An Empire of Wealth: Rise of Amer Economy 1607-2000 by John Steele Gordon

Author:John Steele Gordon [Gordon, John Steele]
Language: eng
Format: epub
Publisher: HarperCollins
Published: 2009-10-13T04:30:00+00:00

AS THE NINETEENTH CENTURY began to draw to a close, an ancient problem in corporate affairs became more and more acute: accounting. As enterprises became larger and more complex, accountants began devising more and more tools to keep track of the money and to enable managers to see exactly where and how it was being spent (or misspent). The great corporate enterprises of the Gilded Age were only possible because of these new accounting tools. And this evolution of accountancy continues unabated today. Cash flow, for instance, is now regarded as one of the most important indicators of corporate prospects. But the very phrase cash flow was coined only in 1954.

As the distance between managers and owners increased, their interests in accounting diverged as well. The stockholders wanted timely information so they could evaluate the worth of their holdings and compare the results of their company with the competition to determine how good a job the management was doing. The managers, naturally, wanted to make the books, and thus themselves, look as good as possible. It was common in the nineteenth century for managers to part company with the truth and lurch over into fraud. It is hardly unknown today.

Many publicly traded companies did not release figures at all. When the New York Stock Exchange asked the Delaware, Lackawanna, and Western Railroad for information about its finances, it was told to mind its own business. The “Railroad makes no report,” it curtly informed the exchange, and “publishes no statements.”

Even when a railroad issued a report, it was likely to be, in the words of a contemporary, “a very blind document, and the average shareholder…generally gives up before he begins.” The Erie Railway, because some of its many bond issues were backed by New York State, was required to file an annual report with Albany. But it could frame that report pretty much as it chose. The managers of the Erie—one of the most mismanaged railroads in history—had no hesitation in using very creative accounting indeed to hide their own shenanigans. Horace Greeley in 1870 harrumphed in the New York Tribune that if the new annual report of the Erie was accurate, then “Alaska has a tropical climate and strawberries in their season.”

The weekly Commercial and Financial Chronicle put its finger on the problem and foretold its solution. “The one condition of success in such intrigues,” it noted, “is secrecy. Secure to the public at large the opportunity of knowing all that a director can know of the value and prospects of his own stock, and the occupation of the ‘speculative director’ is gone…. The full balance sheet…showing the sources and amounts of its revenues, the disposition made of every dollar, the earnings of its property, the expenses of working, of supplies, of new construction, and of repairs, the amount and form of its debt, and the disposition made of all its funds, ought to be made up and published every quarter.”

Wall Street took to this new idea immediately. After all, brokers and bankers needed to know the true worth of a company as much as the stockholders did.

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