SECURITIES LEGISLATION AND THE ACCOUNTING PROFESSION IN THE 1930s: THE RHETORIC AND REALITY OF THE AMERICAN DREAM

Abstract Merino and Neimark (“Disclosure Regulation and Public Policy", Journal of Accounting and Public Policy , Fall 1982, pp. 33–57) examined passage of securities regulation in the United States in the 1930s, concluding that the regulation should be viewed as symbolic (i.e. not expected to result in significant changes in distribution of economic resources), a means of restoring investor confidence and preserving the status quo . Since that time, a number of traditional and critical studies have examined that thesis and offered new insights into the complex interrelationships found in the passage of securities legislation (e.g. Neu, “Reading the Regulatory Text: Regulation and the New Stock Issue Process", Critical Perspectives on Accounting , December 1992, pp. 359–388; Bealing, “Actions Speak Louder Than Words: An Institutional Perspective on the SEC", Accounting Organizations and Society , Vol. 19, 1994, pp. 555-569; Bealing, et al. , “Early Regulatory Actions by the SEC: An Institutional Theory Perspective on the Dramaturgy of Exchange" Accounting Organizations and Society , Vol. 21, No. 4, 1996, pp. 317–338). We continue this line of research by developing the rationale behind the argument that symbolic legislation might be sufficient to restore investor confidence. We use as our framework the pragmatic concept of democratic conversation, unique to the United States, to frame the ideological debate. We posit that securities legislation can best be understood as an effort to reestablish the viability of what has been labeled the “American dream". We concur with the conclusion of Wettergreen (“The Regulatory Policy of the New Deal", The New Deal , 1989, pp. 199–213) that passage of the securities legislation must be examined as a response to a moral crisis of capitalism, generated by the “immoral behavior" of the capitalist elite. Following Dewey, we posit that the first priority of any regulation had to be to establish the moral legitimacy of capitalism by restoring trust in the existing system. As Dewey ( Liberalism and Social Action , New York: Putnam, 1935) concluded, radical change was needed, otherwise it would merely be symbolic and used as propaganda to maintain the status quo . We then focus on the framers of regulation and the accounting profession. We do this by examining the private correspondence and the actions of the regulators during the early years of the SEC act. We believe our analysis shows that the early SEC commissioners had a commitment to the private property rights paradigm, and were unwilling to confront the monied interests. We support our position in a historical analysis of Accounting Series Release ( ASR ) No. 4, the Whitney case and the North American case. We interpret the historical evidence as a desire by the regulators to maintain the status quo . Thus, even if we believed the legislation was intended to cause a “real" change, the enforcement was not performed in an activist manner to initiate the change. For example, William O. Douglas (the second chairman of the SEC), who was no doubt a modern day judicial activist, was not an activist when it came to regulation and accounting related issues (e.g. full disclosure). Personal correspondence shows he had close relations with the accounting profession and raises the possibility that he may have been “captured" by the profession. In summary, our arguments are as follows: (i) the rhetoric used by the New Deal was intended to restore trust and fairness in American society; (ii) the underlying basis for the political persuasion was the restoration of the American dream in a liberal environment; (iii) in a contemporaneous analysis of the New Deal environment, Dewey ( Liberalism and Social Action , New York: Putnam, 1935) states that, without radicalism of change, the New Deal was doomed to failure since it would be viewed as protecting the status quo —we concur with this view as to the securities regulation and the behavior of Douglas; (iv) Douglas appears to act in favor of the status quo due to his close relations with the accounting profession, and, in our view, being “captured" by the profession and (v) we support our thesis by examining several SEC actions during Douglas’s tenure.