah Wedg- wood and Cost Accounting in the Industrial Revolu- tion,” Economic History Review 23, no. 1 (1970): 49. Also see Wedgwood to Bentley, August 23, 1772, in Wedgwood, Correspondence, 1:477.

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20. McKendrick, “Josiah Wedgwood and Cost Accounting in the Industrial Revolution,” 50–54.

21. Ibid., 54–55. 22. Dolan, Josiah Wedgwood, 40; McKendrick,

“Josiah Wedgwood and Cost Accounting in the In- dustrial Revolution,” 58–59.

23. McKendrick, “Josiah Wedgwood and Cost Accounting in the Industrial Revolution,” 60–62.

24. T. S. Ashton, Economic Fluctuations in Eng- land, 1700–1800 (Oxford: Oxford University Press, 1959), 128; McKendrick, “Josiah Wedgwood and Cost Accounting in the Industrial Revolution,” 64.

25. Dolan, Josiah Wedgwood, 52. 26. Carl B. Cone, “Richard Price and Pitt’s Sink-

ing Fund of 1786,” Economic History Review 4, no. 2 (1951): 243; Peter Dickson, The Financial Revolution in England: A Study in the Development of Public Credit 1688–1756 (New York: St. Martin’s Press, 1967).

27. Binney, British Public Finance and Adminis- tration, 254, 207–208, 254.

28. Ibid., 254. 29. Ibid. 30. In Wedgwood, Correspondence, Wedgwood

to Bentley, June 1, 1780, 2:466; Wedgwood to Bent- ley, June 10, 1780, 2:469; Wedgwood to Bentley, June 5, 1780, 2:468; Josiah Wedgwood Jr. to

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Wedgwood, July 5, 1790, 3:149; Josiah Wedgwood Jr. to Wedgwood, July 28, 1789, 3:95.

31. Wedgwood to Priestley, November 30, 1791, in Wedgwood, Correspondence, 3:178.

32. Dolan, Josiah Wedgwood, 368. 33. Ibid., 380. 34. Adam Smith, Wealth of Nations, 3:3, 2; 4:5,

34. 35. Jeremy Bentham, An Introduction to the Prin-

ciples of Morals and Legislation (1789), 1–13.

Chapter 9 1. On France’s role as the center of Enlighten-

ment and financial debate, see Robert Darnton, “Trends in Radical Propaganda on the Eve of the French Revolution (1782–1788)” (DPhil diss., Ox- ford University, 1964), 196–232; John Shovlin, The Political Economy of Virtue: Luxury, Patriotism, and the Origins of the French Revolution (Ithaca, NY: Cornell University Press, 2006), 148.

2. Marc Nikitin, “The Birth of a Modern Public Sector Accounting System in France and Britain and the Influence of Count Mollien,” Accounting History 6, no. 1 (2001): 75–101; Yannick Lemarchand, “Ac- counting, the State and Democracy: A Long-Term Perspective on the French Experiment, 1716–1967,” LEMNA WP 2010 43 (2010): 1–26; Seaward,

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“Parliament and the Idea of Political Accountability in Early Modern Britain,” 59. In English, this clearly meant both financial and political accountability. In Romance languages, accountability is still translated as “responsibility.” Also see “Accountability” in the OED. On English public accounting, see William F. Willoughby, Westel W. Willoughby, and Samuel McCune Lindsay, The System of Financial Adminis- tration of Great Britain: A Report (New York: D. Ap- pleton, 1917); P. G. M. Dickson, The Financial Re- volution in England, 81; John Torrance, “Social Class and Bureaucratic Innovation: The Commissioners for Examining the Public Accounts 1780–1787,” Past and Present 78 (1978): 65; Henry Roseveare, The Treasury, 1660–1870, 1.

3. Yannick Lemarchand, “Introducing Double- Entry Bookkeeping in Public Finance,” Accounting, Business, and Financial History 9 (1999): 228–229. For the posters, see “Modelles des Registres Journaux que le Roy, en son Conseil, Veut et ordonne estre tenus par les Receveurs Généraux des Finances, Cais- sier de leur Caisse commune, Commis aux Recettes générales, Receveurs des Tailles, Et autres Receveurs des Impositions ( . . . ). Execution de l’Edit du mois du juin 1716. des Déclarations des 10 Juin 1716. 4 Octobre & 7 Décembre 1723. Et de l’Arrest du Con- seil du 15 Mars 1724 portant Réglement pour la tenuë desdits Registres-Journaux (1724).”

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4. Yannick Lemarchand, “Comptabilité, discip- line, et finances publiques: Un expérience d’introduc- tion de la partie double sous la Régence,” Politiques et Management Public 18, no. 2 (2000): 93–118.

5. Claude Pâris La Montagne, “Traitté des Ad- ministrations des Recettes et des Dépenses du Roy- aume,” (1733) AN 1005, II: 3–8, 48–49, 55, 66, 336. It is not clear if this treatise was earlier than the 1733 date on the manuscript. On the Pâris brothers’ ac- counting reforms of the 1720s, see Declaration du Roy concernant la tenue des Registres Journaux (Versailles: October 4, 1723), 1, which codified in law the practice that all “Accountants, Treasurers, Receivers, Cashiers, Accountant’s Apprentices in our Finances, Tax Farms and depositories of public funds” would have to follow a strict law of daily double-entry accounting by keeping a “Daily Register.”

6. Pâris La Montagne, “Traitté des Administra- tions des Recettes et des Dépenses du Royaume,” 128.

7. Jean-Claude Perrot, Une histoire intellectuelle de l’économie politique XVIIe–XVIIIe siècle (Paris: Éditions de l’EHESS, 1992), 162; Sophus Reinert, Translating Empire: Emulation and the Origins of Political Economy (Cambridge, MA: Harvard University Press, 2011), 177; Steven L. Kaplan, Bread, Politics, and Political Economy in the Reign

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of Louis XIV (The Hague: Martinus Nijhof, 1976), 2:660–675.

8. David Hume, “Of Public Credit,” in Essays, Moral, Political and Literary, 2:ix, 2, and 2:x, 28; J. G. A. Pocock, The Machiavellian Moment, 496–497; Istvan Hont, “The Rhapsody of Public Debt: David Hume and Voluntary State Bankruptcy,” in Jealousy of Trade: International Competition and the Nation- State in Historical Perspective, ed. Istvan Hont (Cambridge, MA: Belknap Press of Harvard Press, 2005), 326; Eugene Nelson White, “The French Re- volution and the Politics of Government Finance, 1770–1815,” Journal of Economic History 55, no. 2 (1995): 229; Michael Sonenscher, Before the Deluge: Public Debt, Inequality, and the Intellectual Origins of the French Revolution (Princeton, NJ: Princeton University Press, 2007), 1–3; Dan Edelstein, The Ter- ror of Natural Right: Republicanism, the State of Nature and the French Revolution (Chicago: University of Chicago Press, 2009), 102; Edmund Burke, Reflections on the French Revolution, in Readings in Western Civilization: The Old Regime and the French Revolution, ed. Keith Michael Baker (Chicago: University of Chicago Press, 1987), 432.

9. White, “The French Revolution and the Politics of Government Finance,” 230–231; Léonard Burnand, Les Pamphlets contre Necker. Médias et imginaire politique au XVIIIe siècle (Paris: Éditions

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Classiques Garnier, 2009), 81; René Stourm, Les fin- ances de l’Ancien Régime et de la Révolution. Ori- gins du système actuel (first printing 1885; New York: Burt Franklin, 1968), 2:188.

10. J. F. Bosher, French Finances 1770–1795: From Business to Bureaucracy (Cambridge: Cam- bridge University Press, 1970), 23–25; Joël Félix, Finances et politiques au siècle des Lumières. Le ministère L’Averdy, 1763–1768 (Paris: Comité pour l’Histoire Économique et Financière de la France, 1999), 144–145.

11. Jean Egret, Necker, ministre de Louis XVI 1776–1790 (Paris: Honoré Champion, 1975), 123, 170; Michel Antoine, Le coeur de l’État (Paris: Fa- yard, 2003), 506–519; Burnand, Les pamphlets, 80–81; Jean Egret, Parlement de Dauphiné et les af- faires publiques dans la deuxième moitié du XVIIIe siècle (Paris: B. Arthuad, 1942), 2:133–140; Marie- Laure Legay, “The Beginnings of Public Manage- ment: Administrative Science and Political Choices in the Eighteenth Century in France, Austria, and the Austrian Netherlands,” Journal of Modern History 81, no. 2 (2009): 280; Shovlin, The Political Economy of Virtue, 148.

12. Charles Alexandre, vicomte de Vergennes, “Lettre de M. le marquis de Caraccioli à M. d’Alem- bert,” in Collection complette de tous les ouvrages pour et contre M. Necker, avec des notes critiques,

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politiques et secretes (Utrecht, 1782), 3:63; Louis- Petit de Bachaumont et al., Mémoires secrets pour servir à l’histoire de la République des lettres en France (London: John Adamson, 1784), 15:56.

13. Egret, Necker, 61. Burnand, Les Pamphlets contre Necker, 95; Augéard was the author of a num- ber of seditious pamphlets. Bachaumont, Mémoires secrets pour servir à l’histoire de la République des lettres en France, 15:152. Quotations from “Lettre de M. Turgot à M. Necker,” in Collection Complette, 1:8.

14. “Lettre de M. Turgot à M. Necker,” in Collec- tion Complette, 1:8; Jacques-Mathieu Augéard, Mém- oires Sécrets (Paris: Plon, 1866), 136. Also see Burnand, Les Pamphlets contre Necker, 96, 108–110.

15. Michel Antoine, Le coeur de l’État, 506–519; Burnand, Les Pamphlets contre Necker, 80–81; Jacques Necker, Sur le Compte Rendu au Roi en 1781. Nouveaux éclaircissemens par M. Necker (Par- is: Hôtel de Thou, 1788), 7–8; Stourm, Les finances de l’Ancien Régime et de la Révolution, 2:194–197; Robert D. Harris, “Necker’s Compte Rendu of 1781: A Reconsideration,” Journal of Modern History 42, no. 2 (1970): 161–183; Robert Darnton, “The Mem- oirs of Lenoir, Lieutenant of Police of Paris, 1774–1785,” English Historical Review 85, no. 336 (1970): 536; Egret, Necker, 170; Jeremy Popkin, “Pamphlet Journalism at the End of the Old Regime,”

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Eighteenth-Century Studies 22, no. 3 (1989): 359. For Necker’s surplus number see Jacques Necker, Compte rendu au roi (Paris: Imprimerie du Cabinet du Roi, 1781), 3. 1 livre = 0.29 grams of pure gold; 1 livre = 20 sols, or sous; 1 sou = 12 deniers.

16. On the rise of mathematics and the social sci- ences in political culture, see Keith Michael Baker, “Politics and Social Science in Eighteenth-Century France: The ‘Société de 1789,’ ” in French Govern- ment and Society 1500–1850: Essays in Memory of Alfred Cobban, ed. J. F. Bosher (London: Athlone Press, 1973), 225.

17. Necker, Compte rendu au roi, 2–4; Munro Price, Preserving the Monarchy: The Comte de Ver- gennes 1784–1787 (Cambridge: Cambridge University Press, 1995), 55–56.

18. Necker, Compte rendu au roi, 3–5, 104. 19. Ibid., 45. 20. Ibid., 10, 116; Egret, Necker, 200. 21. Burnand, Les Pamphlets contre Necker, 96;

Jean-Claude Perrot, “Nouveautés: L’économie poli- tique et ses livres,” in L’Histoire de l’édition française, ed. Roger Chartier et Henri-Jean Martin (Paris: Fayard/Promodis, 1984), 2:322; Stourm, Les finances de l’Ancien Régime et de la Révolution, 191; Charles-Joseph Mathon de la Cour, Collection de Compte-Rendu, pièces authentiques, états et tableaux, concernant les finances de France depuis 1758

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jusqu’en 1787 (Paris: Chez Cuchet, Chez Gatteu, 1788), iii–iv.

22. Bosher, French Finances, 126; Legay, “Be- ginnings of Public Management,” 285. “In the intro- duction to the Declaration on Accounting of October 17, 1779, Necker had pointed out how the flaws in the Royal Treasury’s system of accounting made it impossible to manage government accounts. Necker noted that the Treasury had ‘incomplete information’ and that many expenditures left ‘no traces.’ In order to obtain accurate results, Necker warned, it would take ‘an immense amount of work.’ ” Text cited in Stourm, Les finances de l’Ancien Régime et de la Ré- volution, 2:189; M. A. Bailly, Histoire financière de la France depuis l’origine de la Monarchie jusqu’à la fin de 1786. Un tableau général des anciennes impos- itions et un état des recettes et des dépenses du trésor royal à la même époque (Paris: Moutardier, 1830), 1:238; Egret, Necker, 177. Quotation from Vergennes to Louis XVI, May 3, 1781, in Jean-Louis Soulavie, Mémoires historiques et politiques du règne de Louis XIV (Paris: Treuttel et Würtz, 1801), 4:149–159.

23. Renée-Caroline, marquise de Créquy, Souven- irs de 1710 à 1803 (Paris: Garnier Frères, 1873), 7:33–36.

24. “Les pourquoi, ou la réponse verte,” in Col- lection complette, 3:141.

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25. Charles Alexandre, vicomte de Calonne, Ré- ponse de M. de Calonne à l’Écrit de M. Necker; con- tenant l’Examen des comptes de la situation des Fin- ances Rendus en 1774, 1776, 1781, 1783 & 1787 avec des Observations sur les Résultats de l’Assemblée des Notables (London: T. Spilsbury, 1788), 6, 51. A copy in the Rare Books Collection at Princeton University is bound with the separate “Pièces justificative ou accessoires,” which contains numerous tables prepared by Calonne.

26. Desrosières, The Politics of Large Numbers, 31.

27. Courrier d’Avignon, April 22, 1788, 134–135. 28. François-Auguste-Marie-Alexis Mignet, His-

tory of the French Revolution, from 1789–1814 (Lon- don: George Bell and Sons, 1891), 36.

29. Seaward, “Parliament and the Idea of Political Accountability in Early Modern Britain,” 59; “Of Ac- countability,” Authentic Copy of the New Constitution of France, Adopted by the National Convention, June 23, 1793 (London: J. Debrett, 1793), 15, clauses 105–106. The OED traces the first English appear- ance of the word to 1794; Constitution of 1791: “De- tailed accounts of the expenditure of ministerial de- partments, signed and certified by the ministers or general managers, shall be rendered public by being printed at the beginning of the sessions of every legis- lature. {260}

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The same shall apply to statements of receipts from divers taxes; and from all public revenues.

The statements of such expenditures and receipts shall be differentiated according to their nature, and shall indicate the sums received and expended from year to year in each and every district.

The special expenditures of each and every de- partment relative to courts, administrative bodies, and other establishments likewise shall be rendered public (5, 3).”

30. Convention Nationale: Projet d’organisation du Bureau de Comptabilité (Paris: Par Ordre de la Convention Nationale, 1792), 25, 28, Maclure Collec- tion, 1156:1, University of Pennsylvania, Special Collections Library; Antoine Burté, “Pour L’Assemblée Nationale. Observations rapides sur les conditions d’eligibilité des Commissaires de la Comptabilité” (Paris: Imprimérie Nationale, 1792), 5–13, Maclure Collection, 735:5, University of Pennsylvania, Special Collections Library.

31. Isser Woloch, The New Régime: Transforma- tions of the French Civic Order, 1789–1820s (New York: W. W. Norton, 1994), 40; “Compte rendu par le Ministre de la Marine à l’Assemblée Nationale 31 Oct. 1791” (Paris: Imprimérie Nationale, 1791), Maclure 974:19, University of Pennsylvania, Special Collections Library.

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Chapter 10 1. Quotations from Previts and Merino, A History

of Accountancy in the United States, 15–17; Bernard Bailyn, The New England Merchants in the Seven- teenth Century (New York: Harper Torchbook, 1964), 170.

2. W. T. Baxter, “Accounting in Colonial Amer- ica,” in Studies in the History of Accounting, ed. Littleton and Yamey, 278.

3. Quotations from Previts and Merino, A History of Accountancy in the United States, 17, 21.

4. John Mair, frontispiece and page 4 of preface to Book-Keeping Methodiz’d; or A methodical treat- ise of MERCHANT-ACCOMPTS, according to the Italian Form (Edinburgh: W. Sands, A. Murray, and J. Cochran, 1765). Library Company of Philadelphia: Am 1765 Mai Dj.8705.M228 1765.

5. Baxter, “Accounting in Colonial America,” 279.

6. Ibid. 7. Max Weber, The Protestant Ethic and the Spir-

it of Capitalism, 50–67. 8. Benjamin Franklin, The Autobiography and

Other Writings on Politics, Economics and Virtue, ed. Alan Houston (Cambridge: Cambridge University Press, 2004), 34–35.

9. Benjamin Franklin, Papers of Franklin, ed. by Leonard W. Lebaree and Whitfield Bell Jr. (New

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Haven, CT: Yale University Press, 1960), 1:128; Franklin, Autobiography, 81.

10. Franklin, Papers of Benjamin Franklin, 5:165–167.

11. Ibid., 5:174–175. 12. Benjamin Franklin, DIRECTIONS to the

DEPUTY POST-MASTERS, for keeping their ACCOUNTS (Broadside, Philadelphia, 1753), Pennsylvania Historical Society, Ab [1775]–35, 61 × 48 cm; The Ledger of Doctor Benjamin Franklin, Postmaster General, 1776. A Facsimile of the Origin- al Manuscript Now on File on the Records of the Post Office Department of the United States (Washington, DC, 1865).

13. The Ledger of Doctor Benjamin Franklin, 127, 172–173.

14. Benjamin Franklin and George Simpson Eddy, “Account Book of Benjamin Franklin Kept by Him During His First Mission to England as Provin- cial Agent 1757–1762,” Pennsylvania Magazine of History and Biography 55, no. 2 (1931): 97–133; El- len R. Cohn, “The Printer at Passy,” in Benjamin Franklin in Search of a Better World, ed. Page Tal- bott (New Haven, CT: Yale University Press, 2005), 246–250.

15. Stacy Schiff, A Great Improvisation: Frank- lin, France, and the Birth of America (New York: Henry Holt, 2005), 87, 268; Franklin and Necker

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corresponded February 21, 1780, and April 10, 1781. Quotations from Benjamin Franklin, The Writings of Benjamin Franklin, ed. Albert Henry Smyth (New York: Macmillan, 1907), 8:581–583.

16. Stephanie E. Smallwood, Saltwater Slavery: A Middle Passage from Africa to American Diaspora (Cambridge, MA: Harvard University Press, 2008), 98.

17. William Peden, “Thomas Jefferson: The Man as Reflected in His Account Books” Virginia Quarterly Review 64, no. 4 (1988): 686–694; Thomas Jefferson, The Works of Thomas Jefferson, Federal Edition (New York: G. P. Putnam’s Sons, 1904–1905). II “inscription for an african slave”: 1.

18. All of Washington’s accounts are online: ht- tp://memory.loc.gov/ammem/gwhtml/gwseries5.html.

19. Previts and Merino, A History of Accountancy in the United States, 46; Jack Rakove, Revolutionar- ies: A New History of the Invention of America (New York: Houghton Mifflin Harcourt, 2010), 233.

20. Marvin Kitman, George Washington’s Ex- pense Account (New York: Grove Press, 1970), 15.

21. Facsimile of the Accounts of G. Washington with the United States, Commencing June 1775, and Ending June 1783, Comprehending a Space of 8 Years (Washington, DC: Treasury Department, 1833), 65–66.

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22. Ibid., 5–6; Kitman, George Washington’s Ex- pense Account, 127–129, 276.

23. Thomas K. McCraw, The Founders and Fin- ance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy (Cambridge, MA: Harvard University Press, 2012), 65–66.

24. Michael P. Schoderbek, “Robert Morris and Reporting for the Treasury Under the U.S. Continent- al Congress,” Accounting Historians Journal 26, no. 2 (1999): 5–7.

25. Ibid., 7–8; Charles Rappleye, Robert Morris: Financier of the American Revolution (New York: Si- mon and Schuster, 2010), 231.

26. Rappleye, Robert Morris, 234; Schoderbek, “Robert Morris and Reporting for the Treasury Under the U.S. Continental Congress,” 10–11.

27. Schoderbek, “Robert Morris and Reporting for the Treasury Under the U.S. Continental Con- gress,” 12.

28. Ibid., 16–17. 29. Robert Morris, A State of the Receipts and Ex-

penditures of Public Monies upon Warrants from the Superintendent of Finance, from the 1st of January, 1782, to the 1st of January 1783. Cited in Schoder- bek, “Robert Morris and Reporting for the Treasury Under the U.S. Continental Congress,” 18, 28.

30. Quotations from McCraw, The Founders and Finance, 16.

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31. Ibid., 17–18. 32. Ibid., 24, 54. 33. Jack Rackove, Original Meanings: Politics

and Ideas in the Making of the Constitution (New York: Vintage Books, 1997), 236.

34. Ron Chernow, Alexander Hamilton (New York: Penguin Books, 2004), 249.

35. Albert Gallatin, the Genevan one-time French tutor at Harvard and longest serving secretary of the Treasury in U.S. history wrote his own detailed Sketch of the Finances of the United States in 1796; Journal of the First Session of the Second House of Representatives of the Commonwealth of Pennsylvania (Philadelphia: Francis Bailey and Tho- mas Lang, 1791), last two pages of “Appendix”; John Nicholson, Accounts of Pennsylvania (Philadelphia: Comptroller-General’s Office, 1785), 1 of the “Advertisement.”

Chapter 11 1. Lady Holland, A Memoir of the Reverend

Sydney Smith (London: Longman, Brown, Green and Longmans, 1855) 2:215.

2. Hugh Coombs, John Edwards, and Hugh Greener, eds., Double-Entry Bookkeeping in British Central Government, 1822–1856 (London: Rout- ledge, 1997), 3–5.

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3. John Bowring, Report on the Public Accounts of the Netherlands (London: House of Commons, 1832); Nikitin, “The Birth of a Modern Public Sector Accounting System in France and Britain, 90. Quota- tions from John Bowring, Report of the Public Ac- counts of France to the Right Honorable the Lords Commissioners of His Majesty’s Treasury (London: House of Commons, 1831), 3–7.

4. Oliver Evans, “Steamboats and Steam Wagons,” Hazard’s Register of Pennsylvania 16 (July–January 1836): 12.

5. Hobsbawm, Industry and Empire, 88, 93. 6. Previts and Merino, A History of Accountancy

in the United States, 69, 110, 134; Alfred D. Chand- ler, The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA: Harvard University Press, 1977), 122.

7. Theodore M. Porter, Trust in Numbers: The Pursuit of Objectivity in Science and Public Life (Princeton, NJ: Princeton University Press, 1995), 60.

8. Ibid., 87–88. 9. Chandler, The Visible Hand, 11, 110; Vanessa

Ogle, Contesting Time: The Global Struggle for Uni- formity and Its Unintended Consequences, 1870s—1940s (Cambridge, MA: Harvard University Press, forthcoming).

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10. Chandler, The Visible Hand, 110–112; Previts and Merino, A History of Accountancy in the United States, 99.

11. Drew quotation from Previts and Merino, A History of Accountancy in the United States, 112; Mark Twain, Letter to The San Francisco Alta Cali- fornia, May 26, 1867.

12. “Reports of Cases Decided on All the Courts of Equity and Common Law in Ireland for the Year 1855,” The Irish Jurist 1 (1856): 386–387; Times of London, February 18, 1856; Dickens quotation from The Dictionary of National Biography, ed. Sydney Lee (New York: Macmillan, 1897), 50:103.

13. Brown, A History of Accounting and Account- ants, chaps. 3–4; Previts and Merino, A History of Ac- countancy in the United States, 69.

14. Brown, A History of Accounting and Account- ants, 285.

15. David Grayson Allen and Kathleen McDer- mott, Accounting for Success: A History of Price Waterhouse in America 1890–1990 (Cambridge, MA: Harvard Business School Press, 1993), 4; Previts and Merino, A History of Accountancy in the United States, 99; Porter, Trust in Numbers, 91, 103.

16. Allen and McDermott, Accounting for Suc- cess, 14, 34.

17. John Moody, How to Analyze Railroad Re- ports (New York: Analyses, 1912), 18–21; Previts

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and Merino, A History of Accountancy in the United States, 216.

18. Previts and Merino, A History of Accountancy in the United States, 157.

19. Ibid., 116–117. 20. Ibid., 98. 21. Ibid., 132; D. A. Keister, “The Public Ac-

countant,” The Book-Keeper 8, no. 6 (1896): 21–23. 22. Charles Waldo Haskins, Business Education

and Accountancy (New York: Harper & Brothers, 1904), 32, 54.

23. Charles Waldo Haskins, How to Keep House- hold Accounts: A Manual of Family Accounts (New York: Harper & Brothers, 1903), v, 13–14.

Chapter 12 1. Honoré de Balzac, L’Interdiction (Paris: Édi-

tions Garnier Frères, 1964), 37. 2. Charles Dickens, A Christmas Carol (Clayton,

DE: Prestwick House, 2010), 21. 3. Charles Dickens, Little Dorrit, ed. by Peter Pre-

ston (Ware, UK: Wordsworth Editions, 1996), 102. 4. Henry David Thoreau, Walden or Life in the

Woods (Mansfield Centre, CT: Martino, 2009), 26. 5. Ibid., 17, 28. 6. Amanda Vickerey, “His and Hers: Gender,

Consumption and Household Accounting in

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Eighteenth-Century England,” Past and Present 1, Supplement 1 (2006): 12–38.

7. Porter, Trust in Numbers, 17–30. 8. Thomas Malthus, An Essay on the Principle of

Population (New York: Oxford University Press, 1999), 61.

9. Janet Browne, “The Natural Economy of Households: Charles Darwin’s Account Books,” in Aurora Torealis: Studies in the History of Science and Ideas in the Honor Tore Frängsmyr, ed. Marco Beretta, Karl Grandin, and Svante Lindqvist (Sagamore Beach, MA: Watson, 2008), 104.

10. The questionnaire is reproduced in Francis Darwin, ed., The Life and Letters of Charles Darwin (London, 1887), 3:178–179. All citations come from it.

11. Browne, “The Natural Economy of House- holds,” 88–99.

12. Ibid., 92–94. 13. Ibid., 97; Charles Darwin, The Descent of

Man, and Selection in Relation to Sex (London: John Murray, 1871), 1:167–182.

14. Joseph Conrad, Heart of Darkness, ed. Ross C. Murfin (Boston: Bedford/St. Martin’s, 1989), 33.

15. Rosita S. Chen and Sheng-Der Pan, “Freder- ick Winslow Taylor’s Contributions to Cost Account- ing,” Accounting Historians Journal 7, no. 2 (1980): 2.

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16. Daniel J. Boorstin, The Americans: The Democratic Experience (New York: Vintage Books, 1973).

17. Cited by John Huer, Auschwitz USA (Lanham, MD: Hamilton Books, 2010), 31.

18. Alfred C. Mierzejewski, Most Valuable Asset of the Reich: A History of the German National Rail- way (Chapel Hill: University of North Carolina Press, 2000), 2:20–21.

Chapter 13 1. Allen and McDermott, Accounting for Success,

32–37. 2. Ibid., 31. 3. Ibid., 45, 61. 4. William Z. Ripley, “Stop, Look, Listen! The

Shareholder’s Right to Adequate Information,” At- lantic Monthly, January 1, 1926.

5. Allen and McDermott, Accounting for Success, 67.

6. Ibid., 64; John Kenneth Galbraith, The Great Crash of 1929 (New York: Houghton Mifflin Har- court, 2000), 64.

7. Previts and Merino, A History of Accountancy in the United States, 275.

8. Securities Act of 1933, www.sec.gov/about/ laws/sa33.pdf, section 19; Stephen A. Zeff, “The SEC

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Rules Historical Cost Accounting: 1934 to the 1970s,” Accounting and Business Research 37, suppl. 1 (2007): 1; Mike Brewster, Unaccountable: How the Accounting Profession Forfeited a Public Trust (Hoboken, NJ: John Wiley & Sons, 2003), 81.

9. Allen and McDermott, Accounting for Success, 71; Previts and Merino, A History of Accountancy in the United States, 70, 270.

10. Kees Camfferman and Stephen A. Zeff, Fin- ancial Reporting and Global Capital Markets: A His- tory of the International Accounting Standards Com- mittee 1973–2000 (Oxford: Oxford University Press, 2006), 21–24; “The Norwalk Agreement,” www.fasb.org/news/memorandum.pdf.

11. Barbara Ley Toffler, Final Accounting: Ambi- tion, Greed and the Fall of Arthur Andersen (New York: Crown, 2003), 18; Robert A. G. Monks and Nell Minow, Corporate Governance (New York: John Wiley & Sons, 2008), 563.

12. Toffler, Final Accounting, 28, 41. 13. Ibid., 14. 14. Allen and McDermott, Accounting for Suc-

cess, 171–172. 15. Ibid., 173. 16. Ibid., 175–181. 17. Philip G. Joyce, Congressional Budget Office:

Honest Numbers, Power, and Policymaking

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(Washington, DC: Georgetown University Press, 2011), 16–17.

18. Richard Cantor and Frank Packer, “Sovereign Credit Ratings,” Current Issues in Economics and Finance of the Federal Reserve Board of New York 1, no. 3 (1995): 41.

19. Allen and McDermott, Accounting for Suc- cess, 181.

20. Mark Stevens, The Big Six: The Selling Out of America’s Accounting Firms (New York: Simon and Schuster, 19991), 28.

21. Richard Melcher, “Where Are the Account- ants?” BusinessWeek, October 5, 1998.

22. Toffler, Final Accounting, 203. 23. Ibid., 138. 24. William Jefferson Clinton, “Statement on

Signing the Gramm-Leach-Bliley, Act November 12, 1999,” www.presidency.ucsb.edu/ws/?pid=56922.

25. For the SEC’s charges against Andersen in re- lation to WorldCom and Waste Management, see www.sec.gov/litigation/complaints/comp17753.htm and www.sec.gov/litigation/litreleases/lr17039.htm.

26. Toffler, Final Accounting, 217. 27. Ibid., 213. 28. Elizabeth Bumiller, “Bush Signs Bill Aimed

at Fraud in Corporations,” New York Times, July 31, 2002. Note also that in 2002, President Bush cut SEC funding by 27 percent, causing its chairman, Harvey

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Pitt, to publicly warn that “the administration’s level of financing will not allow it to undertake important initiatives”: Stephen Labaton, “Bush Tries to Shrink S.E.C. Raise Intended for Corporate Cleanup,” New York Times, October 19, 2002.

29. Adam Jones, “Auditors Criticized for Role in Financial Crisis,” Financial Times, March 30, 2011; Adam Jones, “Big Four Rivals Welcome Audit Shake-up,” Financial Times, February 2, 2013.

30. Andrew Ross Sorkin, “Realities Behind Pro- secuting Big Banks,” New York Times, March 11, 2013.

31. Matt Taibbi, “The People vs. Goldman Sachs,” Rolling Stone, May 11, 2011; “Government Accounting Book-Cooking Guide: The Public Sector Has Too Much Freedom to Dress Up the Accounts,” Economist, April 7, 2012; Peter J. Henning, “Justice Department Again Signals Interest to Pursue Finan- cial Crisis Cases,” New York Times, August 26, 2013.

Conclusion 1. Dickens, Little Dorrit, 107. 2. “Government Accounting Book-Cooking

Guide: The Public Sector Has Too Much Freedom to Dress Up the Accounts,” Economist, April 7, 2012.

3. “An Aberrant Abacus: Coming to Terms with China’s Untrustworthy Numbers,” Economist, May 1,

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2008; Timothy Irwin, “Accounting Devices and Fis- cal Illusions,” IMF Staff Discussion Note, March 28, 2012, www.imf.org/external/pubs/ft/sdn/2012/ sdn1202.pdf; Alan J. Blinder, “Financial Collapse: A Ten-Step Recovery Plan,” New York Times, January 19, 2013.

4. Jean-Baptiste Say, Traité d’économie politique ou simple exposition de la manière dont se forment, se distribuent et se composent les richesses (Paris: Crapalet, 1803).

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INDEX

Abacus schools, 10–11, 31 Academies, 118–120 Accompts for landed-men (Snell), 118 Accountability, financial and political

2008 financial crisis and, ix–xi, 206 in the ancient world, 1–6 Colbert’s statecraft and, 94–98 cultural framework and, xvi–xvii, 207–208 (see

also Cultures of accountability) Datini and, 27 in England, 101–116, 230n2 in France, 134, 141–146, 230n2 French Revolution and, 132–133, 145–146 in Genoa, 13–14 Great Depression and crisis of, 191–193 Hitler and, 187–188 in Holland, 71, 77–78, 80–82, 85 lack of outcry over, xi

Louis XIV and, ix–x, 87, 98–100 in the Middle Ages, 6–9 modern nations and, xi, 206 Necker and, 141–143 in northern Italian city republics, 9–13 professional accountants and, 172–177, 178–181 railroads and, 174–175 republican, 52 Spanish Empire and, 65 study of, xiv in the U.S., 147, 161, 164

Accountants, private professional accounting scandals and, 196–197 Big Eight firms of, 196–197, 199 Big Four firms of, x, xi, 202–203 Big Six firms of, 199, 200 business consulting and, 195–196, 198–200 dehumanizing number crunching and, 194, 205 emergence of, 172–177 golden age of, 194 views of, 172, 178–182, 185–186, 188, 190, 205

Accounting, 9, 11–12 assets in, 51, 83 balance sheets and income statements and, 171,

186, 193 balanced books and, xvi building businesses and, xi cost, 122–126, 169–170, 186–188

613/648

danger of transparency in, xiii expenses in, 125 fair value, 196–197 financial analysis and, 109 liabilities in, 83 single-entry, 2 study of, xiv two faces of modern, 166 See also Double-entry accounting/bookkeeping

Accounting, history of in the ancient world, 1–6 cycles of destruction and, xi–xiv, 205–206 in England, 7–9, 101–116, 117–131, 165–168 first accounting manual and, 48–55 in France, 87–100, 107, 133–146, 167 French Revolution and, 138–146 Great Depression and aftermath of, 191–194 in Holland, 70–86 humanist discrediting of, 55–59 industrialized life and science and, 182–186 Louis XIV, Colbert and, ix–x, 87–100 Louis XVI and, xiii, 135, 139–140, 142 in the Middle Ages, 6–9 in northern Italian city republics, xii, 9–13 railroads and, 165–177 in the Renaissance, 29–47 in the Spanish Empire, 59–69 successful capitalist societies and, xii–xvi

614/648

in the U.S., 147–164, 189–204 Accounting for Princes (Stevin), 77 Adams, John, 133 Advertising, 191–192 Affair of the Diamond Necklace, 143 Alba, Duke of, 76 Alberti, Leon Battista, 49–50 Alcott, Louisa May, 181–182 Allegory to Commerce (woodcut), 75–76 Ambrose, Saint, 21 American Association of Public Accountants, 172 American War of Independence, 127, 135, 156–158 Amman, Jost, 75 Amsterdam, 72–74, 78–79 Ancient world, 2–3 Andalusia, 59 Andersen, Arthur, 194–196 Andersen & Company, 194–196, 199–202 Anne, Queen, 103 Annuities, Dutch, 71, 86 Antony, Mark, 5 Antwerp, 70, 72 Aquinas. See Thomas Aquinas, Saint Arabic numerals, 9, 10–11 Aristotle, 3–4, 24, 31, 38–39, 183 Armada, 66 Ars mercatoria (business arts), 55, 89 Arthur Young & Company, 196, 199

615/648

Assets, 51, 83 Athens (ancient), 3–4 Audits

Colbert/Louis XIV and, 94–97, 99 colonies and, 148–149 Cosimo de Medici and, 37 difficulty of modern, 206–207 Dutch East India Company, 80–84 in England, 105, 128 financial crisis of 2008 and, 203–204 in France, 136–137 in Genoa, 13–14 in Holland, 70–86 origin of, 8–9 Pacioli’s manual and, 52 private firms and, 172–173 railroads and, 169–170 South Sea Company and, 110–113 in Spanish Empire, 63–65 in U.S., 159–161, 190, 192–204

Augéard, Jacques-Mathieu, 137–138, 140 Augustine, Saint, 24, 26–27 Augustus (emperor), 1–2, 5–6 Autobiography (Franklin), 151

Babylonia, 3 Bacon, Francis, 103–104 Bailouts. See debt bailouts

616/648

Balance sheets, 171, 186, 193 Balanced books, concept of, xvi Balzac, Honoré de, 178–179 Bank of England, 108, 111, 165 Bank of the United States (first National), 163 Banker (or Moneylender) and His Wife, The (art)

(Matsys), 58 Banking

development of, 9 Dutch, 72–73 Glass-Steagall Act and, 192, 200 Gramm-Leach-Bliley Act and, 200 laws of the church and, 20–22 Medici family and, 30, 33–34 papacy and, 16–17, 33

Bankruptcy Act of 1831 (England), 172–173 Banque Générale, 134 Baring Brothers bank, 123 Barlaeus, Caspar, 79 Basilica of San Lorenzo, 35 Bastille, 144 Bear Stearns, 202–203 Beaumarchais, Pierre-Augustin de, 154 Beeckman, Isaac, 74 Benci, Giovanni di Amerigo, 37–38 Benson, Sir Henry, 194 Bentham, Jeremy, 117, 130, 167 Bentley, Richard, 120

617/648

Bentley, Thomas, 122, 125 Bernardino of Siena, 27 Bevis, Herman, 197 Bewindhebbers, 79, 81–82 Bill of Rights of 1689 (England), 103 Black Death, 25 Blunt, John, 106 Boccaccio, Giovanni, 25 Book of Revelation (Bible), 24 Book-keeper, The, 165, 176 Book-keeping methodiz’d (Mair), 118, 150 Borgia, Cesare, 56 Boston & Worcester Railroad, 169 Botticelli, 39 Boulton, Matthew, 124 Boulton and Watt (firm), 124 Bowring, John, 167–168 Braams, Daniël, 84 British Enlightenment Protestantism, 119–122 Brodrick, Thomas, 109 Brown, Obadiah, 150 Brown University, 150 Brunelleschi, 35 Bubbles

French Mississippi scheme as, 106, 107 risky mortgages and, 202–203 South Sea Company, 107–112

Bureau of Accountability (France), 145

618/648

Burgundy, Duke of (Charles the Bold), 44–45 Bush, George W., 201, 202, 239n28 Business Education and Accountancy (Haskins), 176 Byzantium, 9–10, 12

Caligula (emperor), 6 Calonne, Vicomte de, Charles Alexandre, 142–143 Calvinists. See Puritans Capitalism

accountants as regulators of, 172–177 accounting breakdown and, xii–xiv culture

of accountability and, xvi–xvii essential tools of, 51 expansion of across continents, 169–171 successes of, xii–xvi, 9–14 work ethic and, 19, 151

Capitularies (Charlemagne), 7 Casa de la Contratación (House of Trade), 60–62, 66 Casa del Ceppo dei Poveri di Francesco di Marco,

27–28 Cash-Book and Accounting Manual for Merchants

and Other People (Solórzano), 67 Cassette (Fouquet), 93 Castiglione, Baldassare, 56–57 Catasto tax, 34–35 Catholic Church, 7

banking and, 16–17, 33

619/648

culture of accounting of, 22–28 Medici and, 33 ursury laws of, 20–22

CDOs. See Mortgage securities bundles (CDOs) Centralized accounts

in Athens, 5 England and, 165–167 France and, 99, 135, 137, 146, 167 in Genoa, 12–13 Spanish Empire and, 61, 63–68, 71 U.S. and, 160–163

Cervantes Saavedra, Miguel de, 68 Charlemagne, 7 Charles II (king), 102 Charles V (emperor), 57, 59–61 Charlotte, Queen, 122, 124–125 Chartered Public Accountants, 172, 176 Cheating, two sets of books and, 53 Child, Frederick W., 175 China, 207 Chivalry, age of, 55, 56 Christianity. See Catholic Church; Protestantism Christianity, money and, 15–28

culture of accounting of, 22–28 Datini and, 15–22, 25, 26, 27–28 laws of the church and, 20–22 Neo-Platonism and, 39–40

Christmas Carol, A (Dickens), 179

620/648

Chrysoloras, Manuel, 31–32, 38–39 Cicero, 5 Clarendon, Earl of, 101 Clews, Henry, 175 Clinton, William, 200 Colbert, Édouard François, 99 Colbert, Jean-Baptiste, ix, 88–99 Colonies, account books and, 148 Commines, Philippe de, 45 Commission of Accounts (England), 101, 128 Compte Rendu au Roi (Necker), 138–142, 147 Comte, Auguste, 182 Conferencia Interamericana de Contabilidad, 193 Congressional Budget Office (CBO), 198 Conrad, Joseph, 185–186 Consejo de Hacienda, 63 Constantine (emperor), 6 Constitutions

French revolutionary, 145, 233n29 U.S., 147, 163–164

Contaduría de Cuentas, 63 Contaduría de Hacienda, 63 Convention Nationale, 145 Coolidge, Calvin, 192 Coopers & Lybrand, 196 Copying machine, Watt and, 124 Corruption

Athenian, 4

621/648

Dutch, 82 English, 111–116, 166 French, 136 professional accountants and, 178–179, 195–200 railroads in the Gilded Age and, 168, 170–171, 176 Spanish, 68

Cost accounting Nazi Germany and, 187–188 railroads and, 169–170 scientific management and, 186–187 Wedgewood and, 122–126

Council of Finance (France), 94, 96 Council of Finance (Spain), 63–64 Council of Florence, 38 Courtier, The (Castiglione), 56–57 Covenants, 22 Creative accounting, 106–107 Credit and exchange, tools of, 17, 33 Credits and debits. See Double-entry accounting/

bookkeeping Cultures of accountability, xvi–xvii, 207–208

British Protestantism and, 119–122 Christianity and, 22–28 in colonial America, 149–155 in England, 103–104, 107–108, 112–113, 119–122 French Revolution and, 133 in Holland, 80, 207 Jesuits and, 57

622/648

Medici family and, 35–47 Neo-Platonism and discrediting of, 55–59 republican, 52–54

Da Vinci, Leonardo, 50 Dante, 21, 25, 189 D’Artagnan, Charles Ogier de Batz-Castelmore,

comte, 93 D’Artois, Charles-Philippe de France, comte, 143 Darwin, Charles, 183–185 Darwin, Emma, 184 Darwin, Erasmus, 129, 183 Darwin, Francis, 184 Darwin, William, 183–185 Datini, Francesco, 15–22, 25–28 Davenant, Charles, 103 David Copperfield (Dickens), 180 De Bonicha, Jacobus, 12 De Calonne, Vicomte, Charles Alexandre, 137 De Chabrol de Crouzol, Christophe, comte, 167 De Computis (Pacioli), 51, 54–55 De Créquy, Marquise, Renée-Caroline, 141–142 De Gournay, Vincent, 135 De la Court, Pieter, 84–85, 86 De Solórzano, Bartolomé Salvador, 67 De Witt, Cornelis, 86 De Witt, Johan, 85–86 Death and the Miser (art) (Provost), 208

623/648

Debits and credits. See Double-entry accounting/ bookkeeping

Debt American War of Independence and, 158–164 in colonial America, 148–149 current U.S., 198 in England, 103–114, 127–128, 132, 136 in France, 127, 132–146, 167 Medici bank and, 44–45 moral, 22–27 nations and, xi–xiv, 206 prison and, 180 in Spanish Empire, 60–61, 64, 68 views of, 78, 83, 135, 163

Debt bailouts 2008 financial crisis and, x–xi, 203–204 South Sea Company, Walpole and, 106–116

Decameron (Boccaccio), 25 Deffand, Marie Anne de Vichy-Chamrond, 138 Deficiencies of the Confederation, The (Hamilton),

163 Defoe, Daniel, 111, 121 Della Francesca, Piero, 49 Deloitte, x, 173, 190, 196, 199 Deloitte & Touche, 199 Deloitte Touche Tohmatsi Ltd., 202 Depreciation and appreciation

inflation and, 196

624/648

railroads and, 170, 174–175 Wedgewood and, 125

Descent of Man (Darwin), 185 Desmoulins, Camille, 144–145 Deutsche Reichsban (railway), 187 Dewey, John, 186 Di Barbari, Jacopo, 50, 55 Di Tacco, Benedetto, 20 Dickens, Charles, 171, 178, 179–181, 205–206 Dickens, John, 180 Dickinson, Arthur Lowes, 189–190 Discipline

Italian world of trade and, 17–19 Protestant work ethic and, 119–120, 152 views on, 52–54, 57, 65, 195

Discourses on the Publick Revenues (Davenant), 103 Discrezione, 21, 33 Dissenters, 119–122, 127–128 Domesday Book, 7, 130 Donatello, 39 Dordrecht Latin school, 74, 85 Double Entry Books and Their Journal (Manzoni),

54–55 Double-entry accounting/bookkeeping, xiv–xv

Colbert, Louis XIV and, 94–97 in colonial America, 150, 151, 153 Cosimo de’ Medici and, 35–37 Datini’s system and, 15–20

625/648

Dutch accounting and, 70–78 earliest forms of, 12–14 in England, 105, 118–119, 122–124 first manual of, 48–54 in France, 133–134, 167 origin of, xii–xiv, 9, 11–12 Royal African Company and, 155 Spanish Empire and, 60–61, 63–67 in U.S., 161 Weber’s theory and, 151

Dow Jones Industrials Index, 192 Drew, Daniel, 170–171 Dubois, Cardinal, 134 Dudley, Thomas, 148 Duncan, David, 201–202 Dutch audit, See Holland Dutch East India Company, 68, 70, 73, 78–84 Dutch Republic, 72–73 Dutch Revolt, 65, 66, 72 Dyckman, Johannes, 149

East India Company, 111, 114 Education and accounting

in colonial America, 149–150 Dutch, 73–75 England and, 117–120 Florence and, 31–32

Edward III (king), 9

626/648

Efficiency and speed, 186–187 England

seventeenth- to eighteenth-century bailout in, 101–116

eighteenth-century industrial power of, 117–131, 132–133

nineteenth-century accounting in, 166–168, 171–173

early accounting in, 7–9 Enron, 201–202 Equity, double-entry accounting and, 11–12, 17 Erasmus, 57 Ernst & Young, x, 173, 199, 202 Ernst and Whinney, 196, 199 Escorial, 61–62 Essay on the Principle of Population (Malthus), 182 Eugenius IV (pope), 38 European Economic Community (EEC), 194 Evans, Oliver, 168 Exchange and credit, tools of, 17, 33 Exchequer, 8

Factor General of the Kings of Spain, 61 Fair value accounting, 196–197 Far East Conference of Accountants, 194 Farolfi merchant house, 11 Federal Rules Procedure, 197 Federalist movement, 161

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Ferdinand and Isabella, 59–60 Feudalism, 7–9 Fibonacci, Leonardo, 10 Ficino, Marsilio, 39, 43–44 Fielding, Henry, 115 Financial accountability. See Accountability, finan-

cial and political Financial analysis, 109 Financial crisis of 2008, x–xi, 202–204 Fini, Rineiri and brothers firm, 11 Firms, development of multipartner, 9, 11–12, 17 Florence

commerce and, 16–17 golden age of art and, 41 Medici family and, 29–47 Renaissance and, 30–32, 35

Florins (currency), 16 Ford, Henry, 187 Fouquet, Nicolas, 92–93 France

seventeenth- to eighteenth-century accounting in, 87–100, 107

nineteenth-century accounting in, 167 Revolution and accountability in, 132–146 wealth of nobility in, 133

Francesco Sassetti and His Son Teodoro (art) (Ghir- landaio), 46

Franklin, Benjamin, 151–155, 158

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Franklin, Deborah Read, 153 Fraud

accountant liability for, 197 in the ancient world, 4, 5, 6 in Genoa, 13–14 numbers as cover for, 142, 166 professional accountants and, 178–179, 201–202 railroad balance sheets and, 171 South Sea Company and, 112 in the Spanish Empire, 60, 67

French Mississippi scheme, 106, 107 French Revolution

accountability and, 145–146 accounting background of, 132–144 outbreak of, 144–145

“French School” (Dutch), 72, 74 Fronde, 88–89, 90

GAAP, 193, 194 Galbraith, John Kenneth, 192 Gallatin, Albert, 163, 236n35 Galton, Francis, 183–185 Geithner, Timothy, x Genoa, Republic of, xii–xiii, 12–14 Gentleman Accomptant (North), 118 George I (king), 105–106, 108 George II (king), 112, 114 George III (king), 125

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Ghirlandaio, 43, 46 Gibbon, Edward, 6, 136 Glass-Steagall Act (U.S.), 192, 200 Global accounting framework, 194 Gordon, Thomas, 112–113 Gordon Riots, 127 Government

auditing of, 198, 204 current accounting disarray of, 206

Government regulation 1970s accounting scandals and, 197 1990s deregulation and, 200 financial crisis of 2008 and, 203–204 Great Depression and, 191–193 railroads and, 171–177 Sarbanes-Oxley Act and, 202

Grammar schools, 117–118 Gramm-Leach-Bliley Act (U.S.), 200 Gratian, 57 Great Depression, 191–193 Green Book, 112 Grey, Earl, 166–167 Grotius, Hugo, 77 Guzik, Jake “Greasy Thumb,” 195

Hamilton, Alexander, 156, 162–164 Hammurabi’s Code, 3 Hancock, John, 150

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Happiness, accounting and, 117, 119, 122, 130–131 Hapsburg Spanish Empire. See Spanish Empire Harley, Edmund, 105 Harley, Robert, 106 Harvard Business School, 187 Haskins, Charles Waldo, 176, 188 Haskins and Sells, 190, 196, 199 Heart of Darkness (Conrad), 185–186 Hein, Piet, 68 Henriques, Moses Cohen, 68 Heren Seventien, 79, 81–82, 84 Historical Memoirs on French Financial Affairs

(Colbert), 94 Hitler, Adolf, 187 Hobbes, Thomas, 104 Hogarth, William, 114 Holder, Eric, 204 Holland, 70–86, 132, 167

accounting education and, 73–75 Dutch East India Company and, 78–84 political stability and, 77–78 risk-taking, violence and, 76–77

water management and, 80 Holy League, 62 Holy Roman Empire, 59–61 Holyland, William Hopkins, 173 Hoover, Herbert, 187

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How to Keep Household Accounts (Haskins), 176–177

Hudde, Johannes, 82–84 Hugh of St. Cher (cardinal), 26 Humanism

accounting and, 56, 57–59 Dutch, 77 Italian, 38–39, 50

Hume, David, 135 Hutcheson, Archibald, 108–112

Impairment recognition, 196 Income statements, 186 Indulgences, 26, 33 Industrial Revolution, 117, 165–166

academies and, 119 accounting and, 122–126 pollution and, 129–130 railroads and, 168–171 scientific management and, 186–187

Inequity, 127, 131, 133 Inflation, 196 Inspiration of St. Matthew (art) (Caravaggio), 23 International Accounting Standards Board (IASB),

194, 206 International Accounting Standards Committee

(IASC), 194 Interstate Commerce Commission, 172

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Introduction to the Counting House, An (Serjeant), 150

Inventorying, 2–3 Investment banks, x, 192, 200, 202–204 Investment in stocks

Dutch East India Company and, 79–84 Great Depression and, 192–193 railroads and, 169, 174 risky mortgage bundles and, 202–203, 206 South Sea Company and, 106–112

Invisible hand, 130, 135 Irwin, Timothy, 207 Islington Academy, 119 Italian city republics. See Renaissance; Republics,

Italian

Jacombe, Robert, 110 Jacques Savary, 96–97 Jarry, Nicolas, 97 Jefferson, Thomas, 155–156 Jesuit order, 57 Jesus Christ, 23, 26 Jews, usury and, 21 Johnson, Lyndon, 198 Johnson, Samuel, 115 Joint Stock Companies Act of 1844 (England), 173 Jones, Joseph, 159 Jones, Lewis Davies, 173

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Jullien, Adolph, 169 “Just price” concept (Aquinas), 21, 62

Kantoor van de Financie van Holland, 71 Keayne, Robert, 149 Kennedy, Joseph P., 192 Kent, William, 116 Knight, Robert, 112 KPMG, x, 202

Laffitte, Jacques, 167 “Laissez faire” theory, 135, 163, 171–172 Lampe, Barent, 81 Law, John, 107, 134 Lawrence, Thomas, 123 Le Maire, Isaac, 80–81 Le Peletier, Claude, 99 Leeson, Nick, 123 Lehman Brothers Bank, x, 203 Lenin, Vladimir, 187 Leonardo da Vinci, 50 Lerma, Duke of, 68 Leviathan (Hobbes), 104 Liabilities, in accounting, 83 Liancourt, Duke de, 145 Liber abaci (Fibonacci), 10 Libro segreto, 18–19, 34, 37, 44 L’Interdiction (The Ban) (Balzac), 178–179

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Little Dorrit (Dickens), 171, 178, 180–181 Little Women (Alcott), 181–182 Locke, John, 103 London (Johnson), 115 Loose-leaf notebooks, 169 Lorenzo the Magnificent. See Medici, Lorenzo de’ Louis XIV (king), ix–x, 86, 87–88, 91–100 Louis XVI (king), xiii, 135, 139–140, 142, 144–145 Loyola, Ignatius, 57

Machiavelli, 32, 42, 46–47 Madonna del Ceppo (art) (Lippi), 16, 27 Mair, John, 118, 150 Malthus, Thomas, 182–183 Manzoni, Domenico, 54–55 Marie Antoinette, 143 Market-to-market method, 196 Marshalsea Debtor’s Prison, 180 Mascranni family, 89 Massachusetts Bay Company, 148–149 Matsys, Quentin, 58 Matthew, Saint, 23–24, 26–27 Maurice, Prince, 76–78, 82 May, George O., 191, 193 Mayflower Compact, 147–148 Maynwaring, Arthur, 104 Mazarin, Jules, 88, 90–91 McKinsey & Co., 187

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Medici, Cosimo de’, 30, 32–40, 47 Medici, Giovanni di Bicci de’, 30 Medici, Lorenzo de’, 34, 41–42, 44–47 Medici, Marie de’, 78–79 Medici bank, 30, 33–34, 36–37, 40–46 Medici family, 29–30, 34–35, 40–41, 47 Melcher, Richard, 199 Mennher, Valantijn, 74–75 Mercantilism, 91–92 Mesopotamia, 2–3 Metcalf Report, 197, 198–199 Montaigne, Michel de, 58 Moody, John, 174 Morgan, J. P., 173, 175, 192 Morris, Robert, 158–162 Mortgage securities bundles (CDOs), 202–203, 206 Mowbray, John, 123

National Congress of Accountants (Italy), 172 Nationally Recognized Statistical Ratings Organiza-

tions (NRSROs), 198 Nations, accounting and, xi–xiv, 206 Natural History (Pliny), 4 Necessary Discourse, The (pamphlet), 81–82 Necker, Jacques, 129, 135, 136–146, 232–233n22

influence of, 147, 154, 159–160 Nederlands Institut van Accountants, 172 Neo-Platonism, 38–39, 56–57

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Nero (emperor), 6 Netherlands, 59, 65, 66, 70–86, 72 Neudörfer, Johann, 75 New Instruction and Proof of the Praiseworthy Arts

of Account Books (Ympyn de Christoffels), 74 New Netherlands, 149 New York Stock Exchange, 192, 198, 201, 202, 206 Newton, Isaac, 101, 108 Nicholson, John, 164 Nixon, Richard, 196, 198 Norman Conquest of England, 7 North, Roger, 118

Obama, Barack, x–xi Oikonomia concept (Aristotle), 4 Oldenbarnevelt, Johan van, 76–77, 79, 81 On the Family (Alberti), 50 Operating ratio, 170 Oration on the Dignity of Man (Pico della Miran-

dola), 40 Origin of the Species, The (Darwin), 183 Ovando, Juan de, 63–66

Pacioli, Luca, 48–55, 64, 67, 69, 70, 74 Padilla y Meneses, Antonio de, 65 Paine, Thomas, 160 Panofsky, Erwin, 58 Papacy, banking and, 16–17, 33

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Pâris brothers, 133–134 Pâris Le Montagne, Claude, 134 Particelli family, 89 Passavanti, Fra Jacopo, 21 Pathway to Knowledge, The (Pietersz), 75 Patronage, 38–39, 41, 49, 115 Peat Marwick Mitchell, 194, 196 Pecora, Ferdinand, 192 Penance, 22, 25–26 Pendleton, Edmund, 156 Penn Central, 196 Pennsylvania Railroad, 170 Pepys, Samuel, 102 Pericles, 113 Peruvian silver, 59 Philip II (king), 61–69, 71–72 Philip III (king), 68 Philip IV (king), 68 Philippics (Cicero), 5 Physiocrats, 134–135 Pico della Mirandola, Giovanni, 39–40, 57 Pietersz, Claes, 74–75 Pitt, Harvey, 239n28 Pitt, William, 127–128 Plato, 31–32, 38–39, 50 Pletho, Georgius Gemistus, 39 Pliny the Elder, 4

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Political accountability. See Accountability, financial and political

Political stability cultures of accountability and, xvi–xvii Medici family and, 41 threat to English, 107, 111–112

Poliziano, Angelo, 40, 43 Polybius, 4 Pontifex Maximus (pope), 10 Ponzi schemes, 107–112 Population statistics, 182 Portable accounts, 97–98 Portinari, Tommaso, 36, 37–38, 44–45 Post office management, 152–153 Praepostinius of Cremona, 26 Pragmatic Sanction, 61 Prato Museum, 17 Price, Richard, 127 Price, Samuel Lowell, 173 Price Waterhouse & Company, 173, 189, 194, 196 PricewaterhouseCoopers, x, 173, 202 Priestley, Joseph, 128–129, 131 Probability, 83, 126, 182 Profit and loss

Christianity and, 20–28 Datini and, 15–22, 25, 26, 27 Dissenters’s view of, 121–122 double-entry accounting and, xiv–xv, 9, 11–12

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expected vs. real, 84 railroads and, 169–170 scientific management and, 186–187 Spragues’ equation (A=L+P) and, 174–175

Protestant Ethic and the Spirit of Capitalism (Weber), 151

Protestantism, British Enlightenment, 119–122 Provost, Jan, 208 Prynne, William, 101 Public Company Accounting Oversight Board (U.S.),

202 Puritans, 119–120, 148, 149

Queensware, 122, 124–125 Quesnay, François, 135 Quilter, William, 173

Rabelais, 57 Racism, scientific, 183–184 Railroad Reports (Moody), 174 Railroads, 168–177 Ralph, James, 151 Rathenau, Walter, 187 Ratings agencies, 198, 206 Reading Railroad, 170 Religion, accounting and, 22 Renaissance, 30–32, 35

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Report Relative to a Provision for the Support of Public Credit (Hamilton), 163

Republican political theory, 84–85 Republics, Italian, xii–xiii, 9–14

Datini in, 15–22 Pacioli’s Summa and, 52–54

Res gestae divi Augusti (Augustus), 1–2 Revolutionary War Expense Account 1775–1783

(Washington), 157 Richardson, Samuel, 115 Rinuccini, Alamanno, 42 Ripley, William Z., 191 Robber barons, 170 Robespierre, 144 Robinson Crusoe (Defoe), 121 Rockefeller, John D., 175 Roman numerals, 9 Roman Republic and Roman Empire, 1–2, 4–6 Roosevelt, Franklin D., 192 Rose, George, 128 Rossi, Roberto de, 32 Royal African Company, 155 Royal Swedish Railroad Company, 171 Ryder, Joseph, 121

Sadleir, John and James, 171, 180 Saint-Simon, Duke de, 99 Salutati, Coluccio, 31

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Sarbanes-Oxley Act of 2002 (U.S.), 202 Sassetti, Francesco, 42–46 Sassetti Chapel, 43–44 Say, Jean-Baptiste, 208 Schumpeter, Joseph, xv Scientific management, 186–187 Secret Committee (England), 112 Securities Act of 1933 (U.S.), 193 Securities and Exchange Commission (SEC)

2008 financial crisis and, x, xi, 203 accounting scandals and, 197 formation of, 192–193

Serjeant, Thomas, 150 Sevigné, Marie de Rabutin-Chantal, marquise de, 92 Shamela (Fielding), 115 Shortly After the Marriage, or The Tête à Tête (art)

(Hogarth), 114 Single-entry accounting, xiv

in the ancient world, 2, 4 in the Middle Ages, 8 in northern Italian city republics, 10

Sinking funds American War of Independence and, 127–128 Walpole and, 106, 108, 111, 113–114

Slavery, 155–156 Smith, Adam, 42, 46, 73, 92, 113, 130 Snell, Charles, 111, 118 South Sea Company, 106–112

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Spanish Empire, 59–69, 70–72 Speer, Albert, 187 Speiß, Walter, 187 Sprague, Charles E., 174 Sprezzatura, 56 St. Dominic College, 195 Stadtholders (Dutch), 76, 85–86 Staël, Anne Louise Germaine, 137, 142 Stalin, Joseph, 187 Standard Hill Academy, 120 Statecraft, accounting and, 94–98, 134 Statistics, 182–183 Stevens, Mark, 199 Stevin, Simon, 77, 80 Stock exchanges

in Holland, 70, 73, 78–79 New York, 192, 198, 201, 202, 206 See also Investment in stocks

Sumeria, 3 Summa de Arithmetica, Geometria, Proportioni, et

Proportionalita (Pacioli), 48–55 Swift, Jonathan, 121 Swift, Peter, 126

Tacitus, 5 Taxation

in England, 103, 114, 118, 127 in France, 97–98, 100, 107, 133–137

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in Holland, 71–72, 221n3 Pacioli on, 53 Spanish Empire and, 59–61, 63–64, 66, 71–72 U.S. system of, 161

Taylor, Frederick Winslow, 186–187 Taylorism, 186–187 Thomas Aquinas, Saint, 21 Thompson, Wardhaugh, 123 Thoreau, Henry David, 181 Tipperary Bank, 171 Tithes, 16, 33 Toland, John, 107 Torregrosa, Pedro Luis de, 66–68 Touche Ross, 173, 196, 199 Trade

double-entry accounting and, 12 Dutch, 73 long-distance, 9

Transparency China and, 207 Colbert, Louis XIV and, 96–97 danger of, in accounting, xiii Dutch East India Company and, 81–82 in England, 8–9, 103, 110–113, 128 financial crisis of 2008 and, 204 Great Depression and, 191–192 historic difficulties of, 207 modern governments and, 206

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Necker and, 138–141 in U.S. financial system, 161, 164 Washington and, 157–158

Treatise on Life Annuities (de Witt), 86 Treatise on the Administration of Finances (Necker),

142 Treaty of Rome, 194 Trenchard, John, 110, 112 Trevithick, Richard, 168 Triumph of Death (fresco) (Traini), 25 Troubled Asset Relief Program (TARP), x–xi, 203 True Interest and Political Maxims of the Republic of

Holland (de la Court), 84–85 Tubeuf, Jacques, 91 Turgot, Anne-Robert-Jacques, 135 Twain, Mark, 171 Two Tax-Gatherers (art) (van Reymerswaele), 18, 58 Typeface, “le Franklin,” 154

Ultramares case, 197 Underreporting, 140 Union Européenne des Experts Comptables, 193–194 Unions, efficiency and, 187 United Dutch East India Company. See Dutch East

India Company United States

colonies in, 147–158 financial crisis of 2008 and, x–xi, 202–204

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Great Depression and aftermath in, 189–194 post Great Depression accounting in, 194–202 railroads and, 169–177 Revolutionary war debt and, 158–164

Urbino, Duke Guidobaldo of, 50, 55–56 U.S. Department of Justice, 203–204 U.S. Treasury, 159 Usury, 21

Van Reymerswaele, Marinus, 18, 58 Van Schoonhoven, Jacob, 74 Venice, Republic of, 33 Vergennes, comte de, Charles Gravier, xiii, 132, 141 VOC. See Dutch East India Company

Walden (Thoreau), 181 Wall Street, x–xii, 191–192, 199, 204 Walpole, Robert, 103–106, 108–116 Warrington Academy, 120 Washington, George, 156–158 Waste Management, 201 Waterhouse, Edwin, 173 Watt, James, 124, 129–130 Wealth

in the ancient world, 6 French nobility and, 133 in northern Italian city republics, 9, 22 views of, 121–122, 134

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Wealth of Nations, The (Smith), 113 Weber, Max, xv, 2, 19, 119, 124, 151, 208 Wedgwood, Josiah, 117, 121–130, 183–184 Wedgwood china, 122, 124–125 Werner, Sombart, xv White, John, 148 William and Mary, 102 William the Conqueror, 7 William the Silent, 76 Winthrop, John, 148 Wisselbank, 72–73 Women, accounting education and, 119, 152,

176–177 Wordsworth, William, 130 Work ethic

Italian world of trade and, 19–20 Protestant, 119–121, 151–153

WorldCom, 201

Ympyn de Christoffels, Yan, 74

Zacharias in the Temple (art) (Ghirlandaio), 43

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