The Bankruptcy Act of 1831 gave accountants a role in winding-up enterprises and the Companies Acts of 1844 and 1862 established a legal requirement for companies to register and file accounts. By the end of the century, audit practices were becoming established. The accountant’s role was to provide a true and fair view of a company’s assets and income, as protection for the state (to whom it paid taxes) and investors (to whom it paid dividends). It was these concerns that led to the gradual emergence during the second half of the 19th century of fair-value based accounting conventions in the US. From the late 19th century, banks’ securities were carried at market values and their fixed assets at “appraised values”. In other words, by the early 20th century fair value principles were widely applied to companies in general and to banks in particular. In many respects, this period may have been the high-water mark for fair value principles. In the US, this first wave of the fair value debate ended in 1938. 4 The backdrop was inauspicious. The first phase of the Great Depression, between 1929 and 1933, saw the failure of a large number of US banks. Between 1933 and 1937, the US economy recovered somewhat. But by 1938 there were fears of a double dip. At the Fed’s prompting, Franklin D Roosevelt called a convention comprising the US Treasury, the Federal Reserve Board, the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC).
Restoring traditional accounting principles sounds desirable, provided the (Italian) values we import are Pacioli rather than Mussolini. At the same time, it needs to be recognised that too much sunlight can scorch. That means applying appropriate filters to fair values, screening out their harmful rays. Rethinking valuation practices across firms, asset classes and countries, better to capture expected losses, is one important such filter. Recognising the liability as well as asset characteristics of institutions may be another. We need to ensure these changes do not erode fair value principles, as that would result in the baby being thrown out with the bathwater. Making fair values less foul ought to advantage both investors and regulators. It would protect fair value from lightening strikes when the next financial thunderstorm breaks. References Allen, F and Carletti (2007), “Market-to-Market Accounting and Liquidity Pricing”, Wharton Financial Institutions Centre Working Paper 06–15. Billings, M and F Capie (2009), “Transparency and Financial Reporting in mid-20th Century British Banking”, Accounting Forum, 38–53. Bronk, R (2009), The Romantic Economist, Cambridge University Press. 12  BIS Review 28/2010  Financial Accounting Standards Board (2009), “Financial Instrument: Improvements to Recognition and Measurement”, Financial Statement Presentation of Financial Instruments, 13 August 2009 (Board meeting handout). Federal Deposit Insurance Corporation (1997), History of the Eighties – Lessons for the Future. Friedman, M and A J Schwartz (1963), A Monetary History of the United States, 1867–1960, Princeton University Press. Goethe, J W (1796), Wilhelm Meisters Lehrjahre.