General accounting
Brief history of firms
Video
Industrial firms are relatively recent
The loom in the home of a weaver.
Source: Fernand Braudel, Civilisation matérielle,
économie et capitalisme, XVe-XVIIIe siècle.
Armand Colin, 1979, Vol. II, page 279.
Industrial firms are relatively recent in History. They arose only after the beginning of the Industrial Revolution, in the second half of the XVIIIth century in England and, a bit later, on the Continent and in America, when a new source of energy, the steam engine of Newcomen (1663-1729), later improved by Watt (1736-1819), made it economically rational to set up factories with a large workforce located in the same place.
In the preceding centuries, "industrial" production was achieved mostly by the putting out system: merchants dispatching the production of goods, for instance textiles, in the dwellings of many people, who each had a loom in their home. Of course, there is no clear cut date for the evolution, one could mention the "manufactures" launched by Colbert in XVIIth century France, according to the mercantilist way of thinking. These factories, however, were not financed and did not function following modern capitalist techniques.
In the Middle Ages, industrial production essentially did not exist. Most of the population was rural (more than 90%) and produced goods for auto-consumption. Some craftsmen worked in towns. Society as a whole was not based on free markets, free production and free exchange.
Furthermore, the only physical products built with a manufacturing process, as opposed to agricultural products, were stones for buildings, bridges and other monuments, wooden elements for various constructions, and some metallic objects like hoes, nails, and later on the first clocks. None of those required plants for their production. Big ships were built in shipyards controlled by the prince.
In other words, industrial firms gathering in the same location large amounts of production equipment and a large workforce are recent. The laws structuring legally these firms mostly date from the XVIIIth and XIXth centuries (corporations, limited liability, etc.).
At the beginning of the XXIst century, we live in a world which changes very fast, and we take this speed for granted, but it has not always been so. Until the Industrial Revolution men traveled at no more than 20 to 30 miles per day, since the beginning of times. We live in the times of the computer revolution. Each century had its technical marvel and revolution: the eighteenth century saw the first steam engines. The nineteenth century improved it. This gave rise to a new science called Thermodynamics. It also developed electricity, the beginning of wireless communication. The twentieth century created many new technologies: automobiles, airplanes, telephones, computers, nuclear power, to mention but a few.
Computers profoundly changed many activities, accounting in the 60's, production control in the 70's, publishing, image treatment, office work in the 80's, but also banking and financial exchanges, even the role and nature of money. It is likely that these changes will go on. Means of payment will probably undergo further tremendous evolutions.
The story of commercial firms is somewhat different. Modern commercial firms can be traced back to the merchants of northern Italian city-states which arose in the XIIth century, when they took their independence from the Holy Roman Empire. This was also the times of the advent of peace in Western Europe, after all the barbarians invasions which caused and followed the fall the Western Roman Empire, the last one being the Normans'. (The Turks and the Mongols came later, but stopped before Vienna.) Peace is always conducive to economic activity, to commerce and to prosperity. Hence the remarkable development of Western Europe, the demographic growth, the universities, the cathedrals, the big ventures like the crusades (of such lasting and nefarious consequences), etc. which characterize the three centuries after the year 1000.
Trade routes and trade fairs in Europe in late medieval times.
Venetian and Genoese merchants
Venetian and Genoese merchants traded between the Orient and Western Europe. Large trade fairs appeared all over Europe. Some famous ones took place in Champagne, in Lyons, in England (Scarborough fair...), in Germany, in northern Italy (Plaisance), in Spain (Medina del Campo). Fairs also sprang up along the North Sea shores, in Scandinavia and Russia, in the wake of the Hanseatic league.
In the XIIth century, Italian merchants began to devise a system of accounting more sophisticated than just keeping track of how much money is in the till. This was the beginning of double-entry accounting, which was almost full-fledged by the end of the XVth century. The first accounting manual was written by the Venetian franciscan monk and mathematician Luca Pacioli in 1494.
Those times also saw the emergence of a new means of payment: the bill of exchange, which is not money but a promise to pay later, signed by its issuer. It had great advantages over precious metals, being much lighter to carry, and impossible to steal. But of course it also had some drawbacks: it is "private money", the trustworthiness of which rests on the credit of its signatory, while precious metals (gold and silver) were accepted everywhere.
The Mathematician Fra Luca Pacioli
by Jacopo de Barbari, 1495
Modern banking activity appeared around the same times, when some big merchants began to lend money in parallel to their trade. Christians were forbidden by their church from receiving an interest on money they lent. This is one of the reasons why Jews often turned to banking. Also, having moved around a lot since the Diaspora, they were less concerned with material belongings and more receptive to abstractions. Despite what many Catholics think, money has little to do with material belongings, it is only a set of signs. The Jews were expelled from England in 1290, from France in the early XVth century, and from Spain in 1492, but in fact each time they were invited back - except in Spain -, under stringent conditions, because they provided useful services.
Climax of the Middle Ages
The XIIIth century is the climax of the civilization of the Middle Ages, before the calamitous XIVth century (Plague, Hundred Years war between England and France, rebellion against the first Mongol rule in China, etc.) and the reconstruction and reorganization of the XVth century (civil wars in France, Spain, England, consolidation of monarchies, great discoveries, etc.) opening onto the Renaissance. Yet the XIVth century is also the century of the greatest abstract ideas in the West, contributed by the Nominalists (Ockham (1285-1349), Oresme (1320-1382)...), arguably more powerful than the ideas of the Renaissance.
The first modern commercial firms with a founding capital, split between stockholders, are the English East India Company, 1600, and the Dutch East India Company, 1602. The first modern bank, with a capitalistic structure, is the Bank of England, incorporated on July 27, 1694, as a private joint-stock association, with a capital of £1.2 million. It lent right away its entire funds to the government of William and Mary. In return for the loan of its capital, at 8%, it received of course receipts (the equivalent of what we today call "government bonds"), but also the right to issue notes and a monopoly on corporate banking in England.