By various measures, the U.S. economy has recovered—at the time of writing, unemployment was near record lows and the Dow Jones Industrial Average was at record highs. But those gains are not evenly distributed; wage growth at the top is six times what it is for those in the middle, and even more compared to those at the bottom. That’s a dynamic that’s been building for decades, but it was made worse by the financial crisis, as well as the policies imposed since then to prop up the financial markets in which the rich hold their assets. It’s one reason people both within and outside the United States believe they’ve been shortchanged by the institutions that had throughout the twentieth century delivered progress and prosperity. This is clear in Pew Research’s ongoing longitudinal study of trust in government in the United States, which puts trust near historic lows (about 20 percent in May 2017). A separate survey by Gallop showed that only 12 percent of U.S. citizens trusted Congress in 2017, down from 40 percent in 1979; that about 27 percent trusted what they heard from newspapers, compared with 51 percent thirty-eight years earlier; and that 21 percent trusted big business, down from 32 percent.
At the time of writing, even traditional Republicans are wondering (1) how on earth Donald Trump was ever elected president, and (2) why so many people seem to fall prey to blatant disinformation and conspiracy theories. Trump’s manifestly a liar, someone who lies even when evidence disproving the lie is readily available. But here’s the bigger problem: in a world where trust has eroded sharply, where our government doesn’t work, and where companies that once guaranteed jobs for life are now either outsourcing them or hiring robots, Trump’s lies can seem minor in comparison to the more systemic breach of trust voters are feeling. Once-trusted news organizations are now thrust into competition with dubious online purveyors of disinformation, with both being accused of peddling “fake news.” The public’s store of trust in institutions is being depleted, and without resolving that breakdown, our democracy will continue to deteriorate at the hands of politicians and media that tell them what they want to hear.
Trust—particularly trust in our institutions—is a vital social resource, the true lubricant of all human interaction. When it works, we take it for granted—we wait our place in line, follow road rules, and assume everyone else will do the same. The trust behind these interactions is not present in our conscious minds. But when trust is lacking, things really, really break down. Today, it’s seen most starkly in places like Venezuela, where people have lost faith in the stewardship of their government and its money, leading to hyperinflation, goods shortages, starvation, violence, rioting, and massive social upheaval. But it’s evident in more subtle ways across the Western world. As government officials and central bankers seek to boost investment and create jobs, printing more money or bestowing more favor on connected players as they go, citizens everywhere are calling foul on the whole enterprise. It brought the United States Donald Trump and the United Kingdom Brexit. But it also created economic dysfunction. If people don’t trust our economic systems, they don’t take risks; they don’t spend. The loser is economic growth and development.
This trust problem is intrinsically connected with ledgers and record-keeping. To comprehend that, we’ll explore the little-known story of a Franciscan friar with a love of math who developed a system that fueled Europe’s explosion out of the Dark Ages more directly than the Medici bankers who financed that growth. From there, we can draw a line all the way forward to Lehman Brothers and show how a better accounting system, such as blockchain, could be the answer to society’s deep funk.
Truth, Trust, and “the Books”
How is it possible that a business could earn $4.2 billion one year and be out of business the next? The reason is not just because Lehman Brothers was manipulating its ledgers but because it was taking advantage of the trust invested in it by shareholders, regulators, and the public at large. On the accounting side, Lehman resorted to myriad tricks to bolster its books, those all-important financial documents that investors and other stakeholders depend upon to ascertain the risk of dealing with an institution. Lehman’s accountants would move billions of dollars’ worth of debts off the bank’s balance sheet at the end of a quarter and stash them in a temporary accounting facility called a repo transaction, a device that’s supposed to be used to raise short-term capital, not hide debt. When it came time to report, the company didn’t appear to be overly indebted. Once the report was in, the company brought the debt back on the books. Really, it was as if the company was maintaining two sets of books—one it showed the public, one it kept private. Most people accepted what was reported in the public-facing books, Lehman’s version of “the truth.” Just how severely skewed Lehman’s books were would become clear in September 2008. But the problem really started with the public’s trust, in the blind faith given to the company’s numbers. And that problem—quite literally one of faith—goes way, way back.
Double-entry accounting was popularized in Europe toward the end of the fifteenth century, and most scholars believe it set the table for the flowering of the Renaissance and the emergence of modern capitalism. What is far less well understood is the why. Why was something as dull as bookkeeping so integral to a complete cultural revolution in Europe?
Over nearly seven centuries, “the books” have become something that, in our collective minds, we equate with truth itself—even if only subconsciously. When we doubt a candidate’s claims of wealth, we want to go to his bank records—his personal balance sheet. When a company wants to tap the public markets for capital, they have to open their books to prospective investors. To remain in the market, they need accountants to verify those books regularly. Well-maintained and clear accounting is sacrosanct.
The ascendance of bookkeeping to a level equal to truth itself happened over many centuries, and began with the outright hostility European Christendom had to lending before double-entry booking came along. The ancients were pretty comfortable with debt. The Babylonians set the tone in the famous Code of Hammurabi, which offered rules for handling loans, debts, and repayments. The Judeo-Christian tradition, though, had a real ax to grind against the business of lending. “Thou shalt not lend upon usury to thy brother,” Deuteronomy 23:19–20 declares. “In thee have they taken gifts to shed blood; thou hast taken usury and increase, and thou hast greedily gained of thy neighbors by extortion, and hast forgotten me, saith the Lord God,” Ezekiel 22:12 states. As Christianity flourished, this deep anti-usury culture continued for more than a thousand years, a stance that coincided with the Dark Ages, when Europe, having lost the glories of ancient Greece and Rome, also lost nearly all comprehension of math. The only people who really needed the science of numbers were monks trying to figure out the correct dates for Easter.
It was only during the twelfth century and the Crusades, when Europeans began trading with the East, that they encountered the mathematics that had developed in the Arab world and Asia. In the thirteenth century, an Italian merchant named Fibonacci made trips to Egypt, Syria, Greece, and Sicily, where he collected numerous mathematical papers. His Liber Abaci, a book filled with integers and fractions, square roots and algebra, showed how this new math had commercial applications, such as currency transfers and profit calculations. Before Fibonacci, European merchants simply couldn’t calculate the things we take for granted today; he taught them how to measure proportions, how to divide, say, a bale of hay and charge accurate prices. He taught them how to divide profits in an enterprise. Fibonacci’s math gave them precision in business matters that people did not previously have.
Fibonacci’s new numbering system became a hit with the merchant class and for centuries was the preeminent source for mathematical knowledge in Europe. But something equally important also happened around this time: Europeans learned of double-entry bookkeeping, picking