Reviewed by A. L. Roberts Georgia State University

“There is a generally held opinion that accounting practices of the 1920s contributed to the stock market crash of 1929.” This statement seems to support the regulations that emerged almost immediately after the crash. Some have concluded that accounting practices were part of the cause of the crash and that public ac-countants, as a group, were to some degree culpable. The essays of Professor William Z. Ripley published in the popular press during the early 1920s, and in 1926 combined in a book entitled Main Street and Wall Street, were aimed at publicizing the inadequacy of financial disclosure by listed companies. Thus, a few years later he was able to claim cause and effect. This relationship may still exist in the minds of many people.

The crash of 1929 is part of American business “folklore” and considered as the proximate cause of the “great depression.” Dillon examines the economic, political and social environments in the United States from the end of World War I through the early 1930s. It becomes obvious that the decade of the 1920s was one of rapid transition from an agrarian, small town society to an in-dustralized and urbanized one. According to Dillon, in many ways it was a decade of “future shock.” In addition, negative characterizations of the “robber barons” by the press and anti-business novels such as Babbit added to the confusion of the changing times. Yet, it was a period of optimism, some of which was transferred to the stock market.

Part of the reason for the crash may be attributable to “the inability of stock market institutions to adapt quickly to the changes which occurred.” An analysis of activity on the NYSE between 1926 and 1929 showed that monthly average volume increased by more than 400 percent. There was a mystique surrounding the stock market. However, later congressional investigations laid bare the various ways by which the stock market had been manipulated. Pecora stated that “. . , the Exchange was … a glorified gambling casino where the odds were heavily weighted against the eager outsider.” Dillon examines pools and other forms of manipulation that mitigated against the Exchange being an impartial forum for the free play of supply and demand. He also presents some interesting insights about the speculation phenomenon and the catalyst of the bull market that preceded the crash.
The accounting environment, as reflected in the accounting literature of the era, is examined by the author. Four topical areas are discussed:

1. Financial statement preparation and content; disclosure
2. Net income determination and users
3. Asset recognition and revaluation; depreciation
4. Intercorporate investment; business combinations.

Also considered in this environment are professional organizations, common accounting practices and the role of the independent accountant,

lt was during the 1920s that the conflict between uniformity and flexibility began to emerge. Eric Kohler was an early advocate of more detailed and uniform disclosure in public financial reporting. In addition, the NYSE was a major force in requiring improved disclosure from listed companies. This was to counter the defense mechanism embedded the rhetorical question of the time, “Does Macy tell Gimbel?”

Dillon summarizes very well the major attempts to establish some theory in the area of income determination during the first quarter of the century. The primary problems seemed to be how to handle the components of income beyond ordinary operating income, and the appropriate treatment of asset valuation. The section on the disclosure and consolidation practices for investment trusts and hold-ing companies is most informative.

After setting the stage and examining the elements, Dillon sum-marizes the reporting and accounting practices used during the 1920s by a sample of 160 listed corporations whose stocks were actively traded on the NYSE. From the data used, his conclusion is that the “conventional wisdom” that the accounting practices during the 1920s were inadequate is not supportable. That is, account-ing practices employed were not a major factor in the stock market crash of 1929. Statistical tests on the selected data tended to refute the hypothesis that relationships existed between attributes of accounting practices and stock price changes.

This is an interesting, well organized and primarily descriptive study of the factors which were potentially important to the 1929 stock market crash. Accounting was one of those factors, in the context of the time, and the chapter dealing with accounting theory is very well done. While the author makes a reasonable argument that “. . . there is not substantial evidence to support the contention that accounting was culpable in the stock market crash of 1929,” his careful wording indicates that he is still not convinced that accounting practices were blameless.

Dillon provides a setting and tries to analyze data within that setting. While hindsight is unavoidable in making judgments, he tries to minimize the comparison of 1920s practices with 1980s standards. However, he is not always successful. The major lapse is the statement, “The accounting theory of the 1920s as expressed in the literature, was surprisingly sophisticated.” Why should this be a surprise? These were intelligent practitioners, facing difficult problems and trying to arrive at logical solutions. They were indeed sophisticated. The monograph is easy to read and the subject has been well researched. I highly recommend it as a source of information and enlightment about accounting and business practices during the 1920s.