The Nature of Money

Calculating a poor person’s wealth is a science. For a rich person, it’s an incredibly abstract art.

Even as the pandemic and financial crisis introduce us to new and grotesque ways to suffer, it seems as if the rich have been spared the worst of it. Their net worth has increased by $637,000,000,000 while poor friends of mine beg for rent money on social media. It can feel as if there are two economies, one for us and another for the rich. This is wrong, however. There is only one economy. The difference between how the wealthy and the working classes experience the same world is not just in the amount of money we have and what that can buy—it’s built into the nature of money, as I learned when I was studying to become an accountant.

The first two classes in an accounting major outline a handful of extremely basic equations, standard forms (like the balance sheet and the statement of cash flows), and the theoretical underpinnings of accounting. They are considered “washout” courses—ones so difficult a significant number of people drop the major—and it’s not because of the math. Accounting requires no more than middle school algebra. If you want to know why it’s so difficult, here is one of the very first thought problems I was presented with in one of my classes: 

A hospital bought a painting to decorate its office from a then-unknown painter in the late 1800s for a dollar. Since acquiring it, its painter became very famous. The art would now sell for millions at auction. How do you record the value of the painting?

There are multiple answers. For internal figures (called managerial accounting), the painting is worth whatever management would find most useful at any given time. How that’s done, and what figures are recorded there, is unregulated. On the other hand, when preparing numbers for people outside the company, there are rules. For tax reporting purposes, the hospital (with some exceptions) needs to have it assessed and recorded at fair market value. Fair market value is a different figure—usually a more conservative one—than what you’d expect the painting to fetch at auction. For the purpose of enticing investors or seeking a loan, there’s yet another answer: it depends on what the hospital plans to do with the painting in the near future. If they’re willing to sell it in the next year or two (especially to repay a debt) then they should report it at fair market value. But if they wouldn’t part with it under any circumstances, it should be recorded at the price it was acquired for—a dollar. The painting is worth a lot of money, but if they’re not planning to make use of that value, then they can’t treat it as a resource. 

To summarize, there are two correct ways to record the value of the painting, either “fair market” or “acquisition” value (i.e. the original purchase price), and neither of them are what the painting would actually “be worth” in the conventional sense. Which value the accountant chooses depends not on anything objective, but on what the business plans to do with the painting.

This example breaks the kind of people who find an accounting major attractive. We’re creatures who love objectivity and order, and accounting is not that.

The thought experiment about the painting isn’t a weird edge case—it’s a typical day on the job. I used to audit natural gas companies, and there are many whose distribution systems are bringing in tens of millions of dollars a quarter, yet their infrastructure is worth $0. The first time I saw a company claiming to literally be worthless, I brought it to my boss because I swore it couldn’t be right. He said, “depreciation,” and I toddled off back to my desk. 

We record the wear and tear infrastructure goes through as depreciation—we slowly reduce its value, in other words—and we do that in a standardized way. Usually this involves an evenly allocated reduction of value per year over the expected life of the asset—for example, if a new oil pipeline is expected to last 10 years, we might subtract 10 percent each year until it’s worth nothing. For other industries or assets, the rate of depreciation might be based on the number of units produced—the more widgets are made, the less the widget stamping machine is worth. The different models are used so we can compare companies apples-to-apples. We do this regardless of whether their infrastructure is still functioning or not. This isn’t a mistake: it is the right way to record the value for the purpose of comparison to other companies and for taxes. 

But if I worked for that same company and wanted to sell it to a buyer, the considerations would be totally different. For example, depreciation for tax purposes is usually accelerated faster than actual wear and tear. A car with a 15 year life, for tax purposes, has to be depreciated over five years. This is the government encouraging companies to build and buy more for political reasons. Depreciation is an expense that is deducted from income to arrive at taxable profit, and so accelerating it is effectively a tax break—but one only companies that rapidly build and expand can reliably use. However, that same infrastructure, when being assessed for sale, is often worth more money than even its depreciated value. When buying or selling infrastructure, businesses take into account how much cash that infrastructure is generating regardless of its age. These differing considerations change the numbers on the page.

Therefore, a business infrastructure’s value may swing millions of dollars based on the market and the needs of a business. A 1992 Geo Metro’s value will not. That giant fluctuation is characteristic of assets which make money (like an oil pipeline or intellectual property) and assets which store value (like fine art or some kinds of real estate). The same holds true for the portfolios of rich people. The wealthy who depend primarily on their assets to sustain them (rather than wages) will have many, many large assets, and their entire net worth will swing millions of dollars simply based on their plans for the coming year.

Accounting is less of a science and more of a language with grammar, vocabulary, and ideological underpinnings. Recording something with a number, especially one with decimal places, gives a false sense of precision and objectivity to what is being quantified. Even in the “hard sciences,” which also use numbers with decimal places and high degrees of certainty, there is a subjectivity. A human being chooses what to count and what the criteria is for counting it for an intended audience. That influences what number makes it onto the page. Accounting as a field is perhaps more aware of this subjectivity than most disciplines that work with numbers. Business accounting’s grammar is set by an organization called the Financial Accounting Standards Board (FASB), which regularly publishes guidance on how to present figures for public consumption. Those standards evolve as part of an ongoing process of polling the industry and holding open discussions, along with formal appeals. 

In short, accounting is an ever-evolving language that records the day-to-day workings of a life or a business. It is designed to describe the flow of assets, assess it, and make arguments about what should be done. It’s not objective because it can’t be. All I can do as an accountant is be clear about the purpose of why I am presenting specific numbers, what assumptions I am making, which set of accounting standards I’m using, and how closely I hew to those standards.

What Money Reveals (and What It Obscures)

We know shockingly little about the mega rich. Lists like the Forbes 400 are the only available resources we have on who is wealthy because governments don’t really track individual wealth, and the wealthy themselves don’t advertise. The first Forbes 400 was an immense feat of journalism, digging through public property records in order to compile estimates. But roughly half of wealth is either privately held or in cash—not a matter of public record, and so unavailable to journalists. Even the public record is easy to evade. The rich routinely use shell corporations and trusts and elaborate tax evasion schemes. We gained a small window into that complex web of financial entities the wealthy use to evade taxes through the Panama Papers. That leak, which comprised millions of documents, detailed many billions of dollars of schemes (legal and not) from only one law firm. One estimate says about 8 percent of the world’s wealth is in offshore tax havens, and 80 percent is untaxed. Because of the sheer complexity of where the wealthy keep their money and how it’s accounted for, it can be literally impossible for a rich person to quantify what they themselves are worth. The richest person on earth may have no idea they are the richest person on earth. The wealthier someone is, the more the relationship between value and currency breaks down, and so the title “wealthiest person on earth” may actually be meaningless.

On the scale we workers live, money seems very precise because it is precise. For young accountants, that’s the appeal. They come into adulthood with some experience of money. A Coke costs $1.75. If they’ve ever filed taxes before arriving at school, the accounting was very straightforward. It was either correct or not correct, with an accuracy to the dollar. But all that lovely order and certainty falls apart outside the realm of small personal finance.This precision in the micro and lack of it in the macro comes down to the function of money.

The purpose of money is to establish an exchange rate between labor and finished goods. It allows capitalists—not us, we are not the primary “users” of the tool—to compare worker to worker, good to good, investment to investment, and translate between them. It does a pretty good job of describing the lives of wage earners because that’s what it’s designed to do. Our hours worked, productivity, and consumer habits are all numbers in a spreadsheet. But any attempt to turn it back on capitalists is like an amoeba trying to look at a human being with a microscope—the lens doesn’t go both ways. A poor person’s tax liability can be calculated to the cent. But when a wealthy person does their taxes, there are a number of arguments to be made about how much they own, how much they made, and how much they lost. Your net worth is a number. A capitalist’s worth is a conversation.

That difference has material outcomes. Among the capitalist class, fraud is rampant. In 2001, Enron—an energy and commodities trading company from Texas—committed fraud on such a large scale (and more importantly, so undermined the credibility of the entire industry’s figures) that it prompted a reform of accounting practices. The Sarbanes-Oxley Act greatly tightened the standards on how figures must be reported outside of a company. The “language” of accounting became more standardized. Financial statements presented to investors must now be audited by independent, outside accountants. And while these reforms seem necessary given the stakes, I can’t find firm figures either way on whether they helped at all.

I am not a fraud investigator myself, but as an auditor I was privy to how several fraud investigations turned out. Without exception, my experience is that whether law enforcement is called is a matter of how much money was stolen. Petty theft is always prosecuted. But if someone embezzles $10 million, a company tends to prefer to keep that person employed with them and treat it like a loan. Someone in a position to steal that much money has connections. 

One white-collar criminal who comes to mind—I personally had some contact with him—was in a niche industry. He was a deal broker for commodities, and his customers would only deal with him. 10 million dollars is a lot of money, but in relation to his commission, it was not that much. His placement in the industry, his relationship to labor, was what made him wealthy, not merely the dollar amount of his salary and his assets. He himself didn’t work to produce a product, or really provide a service. He maintained a set of relationships with business owners (who also didn’t make anything with their own hands—they had employees for that) and acted as a gatekeeper of  information about who needed what. Within the very specific parameters of his work, he was trusted. Of course his embezzlement wasn’t brought to the police. Focusing on the numbers rather than seeing their movement as descriptive of something, as pointing towards his relationships, is the same kind of mistake a dog makes when you point at the moon and he sniffs your finger.

Debt, Theft, and Other Money Problems

This gets at what David Graeber was talking about when he outlined the origin of money in his book Debt: The First 5000 Years. Before the wide use of currency for everyday transactions (which only became common in the 1800s), poor workers relied on credit almost exclusively. Credit in this sense meant “trust.” People did not directly barter (e.g., eight eggs for one shoe), they kept track of what they owed one another over time and paid as they could. These were relationships built on trust. The switch to currency-only transactions had to be imposed by state force. For example, in the very early days of industrial capitalism in England, shipyards were routinely a year or two behind on wages, so workers took tools and food and other things they could barter to pay their rent and their grocery bills. This wasn’t a sign of economic collapse—this was the economy. In order to force a switch to currency, the government criminalized taking tools and goods from the shipyards (previously it was not just legal, but precisely how compensation worked), and the shipyards instituted whippings for this now-theft. Samuel Bentham, an architect, redesigned ship yards with a new central surveillance tower to curb this new kind of theft, an idea lifted by his brother, the architect Jeremy Bentham, for the now infamous prison panopticon. 

Before that, in medieval Europe, the legal penalties for defaulting on a debt were harsh and involved mutilation or death. However, they were almost never used. Debt was considered a private matter between two individuals, worked out between them in whatever units of barter and timeframes suited them. As Graeber put it, capitalism is “the story of how an economy of credit was converted into an economy of interest; of the gradual transformation of moral networks by the intrusion of the impersonal—and often vindictive—power of the state.” Relationships have always been the fundamental underpinning of money: the thing money reflects for the wealthy and destroys for the poor. In a way, the wealthy fraudster I met is a throwback to an older, kinder, more personal concept of money—one most of us will never experience.

Today, prosecution rates for white collar crime are the lowest they’ve ever been and trending downwards. Theft itself becomes a conversation, rather than just a crime, when a wealthy person does it. When one capitalist robs another, my experience is that they tend to discuss among themselves how to restore the thief to good standing without destroying anyone’s life, livelihood, or privacy. There are of course exceptions. Bernie Madoff and his $50 billion investment Ponzi scheme springs to mind. But Madoff’s position was dependent on resources and connections that turned out to be fictional. He had no realistic means to ever repay the investors he scammed (or even to return their initial investment), and so he went to prison. But for those that genuinely are well connected and do have the means to repay the people they rip off, the wealthy already have the restorative justice prison abolitionists fight for. 

Petty theft, on the other hand, is prosecuted mercilessly. I find this especially strange given how much more of a problem fraud is than theft. The FBI estimates that burglary and petty theft cost Americans about $3.4 billion in property losses. White collar crime costs between $426 billion and $1.7 trillion annually. This kleptocratic culture isn’t harmless. Enron was a natural gas company whose entire business was propped up by fraud. When they were no longer able to continue to hide the extent of their debt, they both crashed that industry and spurred massive reforms in accounting practices and fraud controls. Perhaps those reforms worked, but I doubt fraud has dropped at the rate fraud prosecution has. 

Personally, I wonder if the lesson companies learned was about keeping a lid on scandal rather than about curbing white collar crime. They preserve the social relations that money points to at risk to everyone else. And I guess it’s easy to see why—it seems on the surface short-sighted to protect thieves who can crash an entire economy, but the fraudsters and their wealthy connections aren’t the ones who suffer in a crash. They still have the power which underpins money, which their money merely gestures towards. The figures in a spreadsheet are shadows cast by power, and during financial crises their power preserves them. The wealthy are so completely insulated from the consequences of what they do, good or bad, it’s very hard for me to understand what motivates them at all. The future itself feels obscure. Here, the lack of imagination that makes me a good accountant makes me a poor visionary: I’m not sure what to do about money beyond believing something should be done. Depending on the study, between eight and 26 people own half of the world’s wealth, and if money isn’t a good means to describe them, then that is a failure to describe the world as it is. Marx advocated abolishing money, as do some foundational anarchists. There are also thinkers on the left (like Pierre-Joseph Proudhon and David Graeber) who believe public ownership of the means of production is more important than exactly how we account for it, and so are fine with markets and currency, albeit in forms that would be nigh unrecognizable. A full survey of left thought on money and a weighing of the pros and cons of each approach is beyond the scope of a single article. However, on the road to a better society, we will have to grapple with money as it exists. As of now, it’s a tool used to describe workers with the goal of extracting wealth and labor from them. It is an incredibly poor tool for holding the wealthy accountable, and so we will have to come up with other methods.

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