Money talks

by Anna Belfrage

Hands up all of those who think accounting is an absolutely riveting subject. No; I thought not. Accountants have the dubious honour of being labelled the oldest profession in the world together with prostitutes – for the obvious reason that what the prostitutes earned, the accountant had to tally up. For those of you that find accountants – and the art of accounting – rather boring, I would have you know that accounting is as much an art as writing is, and before the advent of the Italian invention, double entry book-keeping, it was even more creative than it is today. Inexact, one could say, which when one is describing accounting is a most unfortunate adjective to use.

When trying to conjure up an image of an accountant in historic time, it’s Mr Cratchit, the father of Tiny Tim in Dickens’ A Christmas Carol, that comes to mind. There he is, leaning over his desk, with his shirt covered by protective half-sleeves in black. With a ruler he draws up nearly invisible lines in his ledger before using ink and pen to carefully enter each transaction. As Mr Cratchit was around long after the invention of double book-keeping, each entry is of course made twice (and so as not to risk losing my audience, I will not explain the intricacies of accounting in detail).

Back in the good old days – the Middle Ages – the accounting ledgers were often the responsibility of the lady of the house. She may have had a steward to handle her business and do the entries, but a well-educated woman of the times could definitely square her own accounts and do whatever audits she found necessary. Not that one needs double book-keeping to handle the household finances – my Mum used a lined pad and a pencil. The Chinese, who, if we’re going to be quite honest, were centuries ahead of Europe when it came to business and profit development, used an abacus. Many Chinese still do.

In Europe, medieval accounts were kept in rolls, long details of expenses. Unless the reader planned on ticking off every single item, line by line, it was relatively easy to sneak in a discrepancy or two. While I would argue most accountants – no matter the day and age they lived in – are honest, there are a few who aren’t, who go beyond making accounting creative to making it criminal. Such behaviour was easier to spot – and stop – once the Italians came up with their little invention: let’s enter all transactions TWICE,  which means it must sum not only vertically but horizontally (a simplification), and if it doesn’t, something is wrong.

It very often was – wrong, I mean. Even today, when most accounting is done through fancy ERP systems, things end up being incorrect, which is why one needs that age-old profession – the accountant – to begin with.

So why this Italian interest in accounting? Well, it all comes down to banks. Banking is another very ancient profession – already in Mesopotamia there were “lending houses”, well-run businesses that made money out of money – or rather, someone else’s lack of money. These banks became increasingly more sophisticated, the Greek did their banking thing, the Romans did theirs, and then along came the Christian Church and banking went belly-up, overnight, almost.

Christ driving out the usurers

The Christian Church considered usury a sin, and if you couldn’t make money out of money-lending, why would you do it? So, for several centuries, Europe muddled along without any type of banking system – at least not formally. Luckily for Europe, they had the Jews. In actual fact, Judaism also condemns usury, but only when dealing with other Jews. Therefore, the Jewish merchants could develop a lucrative little side-line, lending money to the Gentiles – at a cost, of course. This was yet another reason for the anti-Semitism that was as natural as drawing breath for most medieval Europeans. It was also the equivalent of playing with fire, because, as many Jewish moneylenders were to find out, some of their larger debtors showed great creativity – and cruelty – in devising ways to avoid repaying the money.

Medieval Jews had to wear these hats

Take for example the York Massacre in 1190 in which the entire Jewish community in York was wiped out, very much egged on by a handful of noblemen who owed the Jews considerable amounts of money. At the time, rich Jews had been lending money right, left and centre to all the eager wannabe Crusaders – including Richard I of England. The Jews supposedly had royal protection, but it availed them little when the York mob chased them through the city, forcing the Jewish community to seek protection in the castle. None of them made it out. Surrounded by the baying mob, they chose to commit mass suicide, as the alternative – to surrender to the enraged citizenry of York – was less than palatable. The ringleaders took the precaution of burning all Jewish records, thereby erasing all proof of their debt.

Some generations down the line, mighty Edward I financed his martial activity by taxing “his” Jews more or less to death. The Jews were the king’s personal property (!), and once he had wrung them dry of money, Edward used them for political purposes. Ultimately, in 1290 the Jews were expulsed from England – as was happening throughout northern Europe.

While monarchs everywhere could congratulate each other on having rid their countries of the Jews, they were also faced with a long-term financing issue. Yes, ousting the Jews did wonders for their balance sheets in the short term (they appropriated all the assets the Jews couldn’t take with them, which was often most of their estate), but as the prohibition against usury still stood, there was no one to fill the Jewish moneylenders’ shoes.

To this day, business ventures depend on risk capital to develop from mere ideas into viable enterprises. No cash, no company, no future wealth. (Which is why, as an aside, I would always urge you to study the cash-flow of any company you’re planning to invest in) Enter the Italian banks. Already back in the 12th century, Venice founded its first bank, but it wasn’t until the exiled Jews from the north made it to Italy, that banking as a business concept took off.

Originally, banking was a trade in grain futures. The farmer borrowed money on his growing crop, the lender thereby acquired the crop at a discounted (lower) value, and everyone was happy. Unless the crop failed – which it occasionally did. Hand in hand with lending, an insurance business arose. “If you want to borrow money, that’s fine, but I also want you to pay an insurance premium, you know, just in case you die of the plague, or the Po floods your fields, or…” A most elegant construction, whereby the lender charged no official interest. Instead, he covered his risk in the discounted value of the future crop and the cost of the insurance.

Banking at the time was an informal business, conducted at the market place. The money-lenders did their business on a bench (Italian banca, which is where the word bank comes from), and should the money-lenders default on their promises, or overextend themselves to the point of ending up in debt themselves, their bench was broken in two (Italian banca rotta, from which derives the word bankrupt).

The Italian banks became a force to be reckoned with throughout Europe. Kings, noblemen, merchants – they all lined up, cap in hand, eager to tap into this new source of money. Over time, the prohibition against usury was watered down – various Popes, eager for money, helped. Families such as the Bardi, the Mozzi, the Peruzzi and the Medici became synonym with banking, amassing not only wealth but power.

To add a British angle, there arose in England a banking system handled by the goldsmiths. Rich in ready cash, the goldsmiths acted as middle-men between those that had (depositing large amounts of gold and jewels with the goldsmiths for safekeeping) and those that wanted. A new-fangled financial instrument, the promissory note, saw the light of the day. These notes were to a fixed value and were signed by the debtor and the creditor. The note could be sold, passed on in lieu of payment, and so paper money was born.

Whether you were an Italian banker or an English goldsmith, you faced similar issues: if your livelihood depended on lending other people money, you needed a fail-safe way of keeping tabs on who owed you what, when repayment was due, and what interest – oops, sorry! Insurance premium – was valid. The financial relationships were complex – in some cases the banker was both a debtor and a creditor – and unless you knew down to the last florin just how much money you had, things could very quickly go very wrong. This challenging environment resulted in the rolls becoming obsolete, and instead the late 13th century saw the birth of the double-entry book keeping.

Today, eight hundred years later, this system is still in use. What those long dead Italians invented, is what rules the world of Finance today, testament to just how excellent the system is.  It has the further upside – from an accountant’s perspective – of being rather complex, ensuring that this, the oldest profession in the world, has a bright and lucrative future. But it is also that complexity which ensures most businesses adhere to the straight and narrow – being too creative in a double-entry book-keeping system has a nasty tendency to come back and bite you. Hard. Smart guys, those Italians…

And as to the Jews who brought their acumen to the nascent banking trade, many of them managed to hang on to an existence in Italy. In difference to other European states, the various Italian states never formally expelled their Jewish compatriots - at least not at the same time. Yet again: smart guys, those Italians...

Anna Belfrage is not only the CFO of a listed company (which explains her fascination with accounting),  she is also the author of four published books: A Rip in the Veil, Like Chaff in the Wind, The Prodigal Son and her latest release, A Newfound Land. Set in seventeenth century Scotland and Virginia/Maryland, the books tell the story of Matthew and Alex, two people who should never have met - not when she was born three hundred years after him.

For more information about Anna and her books, please visit her website or her blog.