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Essay 1: What Do You Mean By "Dollars?"
(1944)
If you have been accounting for the past thirty years (1914—1944), your statements have had twenty-nine different meanings, since only in the years 1928 and 1929 did the word "dollar" have the same meaning. In the years ahead, the meaning is going to be more variable than in the past, because of the drastic inflation that is imminent. Can there be scientific accountancy with a dollar that is unaccountable? Can the accountant continue in his profession, either oblivious of or indifferent to the changing meaning of his language-tool, the dollar?
That the subject is not being ignored by the leaders in the profession may be illustrated by the following excerpts from the recent book, Financial Accounting, by George O. May:
Again, the monetary unit is generally assumed to be substantially constant in value, but at times this assumption of stability has to be abandoned, with the result that accounting conventions have to be modified. ...The sole relevance of accounts of the past is throwing light on the prospects for the future. These considerations have additional force where the implicit assumption that the monetary unit remains stable is widely at variance with reality—as for instance, in the case of property acquired before a decline in the purchasing power of the monetary unit such as occurred between 1913 and 1920. ...It has frequently been said that the changes revealed by successive balance sheets are more significant than the individual balance sheets themselves. ...An appreciation of property in terms of a stable monetary unit has a different significance from one that reflects only a decline in the value of the unit. Perhaps the most difficult of all problems in this field is presented where a decline in value as the result of use or obsolescence is either accelerated or offset by a change in money value due to fluctuations in the price level. The disentanglement of the elements in such cases is essential to sound accounting treatment.
But, is "disentanglement" possible? Another authority, Henry W. Sweeney, in his book, Stabilized Accounting, published in 1936, seems to think it is. Mr. Sweeney criticized the profession for dealing in "form rather than substance," and that he felt and thought deeply on the subject may be seen from the mere quotation of chapter headings, such as, "Where Ordinary Accounting Always Goes Wrong," "Ordinary Accounting Procedure is Mathematically Unsound," "Ordinary Accounting Procedure is Incomplete." He advocated adjusting the statement to the current power of the dollar on the basis of a price index. The fly in the ointment is the fact that there is and can be no accurate price index, and furthermore, to use Mr. May's words, "the sole relevance of accounts of the past is throwing light on the prospects for the future." Price indexes do not undertake to forecast, and in these days they are not even permitted to approximate current conditions, since no merchandiser will stick his neck out by reporting his "black market" prices. Incidentally, it should be noted how often a black market is the merchandiser's only device for keeping "in the black."
There is no source of accurate information for appraising the current weight of the dollar, nor is there any crystal ball into which the businessman may peer to read the future. We can all feel the boat rocking, and we know whether she is moving toward the crest or the trough, but we don't know whether the storm will abate or grow worse. Nor do we know, when the sea is placid, whether storm or calm is ahead.
Is the accounting profession therefore stymied? Can it shrug its shoulders and assert that it is no more to blame for changes in the power of the monetary unit than the weatherman is for the weather, and get away with it? I believe not. Though the businessman does not expect his accountant to control the dollar, he may, rightly or wrongly, blame him for rendering misleading statements. To the businessman, figures are either black or red. He is not prepared for the shocking discovery that there are also gray figures and pink ones. To him a figure on the right is a rightist and one on the left is a leftist, and if the lefts have a majority, he relies upon his accountant to put a red shirt on the majority. He does not realize that, under the influence of changes in the power of the dollar, figures may actually cross the aisle and vote on the other side.
When in the near future the American businessman discovers that his pride in a cash position was a delusion and a snare; that his cash reserves which he meant to freeze have melted and evaporated under the heat of inflation; that they might have been preserved, had they been cast into materials; that his bonds and money claims on others have shrunken and that he might have profited had he known enough to get into debt; that his tax refund dollars are far less in power than the ones he paid in; that he must pay capital gains taxes on what are actually losses; in short, that the whole accounting picture was a delusion, who do you think will be the whipping boy?
The accounting profession is fated to be the master of money and the community's leader in monetary reform. It did not plan to be, but conditions will make it so. There is no profession now occupying that sphere, and because the accountant is constantly trafficking in monetary accountancy, destiny lays its finger on him. He is continuously on the battlefront, continuously a victim of the evils of monetary instability, continuously the medium of business torture. In self defense he must choose to be a money master and stabilizer to avoid the impossible task of keeping step with a jitterbug dollar.
The accountant can neither practice an ostrich head-in-the-sand policy, nor become a mathematical acrobat. On the other hand, he cannot pursue the study of his profession into its fundamental meanings without, sooner or later, discovering that the art of accounting must be based upon the science of money. This science has not yet been formulated pragmatically. Until that foundation science is laid, accountancy must remain mystic.
Higher accountancy teaches us that there is a master ledger over all other ledgers wherein are consolidated all exchange transactions. This is not a physical ledger, nor has it any place. It is the composite of men's minds. This ledger records the emission of monetary units and the creation of value units. If, in order to strike a balance, it becomes necessary to add a figure on either the value side or the monetary unit side of the ledger, then the monetary unit is destroyed and a new one is created. It is for us to realize this, and to comprehend that this process is the consequence of a natural law that cannot be altered by man-made laws. If we do not realize this, or if, realizing it, we persist in calling by the same name the series of different units that are automatically created, we are basically false accountants and cannot perfect the art of accountancy.
What can we do about this omniscient, omnipotent and omnipresent master ledger? We cannot influence the accounting a jot or a tittle, but we can influence the facts which the master ledger records. We can devise a monetary system such that the issuance of monetary units not matched by value units will be minimized to the point where accountancy can become precision accountancy—using that term in the usual sense with allowance for permissible tolerance.
It is not an impossible challenge to create a nonpolitical monetary unit of constant power, and while the purpose of this discussion is to stress the benefits of an escape from accounting confusion, it is easy to imagine that other benefits will follow.
Not only are accountants logical candidates to master the rationale of money and promulgate a sound monetary system based upon it, but it will be straightforward for them to do so because it is purely a study in accountancy. They will also find it morally easy, since they have not heretofore taken a position on monetary theory and hence need not reverse themselves, as the economists would be obliged to do. The bankers are not free to explore this new approach, because they are part of the political monetary system and must play the game. With a few notable exceptions, lawyers' minds are so steeped in statutory laws that they are not hospitable to truths based upon natural laws. Nor are they professionally conscious of the problem of monetary instability.
There is a void that aches for new leadership. If the accountants will step into it, they will not only relieve the problem that intimately touches their own work, but they will win a new and elevated place in business and public esteem.
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