One of the core features of blockchain technology is immutability. Every transaction, no matter how irrelevant or unimportant, is permanently logged on the blockchain. This is the culmination of the attempts of the last 5,400 years of history — ever since we began to keep records of things. However, if we are to appreciate the accomplishments of blockchain and how it can solve a myriad of problems, we must look into the past for answers.
This article is the second of an ongoing series we are producing regarding the history of finance. The content is written in such a way that the articles are self-contained, but we welcome you to read them in chronological order to get the full experience.
In this piece, we will explore the history of record-keeping and how this affected the rise and fall of empires, along with the development of the modern world.
Keeping a tack record
In the last article, we discussed the story of how society evolved, people were often forced to resort to tokenizing social favors in the form of money out of necessity. While civilization was possible without the need to have a common unit of exchange, it was complicated.
For example, the prehispanic society of the Incas did not develop a currency. Their dominion over the area was quasi-absolute so trade was negligible, and their government was a totalitarian theocracy, so everything was highly regulated and everyone had a role assigned — citizens of the Empire received free food, education, healthcare and clothes in exchange for their work .
In such a centralized society there wasn’t any need for money in its physical form. They did, however, keep expansive records in beautiful and meticulously arranged knotwork called “Quipus” . While perhaps the format might be different, this would be the style of record-keeping that a modern accountant would have, and indeed there have been attempts to transfer the meticulous knotwork into Excel spreadsheets.
Put differently, you can run a complex society without needing cash, but you can’t run an advanced society without proper management and record-keeping.
But we are getting ahead of ourselves. The Incas are a good false example, in that their culture feels atavistic, while in the grand scheme of things being relatively modern. Contrary to what one might expect, the Incan Empire existed between the XV-XVI century. As such, there are pubs in London that are older than the Incan Empire!
So, let’s go back to the beginning of record-keeping — 5,400 years ago in the city of Uruk in Sumer (present-day Iraq), the temple priests had a problem. Given the location of the grand city of Uruk, droughts and other such natural cataclysms weren’t uncommon.
As a means of providing some stability, the great temples began to act as warehouses where they would store grains and materials during good harvests, and then provide them to the people when times were bad.
As the operation and complexity developed, it became necessary to keep logs of how much of each good was being kept by the temple, as well as who provided the materials in the first place. Consequently, the priestly scribes kept a clay checklist of sorts where they would mark the deposits with a little picture.
Even then though, people were overworked and there weren’t enough hours in the day. Hence these pictograms began to be simplified and abstracted, so as to be quicker to draw. Eventually, there was little relation between the symbol and what was being expressed.
Once abstract symbols began to be associated with words, it was easy for them to lose their meaning altogether. At one point in time, the symbols began to express the sounds themselves, and you could chain different pictograms to form a word; an ahistorical English-language example would be the pictogram of a BEE and a LEAF, when put together you have the metaphysical word BELIEF!
Naturally, this linguistic flexibility allowed for increased complexity in exactly what could be expressed in writing. Now, instead of solely being descriptive, documents could become proscriptive (“10 cows, 5kg of wheat, etc.” versus “Pay your taxes, or else”).
It’s interesting to note that the Hammurabi Code, the oldest legal code known to historians, while not an economic document, did have many economic injunctions. In the words of K.V. Nagarajan in his economic analysis of the Code :
“The Code of Hammurabi contains many of the ingredients of modern capitalism: private property, use of commodity money and credit and government by a set of enforceable laws. Thus, The Code can be seen as an exercise in institution-building.”
To successfully build a developed state, and flexible economy, laying the groundwork via record-keeping and writing in some form becomes a necessity. With this in place, we can move on a few thousand years.
From here to there, there are many stops we might consider, such as the invention of various formalized numerical systems, the invention of zero, the development of legal codes, contracts and so on. Those are all worth mentioning, but for our purposes, we shall continue with the evolution of record-keeping and accounting.
Until death do us part
Like any of the major religions, Abrahamic faiths were a totalizing force. There wasn’t any aspect of one’s life, whether it be food, socialization, weekly and daily habits, and finances, where scriptures did not have an opinion.
One particular aspect of Muslim faiths was the requirement of retaining thorough records of one’s obligation to each other and God. This became particularly problematic at someone’s death when their debt had to be settled and it was necessary to determine what portions of one’s estate went to whom.
At the behest of the Caliph Al-Ma’mun in 820 CE, the polymath Muhammad ibn Musa al-Khwarizmi wrote the wordy “The Compendious Book on Calculation by Completion and Balancing”, which established algebra as a separate discipline and set the basis for double-entry book-keeping . It’s worth mentioning that al-Khwarizmi’s surname provided a basis for the word “algorithm”, which is used to mean all computational procedures, and some of the first algorithms were designed for accounting purposes.
In either case, following al-Khwarizmi’a influence, not only were Muslims then able to define the credits and the debits of one’s estate, but they were able to track the inflow and outflow of a business, or any such large institution with relative ease.
It took the next few hundred years for it to catch on in Europe, especially as there were Catholic statues stating that anyone involved with Hindu-Arabic numbers, or utilizing algebra and double-entry bookkeeping, was in league with the devil .
The Renaissance in Europe broke many of these longstanding taboos and allowed new, and possibly heretical ideas to flourish, such as the mathematician Fibonacci’s book Liber Abaci, which spread knowledge about double-entry and Hindu-Arabic numerals to bankers and merchants .
At first glance, these types of factoids seem irrelevant. We’ve gotten used to the accountants in their gray suits and so underestimate their power and influence. By being able to tabulate and keep track of all manner of numbers, it becomes possible to make more believable promises about the future.
Debt becomes more accessible, and as the Roman statesman Cicero put it “The sinews of war are infinite money.” It should not surprise us that once book-keeping technology dispersed, the Italian states where they became popular could suddenly indebt themselves and summon vast armies of mercenaries to fight against other city-states.
Aided by new financial technology, the city-state of Florence started issuing quasi-bonds which were used to fund mercenary armies in an attempt to subdue its neighbors . Financial technology enables the expansion and development of empires.
This is a theme that is echoed throughout history — after the jackboot of the soldier, comes the moccasin of the accountant. As peculiar as it may seem, when a city fell to the Mongols, the first bureaucrats they would send in would be their accountants, who would make note of all the wealth of the city, and then divvy up a portion thereof to the troops .
Yet, all is not just doom and gloom. Financial technology is not solely relegated to the tyranny of the state. It can and does get used to enhance individual liberty and our capacity to enact meaningful change in the world.
Fractionalizing the world
The stock market with its emphasis on fractionalized, proportional ownership that can be traded at will with other members of the public, first came into existence in the Dutch Republic in the XVII century. This was revolutionary for many reasons and it was only possible with flexible enough accounting models that allowed for fluctuating ownership.
Firstly, there was the possibility of crowdsourcing funds — ship journeys were inordinately expensive, to the point where even sea-faring empires only had a handful of ships at any given moment. The Spanish “Invincible” Armada of 1588, for instance, only had 130 ships  — and when Britain countered with a similarly sized force of 150 ships, it almost bankrupted the nation .
Crowdsourcing funds and thereby asking people to individually only pay for a small percentage of the total cost was a powerful change in the status quo. All of a sudden, expensive business ventures didn’t need to find a single rich investor, they could depend on the broader community which collectively had the wealth, but individually no party needed to be wealthy.
In the modern world, we see similar situations. For example, at the time of writing, Berkshire Hathaway’s stock costs $416,449 a share. There are very few individuals who could afford even a single share, yet through fractional ownership, people can purchase portions of shares and thereby participate in a business that would’ve otherwise been out of reach for them.
Secondly, by breaking ownership into shares that represent the business as a whole, the public can use individual stocks as collateral for financial transactions. Through this, investors can use part-ownership in a business as collateral for a mortgage, or even as the basis for complicated financial derivatives (but we will get to that later).
By keeping track of various financial metrics, accountants can create documents that showcase the state of a business, and entrepreneurs can also create a business model flexible enough that it can seamlessly adapt to daily shifts in owners.
To tame the unknown, it must first be properly defined and catalogued, only then can you use it to your advantage. This has been the defining feature of civilizational advancement — through recording, categorizing, and systematizing behaviors in social and natural environments, we can create even more complex systems that incorporate that knowledge.
This brings us to the modern era again, and with a new perspective, we can look at blockchain technology and its promise.
In its idealized state, blockchain technology allows us to tabulate and keep track of every transfer of value from one entity to another. Yet, we are at the beginning of that dream. A lot remains to be done before the dream becomes reality.
For starters, we need to define terms. In the same way as developing language and words to be able to build a complex society, and then using written language to create contracts, we need to develop a common language of finance.
By systematizing and formalizing the different possible transactions, and then making that knowledge widely available, we will greatly improve the efficiency and fairness of our financial systems. In doing so, everyone will be able to participate on equal terms and we will be able to reach a level of complexity hitherto unimaginable.
Axo is working on just that, but that is a story for another time.
The story of civilization is that of being able to catalog and wield data, so as to be able to manage further levels of complexity.
Without the ability to record information, and make use of it at some point in the future to plan and design, we would have not been able to come as far as we have. It’s interesting to think that now with blockchain technology we have access to a set of tools that far exceed any data management techniques we have ever had access to.
It’s impossible to know what shape society will evolve to now that it is democratizing access to these tools. However, beyond the possible dreams of utopia, there is the very real promise that we might be able to run society in a fairer and more democratic way for all.
The ability to log and execute every transfer of value in society is something out of a science fiction book. It’s amusing to think what the Sumer temple priests 5,400 years ago, when they had an army of accountants logging every transaction, might say if one explained to them that now every normal person had far more ability to log and effectively utilize data than the entire city of Uruk back then.
If a clay tablet gave us the seeds for modern society, what might blockchain be the seeds to?
1 Davies, Nigel (1995). The Incas. Colorado: University Press of Colorado.
2 D’Altroy, Terrence N. (2001). The Incas. Victoria, Australia: Blackwell Publishing. ISBN 978–0–631–17677–0. p-18
3 Nagarajan, K. V. “The Code of Hammurabi: an economic interpretation.” International journal of business and social science 2.8 (2011).
4 Westland, J. Christopher (2020). Audit Analytics : Data Science for the Accounting Profession. Cham: Springer International Publishing. ISBN 978–3–030–49091–1. OCLC 1224141523
5 Lauwers, Luc & Willekens, Marleen: “Five Hundred Years of Bookkeeping: A Portrait of Luca Pacioli” (Tijdschrift voor Economie en Management, Katholieke Universiteit Leuven, 1994, vol:XXXIX issue 3, p.300), KUleuven.be
6 Heeffer, Albrecht (November 2009). “On the curious historical coincidence of algebra and double-entry bookkeeping” Foundations of the Formal Sciences. Ghent University. p. 11.
7 Ferguson, Niall. The ascent of money: A financial history of the world. Penguin, 2008. — Mountain of Debt 69–72p
8 Westland, J Christopher. (2020). Audit Analytics : Data Science for the Accounting Profession Cham: Springer International Publishing. ISBN 978–3–030–49091–1. OCLC 1224141523
9 Garrett Mattingly, The Invincible Armada and Elizabethan England (Ithaca, NY: Cornell University Press, 1963), pp. 12–13.
10 Tenace, E. (2003), “A Strategy of Reactions: The Armadas of 1596 and 1597 and the Spanish Struggle for European Hegemony.” English Historical Review, 118, pp. 855–882