Tuesday, November 12, 2013

The holiday season is almost upon us. In pagan religious thought, Yule was a time of year when the barriers between this world and the world of the dead broke down. Spirits roamed the earth at night, and it was a good time for divination, communing with the dead, and seeking knowledge.

These old beliefs about Yule carried over into the Christmas tradition as well. That's most expressly true in Charles Dickens' A Christmas Carol.

A Christmas Carol was published in 1843 at a time when Christmas had little hold on the public imagination -- either in Great Britain or in the United States. A middle class was just beginning to emerge in England, but the vast majority of people were bitterly poor. Among the poor, Christmas was a time for extreme drinking, public riots, bawdiness, rowdiness, and sexual abandon. Wealthier individuals could barely walk the streets from December 23 to January 5 for fear of being accosted by vast crowds of beggars demanding gifts of food and money. In the countryside, where mobs were less likely to form, the wealthy often used guards to keep the poor off their property (and lured them into villages by providing large amounts of free food and massive amounts of free booze).

Dickens, however, had, for a very brief time, experienced the joy of an upper-middle-class Christmas in the English countryside while growing up. These well-off individuals essentially walled themselves off inside their houses, under the pretense of "enjoying time with the family." Significant amounts of food and drink were served, according to tradition, but drink was never consumed to excess. To make the home attractive during this isolated time, it was well-decorated. Since the British royal family kept marrying Germans, the wealthy classes began adopting German Christmas traditions like the Christmas tree, and the use of holly, ivy, and evergreen boughs as decorative elements. A singular focus was placed on Christmas as a children's holiday (primarily in an attempt to teach children the new traditions rather than the old riotous ones).

Charles Dickens was a "Christmas propagandist." He desperately wanted the English people to adopt the new traditions being set by the wealthy rural landowners in Great Britain. And so he wrote A Christmas Carol as a means of introducing these traditions to his readers and encouraging them to adopt them.

Dickens' readers could relate very easily to Ebenezer Scrooge, Bob Crachit, and the cast of minor characters that populate A Christmas Carol. These were the sort of people that urban English citizens of the day saw, worked alongside, and knew.

To us, 168 years removed from A Christmas Carol, this is more difficult.

So just what kind of person was Ebenezer Scrooge?

A Christmas Carol is not very clear on this point. We know that Scrooge lent money, because people complain about the high rates of interest he charges. We know that Scrooge also kept extensive books about his business, because he is not only hard at work keeping these books himself but has a clerk to assist him.

From the minimal evidence we have in the novella, from the original drawings of Scrooge at work at his business which accompanied Dickens' work in Dickens' lifetime, and from traditions about the story, it is often assumed that Scrooge was an accountant, and that he owned a counting house (an accounting firm). Now, modern financial and cost accounting did not exist in 1843. The idea of keeping a ledger in which you listed your debts in one column and your income and credits in another (double-entry bookeeping) had been popularized about 300 years earlier. But accounting had not progressed very far since then.

There wasn't much of a distinction between accountants or bookkeepers at the time. Today, bookeepers are more like clerks, entering data but not having the authority to adjust accounts or make reports. (That's the role of the accountant.) But back then, they were one and the same.

Most accountants in 1843 didn't just do accounting. They also made copies of documents -- which could be anything from receipts to contracts to deeds to loading lists. Most accountants engaged in semi-legal work like drawing up documents, contracts, and deeds. They also usually trained at least one other accountant (who would work for the accountant as a clerk). Accountants also often acted as private money-lenders, issuing small amounts of credit usually in connection with their clients' business. If an accountant's client imported wheat from France, the accountant might well lend the importer funds for their business (such as wharfage fees, or to pay the longshoremen to unload the wheat, or issue a short-term loan until the wheat was sold). Interest rates on these loans could vary, but were often quite high (as the accountant was a lender of last resort).

Although the work of the accountant was quite varied at the time, their primary job was to engage in actual accounting.

Until the 1850s, businessmen kept only rudimentary track of their costs and revenues. Most businesses kept a ledger, usually a cheap, leather-bound book with columns in it in which every single transaction was recorded in chronological fashion. If a contract was needed, it was written out, word for word, in the ledger. If a receipt was needed, two identical copies were entered in the ledger and one torn out for the use of the customer. These ledgers were also known as "daybooks."

Accountants would then take the daybooks, and transfer the transactions into additional daybooks. These other daybooks would break the transactions down into purchases, sales, receipts, payments, and so forth. Different sets of daybooks might be kept for each supplier or each customer. The general set of books for the business as a whole was called the "general ledger." Larger businesses might keep an even more diverse set of daybooks. These businesses often operated on credit, so credit sales would be kept in a Credit Payments daybook while cash payments would be kept in a Cash Payments daybook. Especially large businesses might have multiple columns on each page of the daybook. Each column would correspond to an account. Revenues from Customer X might be allocated proportionally to accounts for wholesale goods, advertising, overhead, and interest.

On a monthly basis, each journal would be totalled and the summaries entered in the general ledger -- a process known as "posting." Smaller businesses might transfer every transaction into the general ledger, but larger or more complex businesses used the general ledger as a way of summarizing the daybooks.

The accountant would then generate various reports for the business based on the figures in the general ledger. These might include an income statement (which shows the revenues, costs, and profit/loss), a balance sheet (which accounts for assets and debts as well as the items in the income statement), a cash flow statement (which documents fluctuations in revenues over a period of time), or a statement of retained earnings (which documents how profits are distributed or used).

Now, at the time, most businesses were sole proprietorships. A single person owned the business, and there was no legal distinction between the person and the business. If the business went bankrupt, creditors had the right to seize the owner's personal effects. But by the 1840s, several new types of businesses were coming into existence. These included the partnership. There were general partnerships (like the sole proprietorship, but with two or more partners rather than a single owner), limited partnerships (in which some partners had more authority and liability than others), and limited liability partnerships (in which one partner's losses or bankruptcy does not affect the other partners). Businesses were also engaging for the first time in joint ventures, in which two or more businesses each contributed equity into a partnership for a limited amount of time and/or limited purpose.

Businesses were also beginning to diversify in purpose. Before the 1800s, most products were made by a craftsman, who made an entire product him or her self, by hand. But industrialization meant that craftsmen were increasingly uncommon. Now, some business simply made parts for other businesses. Some businesses made products, but did not sell them. Some businesses sold products directly to the public, while others sold them to agents (who sold them to the public). The idea of "retailer" and "wholesaler" was being born.

The way in which products were sold was also changing. Some products remained in inventory, an asset (or liability) on the books. Other products were turned over to agents, who bought them and then tried to sell them. But some agents merely assumed control over products, and did not actually own them. Some agents received the whole value of the sale, while others received something new: A "commission."

The 1840s were just beginning to see a great revolution in accounting that would come into full flower in the 1850s. Suddenly, accountants had to understand consignment, bills of exchange, foreign exchange, the need to maintain inventory, how to account for inventory (at cost or selling price), reserves for bad debt, stock subscriptions, how to establish and administer a sinking fund, whether to charge for interest during construction, depreciation, and the difference between capital and other expenditures.

Since Scrooge is quite wealthy, it's entirely possible that he was no stick-in-the-mud when it came to accounting. Yes, he charged fantastic rates of interest on the money he lent. But it's far more likely that Scrooge was intensely curious about newly-developed accounting practices and he employed them to his own benefit.

We know that Scrooge probably did not deal with the new, emerging, large corporations of the day like shipping firms or railroads. His two-man operation simply could not accomodate such large business enterprises. Rather, Scrooge's firm probably handled the accounting needs of very complex but small businesses, such as those which might engage in foreign exchange, the sale of luxury items, consignment sales, or partnerships or joint ventures with many partners.

It's also known that Scrooge handled the accounting for small companies that issued stock -- essentially keeping track of small-company IPOs of his day. That's because Scrooge talks about having a "seat at the exchange." That's the London Stock Exchange, and purchasing a seat on the exchange would have taken incredible amounts of cash. A "seat" would permit Scrooge to buy and sell stocks, or to make initial stock offerings. Scrooge would not have needed a seat on the LSE unless he was actively engaged in trading stocks, at least for some substantial portion of his business. That Scrooge himself was on the floor of the exchange, watching the trading and monitoring it daily, meant that he did not have staff to buy and sell for him. But since Scrooge does not leave us with the impression that he himself was buying and selling stock, it is more likely that he was monitoring the trades in stocks of the small companies he worked for.

Next time you read A Christmas Carol, remember who Ebenezer Scrooge was: A "One Percenter" who did the highly manual work of accounting, probably for small but complex and very wealthy businesses. He was a lender -- not quite a loan shark, not quite a banker -- who stiffed the little people, and a guy who worked the stock exchange.

Occupy A Christmas Carol!

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