The Balance — The Stock, Plate iv

Kuznets gave the world the flow account — the measure of national income — and warned that it was only half the books. The other half, the stock account, was the lifework of Raymond Goldsmith, who set out to do for a nation's wealth what Kuznets had done for its income: to measure it, systematically and across long stretches of time, and so to draw up the balance sheet of whole economies. Where the income account asks what a nation earns in a year, the balance sheet asks what it owns at a moment — the standing accumulation of its assets, net of its debts. Goldsmith's patient reconstruction of national wealth, country by country and decade by decade, supplied the stock that Boulding's reorientation demanded and that Kuznets's income figures could never show. It is the less-watched account, but it is the one that answers the question of holding: not how fast a nation produces, but how much it has.

A nation's wealth, in Goldsmith's reckoning, is the total value of its assets less its liabilities, and its assets fall into two great kinds. The first is TANGIBLE wealth — the physical stock: the land and the buildings upon it, the factories and machines, the roads and ports and power lines, the inventories in warehouses, the durable goods in homes. This is wealth in the most concrete sense, the standing structure of valued things that Boulding had placed at the center of the subject. The second is FINANCIAL wealth — the claims that economic agents hold upon one another: the bonds, the bank deposits, the loans, the shares, the currency itself. A household's wealth is the sum of both: the house it lives in and the savings it has banked, less the mortgage it owes. A nation's gross assets are the sum across all its households, firms, and governments. To compile such a balance sheet is to take inventory of everything a society holds.¹

1. A nation's wealth is its assets less its liabilities, and assets fall into two kinds. TANGIBLE wealth is the physical stock: land and buildings, factories and machines, roads and ports and power lines, inventories, durable goods — wealth in the concrete sense, Boulding's standing structure. FINANCIAL wealth is the claims agents hold on one another: bonds, deposits, loans, shares, currency. A household's wealth is both — the house plus the bank savings, less the mortgage. A nation's gross assets sum across all households, firms, and governments. To compile the balance sheet is to inventory everything a society holds.

Here the accounting turns subtle, in a way that goes to the heart of what wealth is. Financial assets are CLAIMS, and every claim is a debt: the bond that is your asset is the issuer's liability, the deposit that is your wealth is the bank's obligation, the loan that is the lender's asset is the borrower's burden. So when one adds up the balance sheet of an entire closed economy, the financial assets and the financial liabilities CANCEL — every claim held by one party is owed by another, and the two sides net to zero. What remains, as the true net wealth of a nation, is its TANGIBLE stock, the physical things, together with whatever net claims it holds on the rest of the world. The vast superstructure of financial wealth — all the bonds and deposits and shares — washes out internally, a system of mutual claims that nets to nothing for the nation as a whole even as it constitutes the wealth of the individuals within it. A society's real wealth is the things it has built and the land it stands on; the financial layer reshuffles the ownership of that wealth without adding to its sum.²

2. Here the accounting turns subtle. Financial assets are CLAIMS, and every claim is a debt: your bond is the issuer's liability, your deposit the bank's obligation, the lender's loan the borrower's burden. So across a whole closed economy, financial assets and liabilities CANCEL — every claim held by one is owed by another, netting to zero. What remains as a nation's true net wealth is its TANGIBLE stock plus net claims on the rest of the world. The financial superstructure washes out internally — a system of mutual claims that nets to nothing for the nation, even as it is the wealth of the individuals within it. Real wealth is the things built and the land stood on; finance reshuffles ownership without adding to the sum.

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Yet the financial layer, though it nets to zero, is anything but unimportant, and measuring its thickness was one of Goldsmith's signal contributions. He defined what he called the financial interrelations ratio — the ratio of a nation's financial assets to its tangible wealth — as a gauge of how financially developed an economy is. In a poor or primitive economy the ratio is low: wealth is held mostly in physical form, directly, with few claims layered upon it; a farmer owns his land and his tools, and that is nearly the whole of it. As an economy develops, the ratio rises: banks take deposits and make loans, firms issue bonds and shares, governments borrow, intermediaries stack claim upon claim, until a dense and many-layered web of financial instruments overlays the same underlying stock of real things. A modern economy may carry financial assets several times the value of its tangible wealth — many claims, many layers, all resting on the physical base. The ratio measures not the quantity of real wealth but the elaborateness of the financial structure built atop it, and that structure, Goldsmith showed, deepens reliably as nations grow rich.³

3. Yet the financial layer, though it nets to zero, is far from unimportant, and measuring its thickness was a Goldsmith signature. His financial interrelations ratio — financial assets to tangible wealth — gauges financial development. In a poor economy the ratio is low: wealth is held physically and directly, few claims layered on it (the farmer owns his land and tools, nearly all of it). As an economy develops, the ratio rises: banks, bonds, shares, government debt, intermediaries stacking claim on claim, a many-layered web over the same real stock. A modern economy may hold financial assets several times its tangible wealth. The ratio measures not real wealth but the elaborateness of the financial structure atop it.

With Goldsmith's balance sheet beside Kuznets's income statement, the economy can at last be seen whole. The income account shows the flow — the rate at which the nation produces; the balance sheet shows the stock — the accumulation the nation holds; and only the two together tell whether the flow is building the stock or depleting it, whether a nation growing busy is also growing rich. The balance sheet also reveals what the income figures hide: the STRUCTURE of holding. National income tells you the size of the pie produced in a year; the balance sheet tells you who owns the standing wealth, how the claims are distributed, who holds and who owes — the accumulated position behind the annual flow. This is the account that bears on the question of who has what, for that question is about stocks, about holdings, and the income statement is simply the wrong book in which to look for the answer.⁴

4. With Goldsmith's balance sheet beside Kuznets's income statement, the economy can be seen whole. The income account shows the flow (the rate of production); the balance sheet shows the stock (the accumulation held); only together do they tell whether the flow builds the stock or depletes it. The balance sheet also reveals what income hides: the STRUCTURE of holding — who owns the standing wealth, how claims are distributed, who holds and who owes, the position behind the flow. This is the account that bears on who has what, for that question is about stocks and holdings, and the income statement is the wrong book to look in.

It is telling, and a little troubling, that the stock account is so much harder to keep, and so much less watched, than the flow account. National income is estimated every quarter and announced to fanfare; national balance sheets are compiled rarely, with long lags, by a handful of specialists, and noticed by almost no one. We track with great care how fast we are producing and barely at all how much we have accumulated — which is to say we watch the river closely and glance at the reservoir once a decade. Yet it is the stock that holds the deeper truths about an economy: its accumulated wealth, the distribution of its holdings, the layered structure of its claims. Goldsmith built the account that lets us read those truths. It remains to descend from the nation to the person — to ask how an individual, out of a lifetime's stream of income, builds and then spends down a stock of wealth of his own. The next plate is the lifetime.⁵

5. It is telling that the stock account is so much harder to keep, and less watched, than the flow account. National income is estimated quarterly to fanfare; national balance sheets are compiled rarely, with long lags, noticed by almost no one. We track how fast we produce and barely how much we hold — watching the river closely, glancing at the reservoir once a decade. Yet the stock holds the deeper truths: accumulated wealth, the distribution of holdings, the layered structure of claims. Goldsmith built the account that reads them. It remains to descend from nation to person — how one builds and spends down a stock of wealth across a lifetime. Next: the lifetime.

Raymond Goldsmith built the stock account of the modern economy — the national balance sheet — to set beside the flow account that Kuznets had built. A nation's wealth, he showed, is the sum of its tangible assets, the physical stock of land and buildings and machines, plus its net claims on the rest of the world; the great superstructure of financial claims, being mutual debts, nets to zero internally even as it constitutes the wealth of individuals. The thickness of that financial layer — his financial interrelations ratio — measures how developed an economy has become, rising reliably as nations grow rich and stack claim upon claim atop the same real base. With the balance sheet beside the income statement, an economy can be seen whole, and the question of who holds what — a question of stocks, invisible to the flow account — can finally be addressed. The next plate is the lifetime.