15/12/22, 14:12 A Brief History of Ledgers.

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Feb 15, 2018 · 11 min read · Listen

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A Brief History of Ledgers

Before starting my investigation into distributed ledgers I did some
research on the history of ledgers. What I found really put blockchain
in perspective for me.
You’d be forgiven for thinking that “blockchain” and “bitcoin” are just tech memes
like “deep learning”, “smart cities” and “the cloud”. The speculative mania in
cryptocurrencies might even make them seem like products of human greed rather
than ingenuity. In the context of history, blockchain is simply a new way to create
ledgers. This is why I think it will have a lasting impact. In this article, I present
three examples where new ledger technologies drastically changed society and try
to show why blockchain might do the same.

Pictographic Tablets (3,200 BC)

Over 5,000 years ago, the ancient Mesopotamians started to record quantities on
clay tablets. They partitioned the tablet into rows and columns. Within each cell,
they drew a picture of the type of item and made holes indicating the quantity of it.
Each type of item had its own standard pictographic representation, making this
ledger language the earliest form of human writing we’ve discovered¹. It’s called
“Proto-cuneiform” because it later evolved into a complete written language called
“Cuneiform”. In other words, the ancients invented Excel before Word!

690 3

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Proto-cuneiform tablet, Uruk, ca 3100–2900 B.C. Image source.

The earliest Proto-cuneiform tablets came from Uruk around 3200–3000 BC. At the
same time, Uruk became the world’s first city — the first time tens of thousands of
people settled in the same area. The specific meaning of many of the pictographs
remains a mystery. The best we can do is study them and make a reasonable guess
about their function and importance.

The Cuneiform Digital Library Initiative (CDLI) has a searchable database of these
fascinating tablets. Here’s some I found that I thought were particularly remarkable:

W 05233,b: Distribution of different types of grain products to celebrate the

festival of the evening star of the goddess Inanna. IMAGE, DESCRIPTION

MSVO 3, 11: Calculation of how much barley meal and malt were needed to fill
an order for several types of beer. Shows on the reverse side the calculations to

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reach the total requirement of meal and malt from the different quantities of
each beer. IMAGE, DESCRIPTION

MSVO 3, 82: Pictured above. Describes two allotments of barley. The holes each
represents 10 gur. A gur was roughly the same as 300 litres¹, so in total each
allotment was roughly 6,000 litres. Its front and back have the imprint of a
cylinder seal to prove authenticity. IMAGE, LINE ART

MSVO 3, 29: Describes 135,000 litres of barley (produced, lent, borrowed?) over a
period of 37 months IMAGE, DESCRIPTION

And here’s a rough list of features I derived from them:

A pictographic description of the purpose of each transaction/allotment and

other metadata.

Incremental calculations into sub-totals and then totals so the calculations

could be verified.

The signature of an official to specify who authorised the transaction.

Means of authentication with a cylinder seal.

A dating system which can specify a date or duration.

Quite an amazing achievement, but what did they really mean for the development
of civilisation? As society becomes more populous and complex, so do the records
of events. Being able to record data outside of one’s memory is obviously going to
make things more efficient and less prone to error.

I think the tablets also helped facilitate the division of labour. In order to abandon
an agrarian life and embrace an urban profession you had to be able to trust the
system to feed you. Developing trust can be difficult in a large communities. In
small farming communities you can get by with your extended family as your social
network, but in a city you need a wider degree of cooperation. Proto-cuneiform
allowed contracts to be written down so they couldn’t be disputed later. Cylinder
seals provided a technical trust mechanism that made them irrefutable. Having
administrative records in general probably made the system seem trustworthy,
systematic and fair. Once trust and stability were established people could settle
into a specialisation without concern for their survival.

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On the origins of writing with Denise Schmandt-Bessersat

Professor Denise Schmandt-Bessersat explains how small counting tokens led to signed debt envelopes,
which led to tablets and writing.

Of course, we can only speculate on how essential these tablets were to the
population explosion in Uruk. What we can say is that the invention of ledgers
coincided with the dawn of civilisation.

The double-entry system (1340 AD)

Around 700 years ago a new method of accounting emerged amongst the merchants
and money lenders of northern Italy. This new ledger technology gave its entries a
logical relationship. Every item must be entered twice, once as a credit and once as
a debit. According to some scholars, its spread led to what we now call “capitalism”.
The Marxist economist, Werner Sombart was one of the first to make the
connection⁴:

The very concept of capital is derived from this way of looking at things; one can say that
capital, as a category, did not exist before double-entry bookkeeping.

It’s easy to see why he thought this — double-entry is essentially an algorithm that
organises the transactions of a business according to the following equation:

Assets = Liabilities + Capital

Where “capital” measures the equity of the business owners. Rearranging the
equation we get:

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Capital = Assets − Liabilities

It should be obvious what we must do as business owners: Get more assets without
adding to liabilities i.e. maximise capital. Hence, Sombart considered double-entry
a necessary condition for the transition to a society based on private companies
maximising capital i.e. capitalism.

The system works by taking the list of transactions from the merchant’s journal (a
single entry ledger) and transferring them to the double entry ledger. Each item
goes into the double-entry system by adding a credit in one account and a matching
debit in another. To me, it’s a very unintuitive, so here’s an example: you sold a shirt
for five dollars that you originally bought for three⁵. In the double-entry system you
would:

Credit your inventory account (an asset account) $3. Credit, because inventory is
an asset account which is decreased by crediting. This credit removes the shirt
from your inventory.

Debit your “cost of goods sold” account (a capital account) $3. Debit, because
you’ve lost a shirt and debits are decreases in capital accounts.

Debit your cash account (an asset account) $5. Debit because cash is an asset
account which is increased by debiting.

Credit your “sales revenue” account (a capital account) $5. Credit because sales
revenue is a capital account which is increased by crediting.

There are four entries because two things happen in this transaction. You lose shirt
and you gain $5. Summing the entries on our capital accounts (cost of goods sold
and salves revenue), we have a $5 credit and a $3 debit giving a total credit (increase
of capital) of $2.

In a complex business money and assets can be going in and out of different places
for different reasons. Entering things twice provides two views of the same event in
different locations. You can look at your capital accounts and see what is causing
debits (loss of capital). Likewise, you can look at your cash account to see how your
cashflow is fairing. Something that is sucking away your cash might be affecting
your capital, or it might not, for example if you are paying down debt (recorded in a
liability account). The double-entry ledger makes it easy to reason about these
things.
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As double-entry became ubiquitous it gave businesses, investors and lenders a

common language. Financial statements derived from double-entry system, like the
balance sheet, became a standard way for businesses to demonstrate their
creditworthiness or potential for investment. This paved the way for an investor
class, an essential feature of capitalism, which specialised in their analysis.

Once again, we can’t definitively say that double-entry caused capitalism. But to me,
it does seem that as the double-entry system spread out of northern Italy, the
western world economically re-orientated itself towards the rational and systematic
pursuit of profit.

Central banking and fiat — Ledgers entries as money (1931 AD)

Prior to the invention of fiat money, ledger entries always measured a quantity of
something tangible owned or owed. A liability on the ledger was someone else’s
asset because it represented a quantity of something that the debtor had to transfer
to the creditor in the future. So how could you make a ledger asset valuable unless
it’s redeemable for something valuable?

The answer lies in the fundamental idea of economic value. Things can be valuable
for two reasons:

They are, or are a means to obtaining, an economic good (something desirable

to an individual).

They are a means to avoiding an economic bad (something undesirable to an

individual)

Redeeming ledger entries in gold gives them value because of the former reason.
The following quote from Adam Smith illustrates how you can use the latter reason
to give paper money value through the tax system:

A prince, who should enact that a certain proportion of his taxes should be paid in a
paper money of a certain kind, might thereby give a certain value to this paper money;
even though the term of its final discharge and redemption should depend altogether on
the will of the prince

— Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations

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In other words, Being in jail is an economic bad. Governments have jails.

Governments put people in jail for not paying their taxes. So the way to give ledger
entries exchange value is obvious: Make people pay taxes by transferring their
ledger credits to you. This scheme was realised by central banking system and
implemented roughly as follows:

1. A bank is given special legal authority. It’s called the central bank. The
government of the country has accounts at this bank.

2. The central bank issues bank notes which are redeemable in credit at the
central bank for the face value.

3. The central bank does not redeem its liabilities for anything.

4. The government only accepts payment of taxes by crediting its account at the
central bank (usually through a commercial bank), or by paying them with bank
notes.

With these four points a new ledger technology is achieved. The numbers on the
central bank’s ledgers magically have value even though you can’t redeem them for
anything!

The history of The Bank of England (BoE) demonstrates the above quite nicely (I’ve
labeled the satisfaction of the criteria above):

The Bank Charter Act of 1844 gave the BoE an effective monopoly on issuing bank
notes (1). A £1 bank note was redeemable by the BoE for one Sovereign (a gold coin)
or could be converted into a £1 deposit (bank credit) (2). In 1931, the BoE stopped
redeeming their notes and deposits in gold (3). Now, the bank notes could only be
exchanged for credit and vice versa. Gold coins were and are still legal tender, but
they trade at a premium to the bank notes so you would be foolish to pay taxes with
them. BoE bank credit and by proxy bank notes, are now effectively the only things
you can pay taxes with (4).

It’s easy to see how this technology is desirable to governments. Indeed, every
government on earth participates in a central banking system of some sort. The
supply of central bank credit is firmly in the control of a small number of humans
appointed by the government. Gold, on the other hand, is an element on the
periodic table that is found all over the world. Its supply is completely outside the
political domain. After freeing paper money from gold, the central bank could use
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its gold like any other asset. More importantly, the central bank can purchase new
assets ad infinitum by trading them for credit it created with an irredeemable
ledger entry. Usually, this power is used to buy or sell government debt to expand or
contract the money supply in accordance with economic data and the economic
theories the central bankers hold.

The central banking systems made ledger numbers, not commodities, the money of
humanity. Most people spend most of their lives working at jobs to get paid. Now,
this concretely means getting an increase in numbers in your bank account or
getting central bank notes. Central banking caused a subtle but fundamental change
in the human condition. Humanity’s primal motivation to gather wealth was
redirected away from real goods to ledger numbers on paper and electronic
databases.

Distributed Ledgers (2009 AD)

Just under 10 years ago, an anonymous person called “Satoshi Nakamoto” released a
paper called “Bitcoin: A Peer-to-Peer Electronic Cash System”. At its core was a new
ledger technology called a “blockchain”. The blockchain runs over a decentralised
peer-to-peer network where all participants come to a consensus on the state of the
ledger. It was the first ledger that wasn’t the tool of any particular person, group or
government. Bitcoin was a decentralised public ledger for the whole world.

But a public ledger of what? Well, just like in the central banking system, the ledger
entry numbers (bitcoin), are the money themselves. Like central bank credit,
bitcoin isn’t redeemable for anything, but unlike central bank credit you can’t pay
taxes with it. The blockchain is just a public ledger for the sake of having a public
ledger. Weirdly enough, people decided that owning entries on this ledger was
worth paying for.

A full theory as to why people are willing to give up their hard earned bank
numbers for bitcoin numbers is outside the scope of this article. I’m going to try and
explain that another time. As a starting point, here a few properties distributed
public ledgers have that central banking ledgers don’t:

Permissionless: Unlike central bank or commercial bank ledgers you don’t need
anyone’s permission to own an entry. This is especially relevant to the billions of
people who don’t have access to reliable electronic financial systems. IOHK, the

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company behind Ouroboros, is setting up offices in Ghana, Ethiopia and Kenya

in 2018 for this reason⁶.

No central authority: The operation of the protocol is the only thing determines
the next state of the system. If you trust the protocol then you can trust the
system. This also means there is no way to create new money on the ledger
unless the protocol defines a way to do that.

Contract execution: The blockchain can be extended with a programming

language. Complex contracts can be written in the language and publicly
executed on the blockchain.

Public: You can prove you own something or have done something publicly
using cryptography as long as it can be represented on the blockchain.

Optional Anonymity: You can own an entry without ever revealing your
personal identity.

These properties don’t by themselves mean that bitcoin or other cryptocurrencies

should have exchange value. But if we can somehow assume they can one day have
a dependable stable value, it’s easy to see the potential for these ledgers to
transform civilisation.

Future
Each of the above ledger technologies probably seemed benign at the time of their
invention and early development. It’s only in retrospect, after their logic has had
many years to permeate through society, that we can see their significance.

Distributed ledger technology is still in its nascent stage. It has already earned its
place in the history of ledgers. Like the other ledger inventions, it might play a
major role in the evolution of our future society. So far, it’s most notable effects are
the emergence online illicit drug markets, a speculative mania and some cat
breeding game. Only time will tell if that’s all it will do!

Notes:
1. There are other older instances of humans scratching symbols into things but
no earlier use of an actually useful written language has been confirmed.

2. http://cdli.ox.ac.uk/wiki/doku.php?id=old_babylonian_scribal_schools, “Bridge
between volume and capacity units: 1 sar-volume is equivalent to 60 gur (ca. 18
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m3 or 18 000 liters)”.

3. http://ianmorris.org/docs/social-development.pdf, see [9.2] Estimates of

Western City Sizes

4. https://web.archive.org/web/20110722064638/http://www.dse.unive.it/summersc
hool/course2007/accounting%20and%20rationality.pdf, Sombart’s is quoted on
page 33.

5. I took this example from this video: https://youtu.be/VxPVM8CRtEM

6. Mentioned in this video https://youtu.be/D_QLfnucgh0?t=52m15s

Blockchain Central Banking Double Entry Bookkeeping Cardano

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