The Presumption of a Monetary Constant

3/26/2013 Portland, Oregon – Pop in your mints…

Today, we offer a second course on the menu of our upcoming eBook release, Pacioli’s Gift vs. Bernanke’s Curse, it is a chapter on the importance of a monetary constant when employing the methods of dual entry accounting.  Enjoy!

The Presumption of a Monetary Constant

Luca Pacioli was first and foremost a mathematician.  He understood that mathematics relies upon certain constants to remain, well, constant in order for the calculations that depended upon them to be meaningful.  Whether or not Pacioli was conscious of the fact, implicit in his presentation of the methods of dual entry accounting is the assumption that the money in which he was directing merchants to keep their accounts on the basis of was sound money.  The use of the monetary unit as a unit of account implies that he understood that money was to the economic world what constants were to mathematical calculations.

Also implicit in his assumption was that the monetary units which were to be used as units of account on the accounting ledger contained a constant weight of silver or gold which existed in the natural world.  Silver and gold that had been hewn out of the ground and struck into coinage of a set weight and metallic alloy by the men at the old Zecca, the Mint of Venice in the Rialto district which preceded its famous successor was completed in 1545.  This was an important assumption, as dual entry accounting only works when the accounts balance.  By design, it implies that physical goods are in existence or are reasonably expected to come into existence and become available for exchange.

When Pacioli penned Summa, the Venetian Zecca was one of the largest and most reputable mints in the world.  This reputation was born in no small part of a scandal at the Zecca which consummated with the Doges, who ruled Venice at the time issuing a decree on the 11th of November, 1457 against then noted variations in the weight and purity of the gold and silver coins that the Mint at Venice.  As a result of this renewed commitment to monetary purity, the coins which circulated in Pacioli’s time and locale, the Silver Ducat, Soldo, Lira Sequin, and Gold Ducat, served as the standard of trade in the world known to Pacioli.

Given that the Venetian merchants could count on this sound monetary standard on which to base their accounts and, by extension, their choice of activities, their use of dual entry accounting not only benefited their own interests, but had the side effect of benefiting all who circulated and traded the Venetian coinage, whether or not they had mastered the art of dual entry accounting.

Luca_Pacioli_Gemaelde by Jacopo de' Barbari circa 1496
Summa de Arithmetica, Geometrica, Proportioni et Proportionale – Pacioli’s great gift to Western Civilization

For those who had mastered the art of dual entry accounting in this environment, the ability to properly recognize and record their transactions and to make sense of the results gave them a sort of super power.  This super power, the ability to recognize the value of transactions over longer time horizons and therefore direct investments over longer time horizons, was further refined by Pacioli, who employed the use of Arabic numerals and proposed a system of mercantile accounting that could apply uniformly to all trades and nations.

However, dual entry accounting, as mankind is now coming to understand, is a two-edged sword.  For dual entry accounting to work in favor of those who practice and/or rely upon it, the unit of account must hold a stable value.  The assumption of the relatively stable value of the monetary unit in relationship to the natural world is essential for interpreting the primary output of dual entry accounting, the profit or loss signal.  The stable unit of account is also essential when evaluating the worth and employment of items that are represented by entries to the balance sheet, upon which the profit or loss signal ultimately depends.

In short, the stability of the monetary unit of account was essential if dual entry was to be relied upon for sound decision-making.

For the Venetians, this requirement was met by virtue of their relatively stable monetary unit.  As such, the Venetian Mercantile class rose to dominate the Western world.  Indeed, with few notable exceptions, dual entry accounting has rendered an invaluable service to mankind and has allowed human progress to follow a generally upward trajectory in terms of material well-being ever since Pacioli made his bequeath to mankind.

As a stable currency enables the super powers of dual entry accounting to operate, an unstable currency, of which there are numerous examples in the largest economies in the world today, circa 2013, is its kryptonite.  A currency that does not have a relatively stable value over long time horizons, specifically the time horizons required for large-scale investments of capital to be planned with the precision required for them to be successful, serves to render the gift of Pacioli powerless.

In doing so, an unstable currency threatens to take mankind from the comfort of their large screen televisions, sofas, and smart phones, and throw them back into the dark ages, from which the world that Pacioli lived in had recently emerged.

In the irony of ironies, mankind has unwittingly made use of Pacioli’s gift to create the largest system of unstable currency that the world has ever known, the one that has operated for the past 100 years.  This disastrous invention is known as central banking, and it has quickly turned the world’s economy into an unmitigated catastrophe waiting to happen.

Stay tuned for the release and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

Key Indicators for March 26, 2013

Copper Price per Lb: $3.45
Oil Price per Barrel:  $96.17
Corn Price per Bushel:  $7.30
10 Yr US Treasury Bond:  1.91%
FED Target Rate:  0.15%  ON AUTOPILOT, THE FED IS DEAD!
Gold Price Per Ounce:  $1,600 THE GOLD RUSH IS STILL ON!
MINT Perceived Target Rate*:  0.25%
Unemployment Rate:  7.7%
Inflation Rate (CPI):  0.7%
Dow Jones Industrial Average:  14,560
M1 Monetary Base:  $2,368,600,000,000 LOTS OF DOUGH ON THE STREET!
M2 Monetary Base:  $10,521,800,000,000