You are on page 1of 14

Credit, Bills, and Bookkeeping in a Simple Economy

Author(s): W. T. Baxter
Source: The Accounting Review, Vol. 21, No. 2 (Apr., 1946), pp. 154-166
Published by: American Accounting Association
Stable URL: http://www.jstor.org/stable/239919 .
Accessed: 08/05/2014 22:06

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp

.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.

American Accounting Association is collaborating with JSTOR to digitize, preserve and extend access to The
Accounting Review.

http://www.jstor.org

This content downloaded from 169.229.32.137 on Thu, 8 May 2014 22:06:25 PM


All use subject to JSTOR Terms and Conditions
154 The Accounting Review
which the S.S. Manufacturing Company recent problems. In November, 1941, Part
"decided to establish standard costs." At I, Problem 3, the candidate must "Prepare
the end of a thirty-day operating period a schedule showing sales, costs, and op-
the factory cost accountant confessed that erating net income for each line of goods
he and the factory foreman had contrived distributed by the Argo Grocery Com-
to produce for their personal benefit 500 pany." Also, in November, 1945, Part 1,
lawn mowers above the recorded produc- Problem 3, "The Johnson Meat Packing
tion. The candidate is requiredto "restate Company desires to study its distribution
the actual and standard production costs costs (selling, administrative and general
for the thirty-day operating period and expenses) which in the aggregateconstitute
show the estimated loss by theft of the 500 65 per cent of the total cost of doing
lawn mowers." business. From the information following,
(4) November, 1941, Part II, Problem prepare an exhibit showing the allocation
4 asks the candidate to "List five items of total distribution cost per cwt. of meat
entering into the cost of a manufactured products for each size-class of order (ex-
product, the treatment of which in an pressed in pounds per order). Carry out
'actual' cost system might differin a 'stand- unit costs to hundredths of a cent."
ard' method of determining costs and It can be seen from this survey that the
briefly describehow the amounts by which cost problems presented in the American
the actual costs vary from the standard are Institute examinations involve questions
treated." of policy and procedure as well as cost
(5) May, 1944, Part II, Problem, 2 in computationsand journalization.Of neces-
which "The management desires to check sity the questions do not cover many of the
manufacturing cost estimates against cor- routine operationsperformedin the setting
responding actual costs through the fac- of standards, the recording of costs, and
tory accounting records, and decides to the preparation of cost reports, since such
make use of procedures followed under operations are not generally provocative
estimated cost systems in which estimated of searching questions. As has been in-
and actual costs are reflected in opposition dicated, the numberof cost problemsin the
in cost accounts and variations are de- examinations has increased proportion-
veloped thereby." ately over the years, and it may also be
The current trend toward apportion- noted that a majority of them have
ment of distribution costs to sales or kinds represented problems that were currently
of products sold is illustrated by two of major concernto industrialaccountants.

CREDIT, BILLS, AND. BOOKKEEPING


IN A SIMPLE ECONOMY
W. T. BAXTER

F the point of view of the


ROM the later medieval stage of 'cash' (money)
"IF'
methods of exchange, there were economy, where goods were bought for
three main stages of economic de- ready money; and the modern stage of
velopment: the prehistorical or early credit economy, where commercial ex-
medieval stage of natural economy, where change was based on credit." Thus Pro-
goods were exchangedagainst other goods; fessor Postan summarizes the views of

This content downloaded from 169.229.32.137 on Thu, 8 May 2014 22:06:25 PM


All use subject to JSTOR Terms and Conditions
Credit, Bills, and Bookkeepingin a Simple Economy 155
nineteenth-century writers on the history paratively modern material shed any light
of exchange.' He goes on to explain that on the issue?
these writers relied on abstract deduction My own experience has been chiefly with
when there were gaps in their knowledge the accounts of American merchants of the
of business history; and further, that their period 1710-75. Some of the ledgers,
minds had been newly quickened by the journals, and statements of Thomas Han-
doctrine of evolution. They not un- cock, his nephew John, his father-in-law
naturally reasoned that, if credit has now Daniel Henchman, and their correspond-
evolved to a high peak of importance, then ents, have been preserved, doubtless be-
credit was probably less and less significant cause of John Hancock's prestige as one of
at each earlier stage. To quote one such the founders of the United States. Rela-
scholar: "It may even be doubted whether, tively youthful though these records are,
in medieval trade, credit operations can be they offer us a wealth of clues regarding
spoken of at all. Early exchange is based trade practices in a primitive society. And,
on ready payment. Nothing is given ex- when we recall what sort of conditions the
cept where a tendered equivalent can be colonial traders had to work under, it
directly received." If loans were ever made, seems fairly reasonable to suppose that
they were for consumption, not trade. their procedure may have been not unlike
Professor Postan goes on to shatter these that of their medieval forebears. Their
deductions. Citing a mass of medieval communications were still dead slow, their
debtors' obligations, he proves that credit commerce was a mere trickle in volume,
was not a negligible force in the Middle mass manufacture was unknown to them,
Ages, but was indeed the essence of many and they had not yet set up transfer
bargains. banks.3 Their coinage was in great dis-
If credit has played its important r6le order, and presents a clear analogy with
for so long, then surely the history of book- the money used by medieval traders.4
keeping should supply further evidence on
CONDITIONS IN COLONIAL NEW ENGLAND
the point. Credit without written reckon-
ing is almost impossible; the first and most The men who wrote the Hancock MSS
fundamental reason for keeping accounts all lived in Boston. And it so happens that
is to aid in remembering what we have eighteenth-century New England is a
trusted to our debtors. particularly good field for research into
Early bookkeeping records fall into two primitive conditions, because its money
groups, namely, the accounts themselves, was much worse than that of many other
and textbooks on accounting. A few sets of places.5 A bad monetary system was still
accounts date back at least to the close of no unusual thing-even England did not
the Middle Ages. But the bulk of the put her coinage onto a moderately sound
available evidence (as well as the text-
books) is several centuries junior to these ' I have described these conditions fully in The
precocious survivors. Does such com- House of Hancock (Cambridge, 1945), XVI. Chapter II
details the accounting evidence, which is mostly
housed in Harvard Business School, and from which
I obtained all my following quotations unless the con-
1 M. Postan: "Credit in Medieval Trade," Economic trary is stated.
History Review, I, 1927-28, p. 235. N. S. B. Gras has also 4 A. Evans, "Some Coinage Systems of the Four-

summarized this interpretation of economic history, teenth Century," Journal of Economic and Business
and pointed out its dubious features, in "Stages in History, III, p. 481; A. P. Usher, Early History of
Economic History," Journal of Economic and Business Deposit Banking in Mediterranean Europe (Boston,
History, II (1930), p. 395. 1943), p. 193.
2 Karl B ucher: Economic Evolution, translated by ' C. P. Nettels: Money Supply in Ike American
Wickett (1901). D. 128 d sex. Colonies (Madison, 1934), p. 163.

11 *

This content downloaded from 169.229.32.137 on Thu, 8 May 2014 22:06:25 PM


All use subject to JSTOR Terms and Conditions
156 The Accounting Review
basis until 1696. But the plight of the New treat coins like goods to be dealt in by
England colonies was exceptional. Nomi- weight, e.g., one entry tells of a debtor's
nally, their money consisted of pounds, payment in silver money "which I sold to
shillings, and pence, each of these units - 4 oz. 17 dwt. 13 gr. @ 12/-per oz."
being (in Massachusetts) worth about But even these battered foreign coins
three-quarters of its British namesake. But were somewhat hard to get. The reason for
I doubt very much whether the Hancocks the shortage is probably as follows. Al-
ever saw any of these coins, which seem to though New England was a hungry buyer
have disappeared about 1700. For hard of British manufactures she could in
cash, the New Englanders relied on dollars return grow little that was pleasing to the
and other foreign coins won in their West mother-country. Consequently her mer-
Indian shipping ventures.' If we turn to chants paid for part of their supplies by
one of Henchman's accounts with a Penn- exporting all forms of coins and specie. A
sylvanian firm that had sold him flour, we coin from the Indies might circulate for
find that he sent back this medley of coins only a brief period before being shipped to
in payment: London.As late as 1750 a visitor to Boston
johannes (i.e. Portuguese gold piece) wrote "This is the first time . .. that
moidores (i.e. Portuguese gold piece) Supplies of Silver Coin could be had from
guineas (i.e. English gold piece) Boston, 'tis quite new to them-merchants
French guineas that could supply 50,000 ? Value in stores
pistoles (French or Spanish gold coins) cannot raise 5,000 ? St. in Cash."7
doubloons (two pistoles) To fill this gap the New Englanders
"checkeens" (i.e. sequins, Italian gold took what was then the bold and original
coins) step of making paper money (as early as
Such moneys were valued by both giver 1690). And not only did each of the various
and taker in the monetary units of their provinces print official notes but groups
respective provinces before being entered of private individuals formed themselves
in their accounts. In other words the local into "banks"that experimentedwith large
pounds shillings, and pence were still used issues on the basis of silver, land, or
as units of value, even when they were not merely personal credit. Soon both types of
the units of exchange. notes began to depreciate "owing to the
This was by no means the end of the idle suspicions of the ignorant." There
story. Perhaps one coin in a hundred was followed a long and gentle inflation which
worth its face value. Most had been so rose sharply to a peak during the war of
sadly clipped and sweated that they would 1744-8. Conservativessometimes accepted
be taken only at a discount. "These the private notes only at a discount which
guineas" writes Thomas Hancock "are varied accordingto the issuer's status and
very short of Weight and to pass them they flatly declined to take the notes of the
here would be a great Loss as they must more exuberant bodies. Even the official
weigh here 5 dwt. 9 grs." So householders notes were looked on with some misgiving;
kept scales for testing the coins that came and as they had almost the status of legal
their way. Journal entries were apt to tender they presumably helped to drive
' For a description of the currency, see W. B. hard money from circulation.8
Weeden, Economic and Social History of New England
(Boston, 1890), and J. M. Davis, Currency and Banking
in the Prowince of Massachusetts Bay (New York, 1901), 7See the CanadianArchives'DocumentsRelatingto
and articles in Proceedings of Ihe American Antiquarian Currency,Exchange,and Finance in Nova Scotia (Ot-
Society (February, 1898), and New England Historic tawa, 1933), p. 296.
Genealogical Society Register, LVII, p. 280. 'Davis, op. cit., pp. 1014.

This content downloaded from 169.229.32.137 on Thu, 8 May 2014 22:06:25 PM


All use subject to JSTOR Terms and Conditions
Credit, Bills, and Bookkeepingin a Simple Economy 157
The Hancock records leave little doubt sure on prices. But the drop was never so
about the scarcity of all forms of money, spectacular as might have been expected;
even in years when metal was being eked and there was no bottomless depression.
out by a considerable flow of paper. The Instead of fettering themselves to the
shortage heightens the resemblance be- ordinary forms of money, the New Eng-
tween Colonial conditions and those ob- landers turned to other and older means of
taining in medieval Europe. In both cases, exchange. The Hancock MSS show that
it is worth noting, the standard of value trade was largely based on commodity
and reckoning was often not the staple money and barter. The accounts are richly
standard of exchange. This has led certain seasoned with references to payment in
writers on medieval currency to talk of an grain, in rum, and in potash, etc. Many a
"imaginary money of account." The debt is stated to be "received in molasses,"
phrase is apparently justified if it means or "settled this day in cordage," or "paid
that some of the units were not represented in pork."
by coins, e.g., the "shilling" might not This is not to say that commodity-
exist (and might indeed never have money ranked on the same plane of ac-
existed) but simply was a handy name for ceptability as cash. Ordering 30 barrels of
"a dozen pennies." Further, changes in pork, a Halifax trader writes: "You were
the relative values of gold, silver, and so kind to tell me when you found the
copper might result, e.g., in the penny's difficulty of procuring Cash that you
(actual coin) ceasing to be the same thing would let me have more pork should the
as the penny (unit of account); the former people here be inclin'd to take it on Accot
was then rated at some such ungainly of payment."'0 As late as 1783, a Salem
fraction as 20/29 of the latter. So the link debtor is commanded to pay "in as much
between the two brands of money might Cash as you can Obtain-and perhaps
well be slender. But I find great difficulty Some W. India Goods if the Price Suits."
in conceiving of genuinely imaginary Goods, it should be noted, were never
money. Surely price units must always thought of as units of value. Like strange
have been anchored to real money or coins, they were weighed and valued in
commodities by some rating system. even terms of Massachusetts money; thus a
if it was unofficial and based merely on the journal entry runs:
common consent of the market.9 In the James Barrick Dr to Merchandise
case of New England, prices and therefore Ballance due to him paid in Hemp this
money of account would seem to have been day, 130 cwt. 0.8 lbs. at 64 ?416. 9. 22
tied to the notes, though the links in the The goods were presumably appraised at
chain were elastic. Had money not been the current market prices, or at the official
based on something less airy and illimitable values proclaimed by the legislature when
than mental concepts the temptation to taxes were collected in kind. This meant
offer more of such cheap stuff would surely that a merchant might in theory have to
have been irresistible, and inflation swift. "sell" commodity money to his creditors
In New England, the disappearance or without making a profit; and the books
scarcity of money did not result in a contain traces of many such non-profit
correspondingly low price level. True, any transfers. But doubtless the merchant
withdrawal of the official note issues would tend to glean some revenue. Barter
produced a noisy outcry, checked trade lends itself to the exploitation of creditors.
somewhat and caused a downward pres- 1" Boston Public Library, Ch.M. 3.5, II, p. 221,
' Usher, op. cit., p. 217. July 30, 1767.

This content downloaded from 169.229.32.137 on Thu, 8 May 2014 22:06:25 PM


All use subject to JSTOR Terms and Conditions
158 The Accounting Review
"He that bartereth hurteth hymself, for and painful instalments-perhaps first
commonly the one partie ether for lacke of some butter, then a bill of exchange, next
makyng his reconyng or for not hauyng a barrel of pickled beef, and so on. Between
knowledge of the wares or prises of the any two traders, goods normally flowed
same, or dooth not consider the tyme both ways; and the balance of debt might
whiche passeth and commeth, bee it long swing from side to side as the years went
or short, (for as the prouerbe is: The by. Per-contra payment was thus the rule,
Wolues eate not the daies, for thei passe and any trim division of personal accounts
bothe slepyng and wakyng) ie euer driuen into a debtors' and a creditors' ledger
to the worsse.""1 Abuses were particularly would have been out of the question;
rife when servants were paid in kind. A also, dealings were far too involved to
New England pamphleteer explains how permit of their grouping in specialized day
a carpenter loses by being paid his wages books.
in depreciating notes, "and even this is A certain amount of two-way trade
further reduced, by obliging him to take would be natural enough in a small com-
one half in shop goods at 25 per cent or munity; something similar is still found
more advance above the money price."'12 in rural South Africa, particularly in the
trade of storekeepers in the native ter-
CREDIT IN A BARTER SYSTEM
ritories. But its volume in the Hancocks'
The Han-cock records suggest that credit time (and especially in the twenties, when
was of greater rather than less importance monetary difficulties were unusually se-
under these conditions. Prompt payment vere) can hardly be explained except by a
in pigs, for instance, would often have been great need for bookkeeping barter. Every
highly inconvenient alike to giver and Tom, Dick, and Harry was a credit
taker. Commodity money was probably manipulator. Thus Henchman kept a
thought of more as "commodity" than ledger account for his barber, who took
"money," i.e., its movement was bound up corn as payment. The painter who deco-
with considerations of harvesting, con- rated his house sent in an account-current,
sumption, or resale. Delays in payment which shows that payment was extracted
were therefore inevitable. Further, as the in driblets of cash, corn, and books. Hench-
units were not always homogeneous or man's ledger also shows his brother's being
readily divisible (e.g., the hog) exact charged with board (in an account that
settlement was hard, and a balance of debt runs on for eleven years, and is credited
was often left over. Trade would scarcely with various items such as oranges and
have been possible without abundant oysters); even "Jean Whippo, our maid"
credit. has an account that is credited with her
Under such circumstances, bookkeeping wages (at ?5 per annum) and is debited
was indispensable. Indeed, I feel that the with "1 suit of cloaths . . . ?5," etc. The
system might well be named "bookkeeping life and hopes of countless persons must
barter." Account after account shows how, have been sternly ruled by a ledger ac-
for instance, country shopkeepers would count.
take manufactures from their Boston Plainly, this type of trade does not fit
wholesaler, and would then pay by slow into any neat historical analysis of barter,
money, and credit stages. All three types
11Jan Impyn, New Instruction (1547), reprinted in of exchange exist side by side, and may
Economisch-Historisch Jaarboek, 1934, p. 40.
12 Douglas, quoted by Davis, op. cit., p. 376. indeed be met with in a single contract.

This content downloaded from 169.229.32.137 on Thu, 8 May 2014 22:06:25 PM


All use subject to JSTOR Terms and Conditions
Credit, Bills, and Bookkeepingin a Simple Economy 159
For instance, credit may be allowed to a fifteenth century."4 Here are exact anal-
debtor who promises to pay later with one- ogies to certain warehouse dealings that
third money and two-thirds goods (which are mentioned in the Hancock MSS. For
are always valued and recorded in terms of instance, Hancock had to hand over gun-
money). powder for safekeeping to the official
THE DEVELOPMENT OF powder house; his account with this in-
CREDIT TRANSFERS stitution shows that he would then give
orders to third persons entitling them to
Crude barter has two glaring defects: (1)
withdraw barrels. Much the same sort of
if A and B are to exchange goods, their
thing happened when he had sent molasses
wants must be simultaneous; and (2) each
to a distillery to be made into rum.
must want what the other has.
But if C is a warehouseman or a similar
Bookkeeping and credit enabled the
agent, perhaps we should be wary about
New Englanders to surmount the first
speaking of triangular settlement. C is not
defect. To some extent, they contrived to
here a fully fledged third party, but merely
overcome the second also. This was done
B in thin disguise. The goods still belong
by triangular barter. A sells goods to B; if
to B; thus Hancock did not always keep
B does not have what A wants, but is owed
a money account with C (the powder
a debt by C, he may send A to look for
house) but merely a stores account in
acceptable things in C's store; a purchase
terms of barrels. Happily for our theory,
there will mean that C has paid B, and B
however, such warehouse transactions
has paid A, although the goods in fact
make up only one in a hundred of his
move only across the base of this triangle
triangular settlements. C was far more
of traders. Such three-sided settlements
often an independent trader.
were common as witness waste-book
entries such as the following, in which EARLY BILLS OF EXCHANGE
Hancock fills the rdle of B: Should it prove that triangular settle-
Brown and Son Dr to Joseph Rhodes ments in kind were common in the Middle
for 15 boxes Tin plates Ages, they may well explain the birth and
Were similar transfers made in the popularization of double entry. What is
Middle Ages? Common sense suggests that more, they may perhaps throw light on the
the New Englanders probably inherited origins of bills of exchange.
their technique of settlement from an Medieval scholars have shown us that
earlier generation. And we know at least recognizable ancestors of our bills had
that transfers of goods took place when appeared by the fourteenth century. The
the goods had been deposited in a ware- very first evidence, we are told, consists of
house. Before the Christian era, the references to "letters of payment" in
Egyptians could transfer rights to grain correspondence (dated 1291) from a Flor-
stored in granaries (with the help of a entine company to its branch or agent in
document corresponding to a cheque) ;13 London. The bulk of the early evidence
and transfers of hemp were made in the suggests that bills were used chiefly in
government rope factory of Venice in the foreign exchange; that they were some-
13 W. L. Westermann, "Warehousing and Trapezite
what complex in nature, often involving
Banking in Antiquity," in Journal of Economic and four parties; and that they became usual
Business History, 1931, p. 49; A. T. Olmstead, "Ma-
terials for Economic History of Ancient Near East," 14 F. C. Lane, "Rope Factory and Hemp Trade of
ibid., 1930, p. 224. Venice," in the same Journal, 1932, p. 836.

This content downloaded from 169.229.32.137 on Thu, 8 May 2014 22:06:25 PM


All use subject to JSTOR Terms and Conditions
160 The Accounting Revie
in home trade only at a much later date blunder. In the field of biology, "evolu-
(in England. the seventeenth century).15In tion" is merely growth, not necessarily
the Hancocks' own times, Acts of Parlia- from inefficientto efficient, or from simple
ment and Lord Mansfield's judgments to complex; sometimes the growth may
were still reducing the law governing bills seem degeneration to us. The same may
to order.16 well hold of human institutions like ex-
This history does not seem altogether change. At the beginning of the Middle
complete or convincing. It can say little Ages, the written, as contrasted with the
with assurance about the birth of bills. It verbal, contract was looked on with
cannot yet be supported with any of the suspicion; so the first bills may well have
actual documents, which naturally are been hedged around with formalities.
extremely scarce; and, as resounding legal Further, the medievalist can counter my
deeds and important foreign letters are far suggestions by remindingme that the New
more likely to be preserved than homely Englandershad the very advanced English
trade papers, there must surely be some practices of the seventeenth century to
risk of giving too much weight to the build on; that foreign exchange loomed
former types of evidence. One is left unnaturally large in the minds of the early
wonderingwhether the bill's origins should merchants, because it was often a useful
not be sought in something more simple cloak for usury; and that the medieval
and informal than letters to a foreign merchantwas at many points held back by
agent, and whether these early foreign conservatively minded jurists, whereas the
bills had not some domestic parallel. On new Colonies were relatively unhampered
the face of the matter, evolution from by legal aid. Let me describe the Hancock
foreign exchange to local payment, from papers, and leave the reader to judge for
the elaborate to the easy, does not appear himself.
likely. To my mind, the Hancocks' tri- The simplest group of "orders" to
angular transactions (especially those in reach the Hancocks was part of their two-
goods), and the papers by which such way flow of goods. A wants wares from B;
transfers were engineered, suggest that instead of going for them himself, he sends
our history of bills is one-sided. And it a servant or agent. This was very usual in
must be remembered that the Hancocks' the case of a country customer, who would
legacy of MSS includes many papers of a write to Hancock for goods, and add that
type so informal that they would normally these should be given to some carrieror to
have been destroyed. the captain of a coasting boat for delivery.
Yet I scarcely need to emphasize that Such transactions are no more than mail
what follows is intended as nothing more orders at a time when there was no parcel
than a tentative line of research for the post. The Hancock MSS contain many
medieval scholar. It would indeed be ab- examples; a slight variant, which I found
surd if, in an article that starts by taking on the other side of the Atlantic, may be
to task theorists who prefer doctrines of seen in:
evolution to facts, I were to make the same January the 25th 1763.
Loving Child,
" Usher, op. cit., p. 73 et seq.; R. de Roover, "Early please at your conveniency to allow to
Accounting Problems of Foreign Exchange," AccouNw- the poor wydow Bearer hereof and her
ING REVIEW,1944, p. 381; W. S. Holdsworth, History
of English Law, VIII (London, 1923), p. 113. Orphans one Bole of the Moulter of
"6R. D. Richards, Early History of Banking (Lon- your Mill of Benbeculla, which Shall be
don, 1924), pp. 46-9; C. H. S. Fifoot, Lord Mansfidd
(Oxford, 1936), p. 91. Sustained at accounting with

This content downloaded from 169.229.32.137 on Thu, 8 May 2014 22:06:25 PM


All use subject to JSTOR Terms and Conditions
Credit,Bills, and Bookkeeping
in a SimpleEconomy 161
Dear Sir formula, and even to be on paper of a
Your affectionate father standard size and shape, resembling our
Ronald McDonald Clanronald Senior17 cheques. These facts, and the use of
phrases such as "on demand" and "or
Often the third person was a partner, since
a great deal of trade consisted of joint-
order,"emphasize the likeness of the notes
to bills of exchange. And perhaps it is
adventures by casual and short-lived
worth recording that the "bank" and
partnerships.
provincial monetary notes, on the other
The next group of orders was part of the
hand, leaned towards the bills payable in
triangular trade. Here the third person is
no mere agent. When A asks B for goods,
kind, for their wording mentioned a
weight of metal.1'
B gives him a written order on C. C then
makes an entry such as:
Another, perhaps smaller, group of
T. Atkins Dr to Merchandize
papers consists of bills payable in money.
A lot of these, particularlythe more formal
for his note paid John More in Pork and
Flour 4. 12. 3.
documents, were for foreign trade, thus
B's entry will be like this:18
supporting the views of the writers men-
Andrew Symmes Dr to Capt John
tioned above. On the other hand, many of
Matchett
the papers used at home were the same in
for my order on him for 6 Bushells of
effect as bills, although the informality
Indian corn at 3/- -18.-
with which they were sometimes drafted
may disguise this fact. For instance, an
An example of the note is: order to pay one-third goods and two-
Boston Decr 30 1769 thirds money would not now be classed as
John Hancock Esqr a bill by a lawyer; yet the results are the
Sir please to pay Mr. Joseph Moffat or same.
order in goods One pound thirteen Shil- EVERY MERCHANT A BANKER
lings and 3d Lawful Money and charge The essence of our triangular settle-
your humble servt. ments among A, B, and C is that C gives
Thos Dawes something of value to A on behalf of B.
?1. 13. 3 That something, as we have seen, was
usually goods; it would have been idle to
A suitable receipt is often written on the draw on C for cash if cash was not to be
back. had. In the typical triangularsettlement of
Great numbers of such notes have been to-day, C has blossomed into a banker,
bequeathed to us among the Hancock and the something is usually a credit in his
MSS. These survivors include forty-four books that is transferredfrom B's account
from a single customer, for a period of to A's; settlement is made by the magic of
only four months. Though there were a cross-entry. The question naturally
many individual vagaries, most of the arises: could the New Englanders also
notes tend to use much the same word make settlements aithout moving goods
or cash.
17 Clanronald MSS, Register House, Edinburgh.
18 A doubtful example is: 19Davis, op. cit., p. 158, reproduces a note: "This
Expence Dr to Joseph Scott bill of twenty shillings, due to the possessor thereof,
for my note payable to Wm Warllan. from the province of Massachusetts Bay, shall be equal
This may either be "two-way"-i.e., Warllan is an to three ounces of coined silver, Troy weight, of sterling
agent, or Warllan has rendered some service and is alloy, or gold coin, at the rate of four pounds eighteen
rewarded with the note, without any account being shillings per ounce and shall be so accepted in all pay-
opened for him. ments, and in the treasury. Boston 1741."

This content downloaded from 169.229.32.137 on Thu, 8 May 2014 22:06:25 PM


All use subject to JSTOR Terms and Conditions
162 The Accounting Review

The answer is that they could and did. Wages due to me on board the
This is proved by their odd use of the word Schooner Lucy & charge the same to
"discount." Discount's original meaning Your humble Servt
was 'abatement" or "deduction," e.g., by Charles Anderson.
way of a counter-claim against a sum due.
That the orders were widely understood is
(Discount on a bill was one special type of
suggested by entries in Henchman's ledger
abatement: "interest discounted.") In- for two carpenters, one his debtor and the
stead of taking goods from C, A might
other his creditor; he puts through "dis-
build up a credit with him (or lower an count" entries to set off their balances. On
existing liability). So a variant to the notes
occasion, a verbal order might be a good
runs:
enough authority for such a cross-entry.
Pay into (or Discount with)
Apparently anyone who kept a ledger
Mr. James Dennie, or Order,
might be called on to transfer credit; every
Twenty Pounds.
bookkeeper thus performed one of the
Such "checks" might be endorsed and banker's functions, and clearance was not
circulate from hand to hand.20 I am not yet centralized.
sure whether any "usance" was normal; Most merchants of standing probably
probably, as in the above example, the performed several other of the banker's
drawer did not bother to specify when the functions. In telling the story of the Han-
payment or cross-entry was to be made. cocks, I have explained that any large firm
My impression is that a month here or of repute would naturally be called on to
there meant nothing in that easy-going so- deal in bills, to finance military campaigns,
ciety. Nobody seems to have fussed about to take charge of other people's funds, and
"discount" in our sense. Perhaps the ex- to invest these in securities such as pro-
change rates tendered for foreign bills took vincial loans or lottery tickets.21 But much
the time factor into account, though the less important men also carried out many
risk factor loomed a great deal larger in the of the banker's tasks for their customers.
mind of the buyer, who was willing to pay Because there were no specialized bankers
substantially more for bills drawn by mer- and little cash, trade and finance were per-
chants with first-class reputations. force tightly intertwined. Henchman was
Like the orders payable in kind, the mainly a bookseller, but an account for one
notes may well have had their genesis in of his country correspondents tells this
very simple requests, with the third person tale. In four months, the correspondent
acting merely as agent or messenger. One makes eleven deposits (eight in the form
possibility is shown by this letter: of cash delivered by captains, or others,
Boston Jany 10, 1769. and three by notes). On the other side are
shown a series of payments at the corre-
Sir,
spondent's order (e.g., for pasturing a
Please to pay my Wife Mary An-
horse); finally about ?500 of cash is with-
derson Five dolls per Month on Accot
drawn, together with ?950 made up of a
wedge of gold and 25 double doubloons.

2 Henchman's journal contains: INTERNATIONAL CREDIT AND EXCHANGE


9 Sept 1732 Ebenezer Gennings Cr
By a note to disc' with Mr. Beecham Importing provides another instance of
from Apthorp ?20 the union between trade and banking. The
David Mason Dr
To Mr. Apthorp's Note to pay Beecham
endorsed to me for ?20 n The Hose of Hancock (Boston, 1945), p. 204.

This content downloaded from 169.229.32.137 on Thu, 8 May 2014 22:06:25 PM


All use subject to JSTOR Terms and Conditions
Credit, Bills, and Bookkeepingin a Simple Economy 163
main financial burden of Anglo-American was probably a major cause of the Revo-
trade was shouldered by British exporting lution.
houses, which might give the Boston im- An account-current between a Boston
porter a year's credit, free of interest, and merchant and his London creditor would
extend the loan for a further period at 5 provide an object lesson to those who be-
per cent. The Boston merchant distributed lieve in tariffs or exclusive trade agree-
the goods to country shopkeepers and ments between two countries. It shows us
chapmen, noting in his journal "to pay in the stark realities of international trade,
4 [or 8, or 12] months." If the customer's unobscured by money or bankers. The
account was not squared after a long time, British exporter had to be an importer too,
the balance might be converted into a or go without payment. As in home deal-
bond carrying 6 per cent interest. When ings, the basis of trade was bookkeeping
the account was next reviewed, this bond barter, often with triangular or more com-
might be replaced by a fresh one (including plex geometrical embellishments. If the
compound interest).22 Like most other Boston merchant had nothing that his
commercial documents, the bonds were in- London suppliers wanted, he would send
formal. They might contain a clause stat- provisions to Newfoundland, the West
ing that the debt was to be doubled if not Indies, or Europe, and after one or more
paid when due. Probably they were not exchanges would get goods (or coins, or
normally mortgages over land, etc., though bills) that were acceptable in London.
on occasion even a share in a ship was con- Bookkeeping barter was by no means
veyed as security; in some instances, a the only feature that was common to both
church pew was mortgaged.23 local and international trade. Indeed, the
It will be seen that the Boston merchant New Englanders could probably see little
was doing much work that has since been distinction between the two trades. For-
delegated to bankers, shippers, and other eign coins were everyday fare in Boston,
agents. He was the central link in a chain and dealings with the next-door province
of credit that stretched from London to involved currency exchange. Country
the frontier. A loan seems a great favor trade must have shaded smoothly into
before we have obtained it; after, we interprovincial, interregional, and inter-
are apt to regard it as an injury. The national trade.
heavy load of debt of merchants to Britain As we have seen, country customers
were forced by bad communications to ap-
12 Thus on 22 une' 1767, the journal shows a man
point a Boston supplier as their general
being charged with: agent and banker. In overseas dealings,
Interest on his book debt after one this dependence was the more complete;
year's credit on goods sold him ? 4.11.9
Bond dated 27 September 1764 now even the British government had to rely
given up 421. 8.6 abjectly on Hancock for many supplies of
Interest on this bond, 2 years, 8 months,
24 days 69. 2.2 credit, coin, and victuals, and for innumer-
After giving credit for some pork, a new bond was able small services. Foreign exchange was
issued for the balance.
'2 Hancock wrote this letter to three men: not confined to specialists. Anybody might
"The Pew [of thel late Capt John Bulkley in the dabble in it; illiterate fishermen on the
meeting house whereof the Red Mr Sam' Cooper is
minister Being mortgaged to me the subscriber in Newfoundland Banks provided Boston
1754 which I have taken Possession of. with many sterling instruments drawn on
I am to Desire the favr of you Gentn to apprize
the same that I may give the Estate Credit for it. their Devonshire homeland. A merchant
Note there is an Incombrence of Two Grand Chil- was always willing to deal in sterling bills
dren of Mr. Bulkleys sitting in Sd Pew which I can't
well Refuse." on Boston 'Change, in general as a buyer,

This content downloaded from 169.229.32.137 on Thu, 8 May 2014 22:06:25 PM


All use subject to JSTOR Terms and Conditions
164 The AccountingReview
but occasionallyas a seller if he had some-
fair number of accounting textbooks.*
how managed to build up credits abroad These were usually illustrated with full
(e.g., by a lucky sale of whale oil). It is
specimen accounts. There seems no reason
hardly surprisingthat bills, even those on
to doubt that such specimens give an ade-
the British Treasury,Uwere by no means quate bird's-eye view of contemporary
certain to be honored;each depended on a trade methods, and provide us with fairly
circle of transactions, and a ship might be
reliable standards of comparison.
lost, or another bill might not be due, or aA survey of eighteenth-century books
clerk might make an error in posting. A swiftly dispels any theory that the Han-
creditor was apt to get his dues only after
cock records were like those of western
exasperating delays, bickerings, and re- Europe. True, casual partnership, joint-
bates. ventures, and consignments are often met
As in home trade, slight distinction was
with, and some authors still talk of barter;
drawn between goods and money. Each but bookkeeping barter seems to become
was a "way of remittance." Money might rare about the end of the seventeenth cen-
be preferable,but the creditor could often
tury (especially in home trade), and cash
be bullied into taking goods; thus Hancock,
transactions abound throughout that cen-
after telling a London firm that no gold or
tury. The only triangular transfers spring
bills are to be had, asks in what form they
from bills of exchange-and the latter are
would like a debt in local money to be re-
payable in money. In short, the textbooks
mitted, "and the longer it lyes the worse it
are in some respects far more modern in
will be as our money is daily sinking." flavor than the Colonialaccounts. We may
Among the bills sent to Jamaica was one perhaps risk two generalizations:
"payable on demand in Molasses." (1) Textbooks and Colonial accounts are
The Hancock MSS are worthy of study alike in their stress on joint-ventures,
by monetary theorists on many grounds. etc. (because companies had not yet
They illustrate the workingof an economy replaced partnership as an outlet for
whose money, as we have seen, was largely the speculative), and on bills (because
made up of goods, private or external banks were not yet the staple agents
paper, and private paper based on goods. for credit transfers). Incidentally, day
The quantitative importance of these books had nowherewon their complete
seems to call for investigation. Perhaps a victory over the journal, which sug-
clue to the matter may be obtained from gests that the volume of straightfor-
the effect of the great public note issue of ward transactionswas too small to call
1741-9; the volume of Massachusettsnotes for grouping in specialized books of
jumpedfrom some ?220,000 to ?2,200,000, originalentry.
but the price of silver, and exchange rates,
(2) On the other hand, textbooks differ
merely doubled.2' from Colonial accounts in assuming
that money is always available, and
EARLY TEXTBOOKS AS EVIDENCE
payment in kind a rarity.
So much for eighteenth-centurycolonial The further back we go, however, the
accounts. To what extent were they typi- less seems to be the gulf between the two
cal of other places and dates? sets of evidence. Textbooks dated 1718,
Europe was at that time producing a
"The library of the Society of Accountants in
2
Nettels, op. cit., p. 201; Baxter, op. cit., p. 104. Edinburgh (where I made this survey) contains ten
* Davis, op. cit., p. 367; Proc. of American Acad., works of the eighteenth century, and four of the
p. 211. seventeenth.

This content downloaded from 169.229.32.137 on Thu, 8 May 2014 22:06:25 PM


All use subject to JSTOR Terms and Conditions
Credit, Bills, and Bookkeepingin a Simple Economy 165
1635, and 1610 show signs of bookkeeping Hancock MSS prove conclusively that,
barter. And Jan Impyn (1547) lists the under Colonial conditions at least, any
following ways of buying and selling, analysis of exchange into sequentialphases
whose kinship to Boston methods is pat- of barter,money, and credit is indefensible;
ent: al} three elements existed side by side, and
"The first is with ready money. The second by
were often interdependent. A comparison
tyme and daies of paimente. The third in geuyng of the Hancock MSS with bookkeeping
wares for wares the whiche we call Bartery, and records of the Renaissance suggests that
in Italien Barratto. The fourthe is with money, Europe was at that date emerging from a
and part tyme. The fifth, with money and some somewhat similar stage. We are thus not
wares, or other exchaunge. The sixt is by wares,
and the rest for tyme. The seuenth by assignacion
without justification if we regard Colonial
of one debtor to another. The eight one part by accounts as clues to medieval practice; but
assignacion of redy money, and the other parte conclusions based on the analogy must be
in wares, and tyme. And the nynth and last is by very guarded until many more medieval
all condicions together, in geuyng money, wares records have been unearthed and studied.
assignacions, and for tyme.17
The last word obviously rests with the
The researches of scholars lend color to medieval scholars. I look forwardin partic-
the view that some of the Hancock meth- ular to further discoveries in the early
ods had long been commonplace. "A story of bills. How is that story to be
general rule of Roman Law recognized linked up with the innumerablenotes that
transfer of obligation in books of account the Hancocks have left us? These seem to
as a valid means of payment. Such opera- show that (a) orders in kind were an es-
tions were practiced by private persons as sential part of home trade; (b) bills could
well as by the silversmiths (argentarii) who readily have developed out of the simple
discharged many of the functions of the letters that shopperswould use daily when
banker."28 Professor Postan has mentioned ordering goods; and (c) there was no
medieval triangular transfers as substi- marked gulf between home and foreign
tutes for money.29 And an able study of trade in the matter of payment methods.
Italian accounts at the close of the Middle If we discard the barter-money-credit
Ages confirms this; there was, we are told, theory of exchange phases, dare we hazard
a well-developed system of debt settle- any alternative?
ment based on substitutes for money- The phases suggested by accounting
"the 'setting over' of debts was a common history are perhaps:
practice despite the absence of negotiable (1) Pre-accounting age. Presumably this is a time
instruments. Local payments were often of crude barter, sometimes with credit.
made by transfer in bank or by transfer of (2) Bookkeeping barter. The "two-way flow" of
credit on the books of an ordinary mer- goods allows traders to evade the worst
drawbacks of crude barter. Some of the goods
chant or a merchant-banker. Transfer
are commodity money. "Money of account"
orders were given not in writing, but by is the common denominator for reckoning, but
word of mouth."03 the corresponding coins may not circulate
Let us now review our evidence. The much.
(3) One-way flow. Metallic and paper money are
27Op. cit., p. 24. met with so freely that payment in kind is
u Usher, op. cit., p. 4. Later pages mention many unnecessary. A merchant can divide his per-
medieval analogies to the Hancocks' oral and written sonal accounts into two groups, for suppliers
transfers of money. and for customers. His transactions become so
" Op. cit., p. 246.
4 R. de Roover, "Early Accounting Problems of simple that he can segregate them in special-
Foreign Exchange," AccoUMNoT Rxtvxw, 1944, p. 382. ized day books.

This content downloaded from 169.229.32.137 on Thu, 8 May 2014 22:06:25 PM


All use subject to JSTOR Terms and Conditions
166 The Accounting Review
(4) Bank settlement. Finally, the advantages of by middlemen. In the second, the middle-
payment by cheque reduce cash settlements man has appeared, but he must be om-
to a negligible scale. Clearance is centralized.
nivorous, buying and selling almost every-
Such stages do not, of course, correspond thing, and so making his profits in a tedi-
crisply with successive periods of time. ously roundabout way.3' In the third, he
There must always have been some over- can concentrate on one type of goods. In
lapping; probably all stages existed to the fourth, he rids himself of the work of
some extent even in the Middle Ages. But settlement, leaving it to professional
each may well typify the procedure that bankers. If this analysis is correct, the key
was dominant in certain centuries. to exchange phases is the merchant's degree
Perhaps these accounting phases merely of specialization.
reflect steps in the evolution of the mer-
chant. In the first, there are presumably 31 A counterpart of the unspecialized Boston trader

few merchants, because craftsmen sell is suggested by E. F. Heckscher: "Natural and Money
Economy as illustrated from Swedish History," Jour-
straight to customers without intervention nal of Economic and Business History, III, p. 12.

AIR TRANSPORTATION ACCOUNTING


Louis E. ZRAICK

D URING World War II the United several colleges of business education to


States Office of Education author- offer the essential courses have been im-
ized many of our leading universi- pediments to those who would pursue this
ties to conduct intensive courses in field of study. I should like to introduce
connection with the Engineering, Science, this subject to present airline employees
and Management War Training Program. and to educators gradually, because it is
Air Transportation Management was one my conviction that accountants in con-
of the selected subjects. The students eli- siderable numbers may, in the immediate
gible to take this course were, for the most future, secure employment in this rapidly
part, employees of various airlines who growing new industry.
were selected by university registrars as Air transportation is carried Pout today
most likely to benefit from a course of through the operation of approximately
this type. Through this undertaking, our fifteen major airlines. Yet this type of
government endeavored to promote the transportation is relatively small in com-
usefulness of airline employees at a time parison with transportation by land, or
when the airlines were handling numerous water.
war contracts. Airlines are subject to a greater degree of
Now that the war is over, airlines are control than most private business corpo-
growing on a scale greater than ever before. rations. The control lodged in the Civil
Numerous applications for expansion are Aeronautics Board over air carriers is simi-
now pending before the Civil Aeronautics lar in many respects to the control vested
Board in Washington, D.C. Many airline in the Interstate Commerce Commission
employees may wish to supplement their over railroads and other common carriers
limited knowledge of transportation ac- by land.
counting. The lack of an adequate text- A carrier may be described as an organi-
book on the subject and the inability of zation that transports persons or goods. If

This content downloaded from 169.229.32.137 on Thu, 8 May 2014 22:06:25 PM


All use subject to JSTOR Terms and Conditions

You might also like