Modern Accounting
Read this section about the mathematical origins of modern accounting.
THE EMERGENCE OF
LAYERED MONEY
Always and everywhere, monetary systems are hierarchical. In 1202, a traveling merchant by the name of Leonardo
da Pisa, popularly known as Fibonacci, published a book
called Liber abaci (Book of Calculation) that enriched the field
of mathematics in Europe. Fibonacci grew up in the bazaars
of Algeria where he learned of ancient mathematical discoveries, and he later published a book that brought the Hindu-
Arabic numeral system to Europe, laying the foundation for
the extinction of the limited Roman numeral system. He
detailed advancements in arithmetic that were foreign to
Europeans at the time, as well as accounting techniques that
mirror methods used by merchants from India and universities from Islamic Spain. These accounting techniques were
the foundation of what we consider double-entry accounting
today, the ubiquitous system of assets, liabilities, equity, and
profits. Liber abaci's legacy would be felt right away in Italy as
Fibonacci's ideas spawned a new type of merchant class, one
with its power derived not from a commodity or a service but
from a balance sheet: the banker.
Predating Fibonacci's book of mathematical discoveries was a monetary instrument called the bill of exchange. Bills were a way to send money from one place to another and simultaneously convert it to the recipient's desired currency. They were letters written by bankers promising payment. The bills weren't always paid for up front and therefore were a form of lending and an extension of credit by the issuer, making bills of exchange the world's first widely-used credit instrument. Their origin is difficult for historians to pinpoint, but we know they existed in the Arab world centuries before they arrived in Europe. By the twelfth century, bills became commonplace in northern Italy. By the fourteenth century, bill of exchange issuers denominated at least one side of practically every bill transaction in gold florin. With the florin involved in all major continental transactions, a monetary system started to emerge around this denomination. Even though hundreds of coins were circulating throughout Europe, everybody accounted in florin. It was the international business balance sheet denomination of choice and the world's first world reserve currency. Between the florin and bills of exchange, alongside Fibonacci's crucial innovations, a two-layered money system was starting to emerge.
In the fifteenth century, the international monetary system was finally breaking free from its (precious) metallic chains. Mathematician Luca Pacioli accelerated this process. Pacioli taught mathematics to Leonardo da Vinci and composed a book with him called Divina proportione (Divine proportions) about architectural mathematics, but this was not Pacioli's claim to fame. Before Divina proportione, he published Summa de arithmetica, geometria, proportioni et proportionalita (Summary of arithmetic, geometry, proportions and proportionality) in 1494 which gave Pacioli the nickname "the father of accounting and bookkeeping". Accounting was actually only one of the teachings from his masterful summation of arithmetic, algebra, geometry, trade, and bills of exchange, but it laid the groundwork for the modern balance sheet. He formalized into scripture what had become the "Venetian Way" of double-entry accounting, a system which is still utilized by every major business entity around the world today. Within the double-entry accounting system were the secrets of how bankers could create money not by minting a coin, but from their balance sheet. Ever since Summa, our financial world is viewed through the lens of balance sheets, but this book aims to reframe it with layers.
Source: Nik Bhatia: Layered Money
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