The Decade That Rewrote the Balance Sheet

How the 1930s turned accountants from the servants of bankers into guardians of the investor class

The 1920s were the champagne decade of American capitalism. Brokers peddled stocks like department stores peddled washing machines, and the mood was one of endless ascent. Shares bought on margin were symbols of modernity itself. A factory worker could own a piece of U.S. Steel; a teacher could speculate in Radio Corporation of America.

But when the crash came in October 1929, the hangover was devastating. By 1932, the Dow Jones Industrial Average had lost nearly 90 percent of its value. A quarter of American workers were unemployed. Banks failed by the thousands. The calamity was more than economic; it was epistemic. Ordinary people no longer believed the numbers. They suspected, often rightly, that company reports were opaque, misleading, or downright fraudulent.

Before this collapse, accounting was a quiet craft, practiced in paneled offices where men with green eyeshades totted up columns of figures for the benefit of bankers. Public accountants were little more than technicians who validated whether a company had sufficient collateral to cover its debts. Their client was the lender, not the shareholder. Balance sheets mattered, income statements far less.

The Great Depression blew that world apart. As Yakov Feygin and I have argued, the 1930s precipitated a restructuring of capitalism itself, producing what Gary Gerstle calls the New Deal Order — a settlement in which the state, business, and civil society built new institutional scaffolding to restore legitimacy to a system on the brink. Within that upheaval, accountants were recast from once marginal technicians into guardians of the investing public. Through a combination of regulatory fiat, professional reform, and the imperatives of taxation, the profession pivoted decisively from serving creditors to serving investors.

From Elite to Mass Ownership

The first external force behind this transformation was the sheer democratization of equity ownership. In the 19th century, shares were largely the plaything of the elite. But the long bull run of the 1920s changed everything. By 1929, an estimated 10 million Americans owned stock, making such ownership the province not just of rentiers but also of ordinary “middle class” folks like teachers, shopkeepers, and clerks, as Maury Klein has documented. Buying shares became both a pastime and a badge of middle-class aspiration. “Everyone ought to be rich,” declared John J. Raskob, a former GM executive, in a Ladies’ Home Journal interview the summer before the stock market crash, urging ordinary Americans to invest $15 a month in the market.

This mass shareholder revolution produced a new class of owners with fundamentally different informational needs. A banker extending credit wanted to know: could the borrower pay me back if liquidated? A small investor wanted to know: is this company profitable enough to pay dividends in the future? The first question pointed to the balance sheet; the second to the income statement. Yet the reporting practices of the time offered little clarity on earnings. Companies disclosed selectively, sometimes not at all. The result was that when the bubble burst, millions of small investors lost everything without ever having had a fair shot at understanding what they were buying.

The public outcry was ferocious. In 1933, Senate hearings chaired by Ferdinand Pecora exposed the seamy underside of Wall Street: insider loans, self-dealing, and accounting trickery. What began as a technical investigation into the causes of the crash soon became a national spectacle. Pecora, an unassuming former assistant district attorney from New York, grilled the titans of finance under oath and in public. His interrogations revealed that Charles Mitchell of National City Bank (later Citibank) had orchestrated insider sales to avoid personal losses, that J.P. Morgan & Co. had maintained a “preferred list” of politicians and journalists who received cut-rate stock allocations, and that investment houses routinely peddled worthless securities to unsuspecting small investors. These revelations shocked a public already reeling from the Depression, transforming Pecora into a folk hero and convincing millions that Wall Street was not merely careless but corrupt.

The hearings underscored a deeper problem: there was no standardized, enforceable framework for financial disclosure. Companies could, and often did, manipulate balance sheets to obscure liabilities, inflate asset values, or conceal losses. The resulting informational asymmetry between insiders and the new class of mass shareholders amounted to systemic fraud by omission. As one contemporary observer noted, investors were “buying blind,” e.g. relying on rumor and the blandishments of brokers rather than audited facts.

The political consequences were immediate. President Franklin Roosevelt and his administration came to see that restoring public confidence in capitalism required more than liquidity injections or temporary market interventions. It demanded an institutional architecture that could guarantee transparency and comparability of corporate reports. The Pecora hearings thus laid the intellectual and moral groundwork for the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the Securities and Exchange Commission (SEC). As legal historian Michael Perino argues, “without Pecora, the Securities Acts would not have been enacted in the form they were,” because the hearings crystallized in the public mind the need for systemic reform rather than piecemeal remedies. (Pecora’s own 1939 memoir of these events, Wall Street Under Oath: The Story of Our Modern Money Changers, makes for a riveting read.)

The Regulatory Hammer

The Securities Act of 1933 and the Securities Exchange Act of 1934 were watershed moments. For the first time, companies issuing securities had to disclose accurate, audited financial statements. The new Securities and Exchange Commission (SEC), created in 1934, was empowered to enforce this mandate of “investor protection.”

At the heart of the SEC’s power was accounting. And at the heart of its accounting reforms was Carman Blough, the Commission’s first Chief Accountant. Blough was no shrinking violet. He believed, as he put it, that “the interests of investors must come first, last, and always.” Under his leadership, the SEC issued a series of Accounting Series Releases (ASRs) that redefined the auditor’s role.

One early SEC ruling, ASR No. 4 (1938), required consistent depreciation methods, ending the practice of opportunistically switching methods to goose earnings. Another, ASR No. 25 (1941), demanded disclosure of consolidated financial statements, preventing parent companies from hiding liabilities in off-balance-sheet subsidiaries. These were technical rulings, but they struck at the core of investor trust: comparability, transparency, and honesty. It is telling that the best-selling accounting textbook published at this moment, which made a fierce argument for the use of market values in financial statements, bore the provocative title Truth in Accounting.

Crucially, the SEC pressured the profession itself to codify standards. The American Institute of Accountants — later renamed the American Institute of Certified Public Accountants — was pushed to articulate a coherent body of principles. Out of this emerged Generally Accepted Accounting Principles (GAAP). What had once been an art became, if not a science, then at least a standardized craft.

This was the turning point. Auditors were recast not as private verifiers for banks but as public servants ensuring that capitalism itself could function. The profession’s social contract was rewritten: their duty was to the investing public. Though the accounting profession generally hated the new regulations, which as a congeries of rock-ribbed Republicans they regarded as a massive overreach on the part of the New Deal state, these principles were eventually formalized into the official ethical standards of their professional associations.

The Tax State

Regulation alone did not drive this historic pivot in accounting. The simultaneous rise of what historians call the “tax state” provided a parallel, and in many ways equally powerful, incentive to transform the profession’s priorities. The passage of the Sixteenth Amendment in 1913 had authorized the federal income tax, but in its early years the levy was modest, affecting only a tiny fraction of corporations and wealthy individuals. The New Deal fundamentally altered this landscape, as Elliot Brownlee explains in Chapter 2 of his excellent Federal Taxation in America: A Short History. To finance unprecedented programs of public works, social insurance, and relief, the federal government dramatically expanded both the scope and the rates of corporate and individual taxation. For businesses, this meant that calculating “taxable income” was no longer a marginal task for a handful of elites; it became a universal, legally enforceable obligation for virtually every enterprise of scale. Indeed, one reason why the accountants overcame their ideological objections to the new regulations was that they soon came to realize that it would massively expanded their book of business.

Federal tax authorities required that firms produce clear and standardized measurements of revenues, expenses, and deductions. Although “taxable income” and “book income” often diverged — due to statutory allowances like accelerated depreciation or special exemptions — the mere act of calculating income for tax purposes elevated the importance of earnings measurement across the board. Accountants who had previously focused their attention on valuing assets for balance sheet solvency now had to devote equal, if not greater, energy to the mechanics of the income statement. The government itself had become a stakeholder in corporate profitability, and it demanded accurate, verifiable figures.

At the same time, states were modernizing their corporation laws. Many of these statutes, especially in jurisdictions like Delaware where incorporation was common, began tying the legal ability of a company to pay dividends to the existence of retained earnings on the books. This linkage was more than a technical change. It meant that shareholders could no longer be paid simply because management wished it; dividends had to be backed by demonstrable profits. If the books did not show net income, the cash could not legally be distributed. The effect was to transform income reporting from an internal management tool into a legal precondition for rewarding investors, further embedding the income statement as the centerpiece of corporate reporting.

The consequences of these combined pressures came into sharp relief in 1938 with the notorious McKesson & Robbins scandal, which has been described as “the most impactful fraud of the 20th century.” The pharmaceutical company’s management, led by the colorful conman Phillip Musica, concocted a massive fraud by fabricating sales, inflating inventory values, and creating fictitious accounts receivable. For years, auditors had relied on documents supplied by management without physically verifying inventory or independently confirming receivables. When the scheme was finally exposed, the losses ran into millions of dollars and investor confidence was once again badly shaken.

The SEC’s response was decisive, as accounting historian Stephen A. Zeff has documented. In the wake of McKesson & Robbins, it required auditors henceforth to perform direct observation of inventories and independent confirmation of receivables — procedures that remain bedrock elements of the audit process today. While the case is remembered for its sensational criminality, its broader significance lay in the message it sent: accurate income reporting was no longer optional or secondary. It was the cornerstone of two converging imperatives, ensuring the proper assessment of taxes by the state and protecting investors in the marketplace. From this point forward, the income statement became not just an accounting convention but a legal, fiscal, and moral obligation.

Accountants as Public Guardians

By the late 1930s, democratized ownership, New Deal regulation, and the rise of the tax state had dethroned the balance sheet as the lodestar of reporting. For decades, accountants clung to conservative asset valuations to reassure creditors; the income statement was little more than a bridge between two balance sheets. The Depression upended that hierarchy. Earnings, not assets, became the number that mattered. Investors ruined in 1929 wanted to know whether firms could pay dividends tomorrow, not what they owned yesterday.

The upheaval transformed accountants from obscure clerks into frontline guardians of capitalism. They were recast as professionals with a fiduciary duty to the public, conscripted into the New Deal order as arbiters of transparency and trust. Independence, standardized principles, and investor-focused disclosure became the foundation of financial reporting.

Yet the profession’s rise carried irony. Accountants became indispensable only because capitalism had nearly destroyed itself. The profession’s elevation was less a celebration of technical mastery than a recognition of how badly markets had failed when left to their own devices. Their authority was born not of triumph but of crisis, forged in the crucible of financial collapse, mass unemployment, and political upheaval. They emerged as guardians of honesty only because dishonesty had become so pervasive.

To read this history today is to encounter a poignant reminder of how fragile that trust remains. Nearly a century later, we find ourselves once more in an era when fraud, manipulation, and self-dealing dominate the headlines. The financial scandals of the early 2000s — Enron, WorldCom, Tyco — revealed how quickly creative accounting could again metastasize into systemic rot. The global financial crisis of 2008 exposed how regulatory arbitrage and accounting legerdemain allowed toxic mortgages to masquerade as triple-A securities. And most recently, we have seen the rise of massive financial frauds in the world of cryptocurrencies, most notoriously the FTX collapse.

The symbolic culmination of all this financial ulceration was the reelection last year of a President whose entire career has been predicated on swindles, inflated valuations, and accounting shenanigans — a man who treats financial statements not as ethical obligations but as vehicles of deceit. That such a figure could rise to the pinnacle of American power, be ousted and then convicted of multiple frauds, and yet somehow be returned by the voters to office once again goes to show just how far the guardianship ideal has been eroded. Indeed, one way to think about the entire MAGA agenda is as an effort to roll back all the wise institutional innovations that were put into place in the 1930s to prevent a re-run of the Great Depression.

The profession that once gained its authority by insisting on transparency now finds itself struggling to keep pace with the creativity of criminals and the cynicism of political elites. If the 1930s demonstrated that capitalism could not survive without a renewed moral commitment to honest numbers, our current moment raises the unsettling possibility that we have forgotten that lesson. Accountants of the New Deal era did not choose their elevated role; it was thrust upon them by catastrophe. The question for today is what sort of catastrophe will unfold before we return to holding fraudsters accountable.