Born into darkness: FEI in the 1930s; Financial Executives International (FEI) was born against a backdrop of deep economic troubles. The organization was launched to help financial executives set the professional and ethical tone for their peers for decades to come.It was a terrible time in the U.S., the dark December of 1931. Eight million workers had no work. Banks closed. Businesses failed. Investment evaporated. Bankruptcy prevailed. The Dow Jones had dropped to a miserable 41, down from 400, and radicals were questioning the viability of capitalism.
News from the rest of the world was no better. England had just abandoned the gold standard, Japan had invaded Manchuria and Stalin was collectivizing agriculture in the Soviet Union Agriculture in the Soviet Union was organized into a system of state and collective farms, known as sovkhozes and kolkhozes, respectively. Organized on a large scale and relatively highly mechanized, the Soviet Union was one of the world's leading producers of cereals, although bad . In Germany, the Nazis held 18 percent of the Reichstag and Mein Kampf was a bestseller.
Two days before the end of that year, eight corporate controllers met in New York City New York City: see New York, city.
New York City
City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. . Their conversation may not have bubbled with economic optimism, but their agenda carried a spark of hope. That agenda was to complete the final details to launch a new organization of financial executives, The Controllers Institute of America. They needed an organization that would let them agree on practical standards and an ethical ideal. They needed to define their profession, exchange ideas about its practice, educate themselves and others, and work with the government to improve the general economy. In short, they wanted to dignify dig·ni·fy
tr.v. dig·ni·fied, dig·ni·fy·ing, dig·ni·fies
1. To confer dignity or honor on; give distinction to: dignified him with a title.
2. the practice of accountancy at the level of corporate leadership.
The causes of the Great Depression Causes of the Great Depression are still a matter of active debate among economists. The specific economic events that took place during the Great Depression have been agreed upon since it was first studied: a deflationary spiral forced dramatic falls in asset and commodity prices, had little to do with these financial executives, but if the nation's crisis had a cure, they believed it was, to a certain extent, in their hands. After all, it was an economic crisis, and they were the men who controlled the money.
The roots of the problem went back 10 years, across a decade of apparent prosperity supported tenuously by credit. Tax breaks for the well-off had engorged en·gorge
v. en·gorged, en·gorg·ing, en·gorg·es
1. To devour greedily.
2. To gorge; glut.
3. To fill to excess, as with blood or other fluid.
v.intr. the wealthy. Production soared, but middle-class incomes didn't keep up. Consumers enticed by marvelous new vehicles and appliances felt the need to own what they could not pay for. Irrationally exuberant investors, wild with optimism, leveraged the stock market to breathtaking altitudes.
Then, in a week in late October 1929, the credit ran out. In the ensuing months, sales fell, profits plummeted, the stock market crashed, borrowers defaulted, lenders went broke and productivity slowed as if seized by rust. It wasn't just a downturn in the market: It was the collapse of an economy.
President Herbert Hoover, a staunchly pro-business Republican, defended the strength of the economy. The problem, he said, was in the federal budget. Only a balanced budget would sustain public confidence. So he slashed spending, raised taxes and refused to let federal assistance undermine American self-reliance.
But as his efforts reduced demand, they aggravated the crisis. In a last-ditch effort to protect the economy, Hoover signed the Hawley-Smoot tariff on imported goods, the highest import tax in U.S. history. As European nations retaliated with their own tariffs, international trade withered away, and America's Great Depression America's Great Depression is a 1963 treatise on the 1930s Great Depression and its root causes, written by Austro-libertarian economist and author Murray Rothbard. The fifth edition was released in 2000. went global.
Early in 1932, the founders of the new Controllers Institute of America scraped together some cash and leased space at One East 42nd Street in New York City. The first four months were rent-free because nobody wanted the space. The full-year rent was $1,000. On February 4, The Institute had 50 members; that number doubled to 100 by April. They kept a tight rein on expenses and closed their fiscal year in August with a bank balance of $47.65.
The country's finances went less well. As banks went broke, people lost their savings. Hearing rumors of a bank's demise caused citizens all but rioted to withdraw their money. As the end of 1932 approached, the whole banking system teetered on collapse, and the economy went from bad to worse to dismal. Investment dropped to 5 percent of its 1929 level. Inventory sat unsold, unemployment continued to rise and drought in the Midwest baked the national breadbasket to dust. Homeless people living in so-called "Hoovervilles" grew on the outskirts of towns. In June 1932, 20,000 hungry World War I veterans marched on Washington, D.C., demanding their bonuses, only to be dispersed by federal troops with tear gas and bayonets.
As the election of 1932 approached, President Hoover took a step to the left, offering emergency loans to banks and tossing a little money into public works. His calling on the nation's "haves" to be charitable to the "have-nots," was apparently too little, too late. In November, Americans elected the Democrat candidate, Franklin Delano Roosevelt, hoping that his New Deal might work better than the deal they had.
The country had never seen anything like it. And history would record the events following The Great Depression as a watershed crisis that would change the relationship between the federal government and the nation's people and businesses.
Roosevelt's large electoral majority gave him weight with Congress. To make certain that Congress understood his mandate, Roosevelt's inaugural address threatened a seizure of "broad executive power to wage a war against the emergency, as great as the power that would be given me if we were in fact to be invaded by a foreign foe." Whether in fear or desperation, Congress heeded the new president with a 100-day honeymoon. On March 6, he declared a nationwide bank holiday. Three days later, Congress passed the Emergency Banking Act, which provided for inspections of federal banks.
Over the next week, the U.S. Treasury Department and Federal Reserve examined the financial conditions of the nation's banks. Those found stable were allowed to reopen, and others were permanently closed. In the first of his "fireside chats," Roosevelt said: "I can assure you that it is safer to keep your money in a reopened bank than under the mattress."
If Roosevelt's assurance seems unnecessary today, it's only because of the Glass-Steagall Banking Act, passed that summer. Glass-Steagall created the Federal Deposit Insurance Corporation Federal Deposit Insurance Corporation (FDIC), an independent U.S. federal executive agency designed to promote public confidence in banks and to provide insurance coverage for bank deposits up to $100,000. (FDIC FDIC
See: Federal Deposit Insurance Corporation
See Federal Deposit Insurance Corporation (FDIC). ), which backed deposits at member banks. Glass-Steagall also put up a firewall between two kinds of banks--commercial and investment. Commercial banks couldn't invest in, underwrite or distribute corporate securities. Investment banks couldn't accept deposits.
Roosevelt also used that first week in office to pass the Agricultural Adjustment Act The Agricultural Adjustment Act (or AAA) (Public law 73-10 of May 12, 1933) restricted production during the New Deal by paying farmers to reduce crop area. Its purpose was to reduce crop surplus so as to effectively raise the value of crops, thereby giving farmers relative of 1933 (AAA AAA: see American Automobile Association.
(Triple A) A common single-cell battery used in a myriad of electronic devices of all variety. Like its double A (AA) cousin, it provides 1.5 volts of DC power. When used in series, the voltage is multiplied. ), an effort to stimulate the economy by giving farmers more purchasing power. It supported prices by paying farmers not to grow staples. The AAA made commodities into a kind of currency that allowed farmers to use their crops to buy supplies and equipment.
Then, in June of 1933, Congress passed the National Industrial Recovery Act (NIRA NIRA National Institute for Research Advancement (Japan)
NIRA National Intercollegiate Rodeo Association
NIRA National Industrial Recovery Act of 1933
NIRA National Import Racing Association ), creating the National Recovery Administration (NRA NRA
(National Rifle Association of America) organization that encourages sharpshooting and use of firearms for hunting. [Am. Pop. Culture: NCE, 1895]
See : Hunting ) and the Federal Emergency Relief Administration Federal Emergency Relief Administration (FERA) was the new name given by the Roosevelt Administration to the "Emergency Relief Administration" set up by Herbert Hoover in 1932. It was established as a result of the Federal Emergency Relief Act. . The NRA allowed trade associations to agree on "codes of fair competition" that would help stabilize prices and production--cooperative activities that had been illegal under antitrust laws. The agreements that associations reached could, with the president's approval, be imposed on all companies in a given sector.
Roosevelt's sweeping presidential power lasted only a couple of years. The Supreme Court ruled that this presidential approval constituted the creating of law, which the Constitution reserves for Congress alone.
Nonetheless, the NIRA was a significant precedent. It demonstrated the value of private-sector cooperation--a concept that would figure heavily in accounting and finance. It also lent a certain federal power to private-sector initiatives. The NIRA also gave unions and workers new powers, which they were quick to use.
Over the next three years, millions of workers went on strike. Over 18,000 strikers were dragged from picket lines and thrown in jail, and scores were murdered. Despite the general desperation for jobs, few crossed the picket lines. During these turbulent times, just about everyone agreed on one thing: America needed a drink! All they had to do was amend the Constitution. So, on Dec. 5, 1933, President Roosevelt ratified the 21st amendment, ending 13 years of Prohibition.
On Jan. 31, 1934, the Gold Reserve Act transferred all gold and gold certificates from the Federal Reserve to the U.S. Treasury. A day later, the president raised the value of a troy ounce of gold from $20.67 to $35. The de facto devaluation of the dollar was meant to increase exports.
During these hard years, Roosevelt kept trying to work with a balanced budget or at least borrow no more than needed to prevent catastrophic suffering. But in 1934, John Maynard Keynes Noun 1. John Maynard Keynes - English economist who advocated the use of government monetary and fiscal policy to maintain full employment without inflation (1883-1946)
Keynes , a British economist, visited the White House and presented a radical idea: that by spending its way into a deficit, a government could fuel an economy with the cash it needed to stimulate consumption, production and investment. Roosevelt doubted the Keynes counterintuitive coun·ter·in·tu·i·tive
Contrary to what intuition or common sense would indicate: "Scientists made clear what may at first seem counterintuitive, that the capacity to be pleasant toward a fellow creature is ... "rigmarole rig·ma·role also rig·a·ma·role
1. Confused, rambling, or incoherent discourse; nonsense.
2. A complicated, petty set of procedures. of figures"--as did most economists--but he didn't forget it.
New Publication, Legislation
February 1934 brought two interesting developments: The Controllers Institute published the first issue of a new magazine, The Controller (see the "editorial comment" below from the first issue), with a subscription price of $4.00 per year; and Congress passed the Securities and Exchange Act (SEA), the most powerful piece of legislation that had ever hit public companies.
The SEA came on the heels of congressional investigations into a host of stock market scandals. Americans suddenly understood why the United Kingdom had been regulating its stock market for almost 100 years. The Act established the Securities and Exchange Commission (SEC) and gave it power over stock exchange rules, financial reporting and the trading of securities. Many shady but standard trading practices were outlawed as a host of new regulations were put in place.
The first issue of The Controller was published too early to mention the SEA or the SEC, but the lead article broached the hottest issue of the day: "Why Should We Not Return to [the] Gold Standard, with Limitations?" By March, The Controller was echoing the future. "Institute Seeks Facts Concerning Burdensome Questionnaires, Reports" was the title of one short call for contributions. Its last paragraph might well appear in a current issue of Financial Executive: "It is conceded that many of the reports required are unnecessary and that they are valueless when completed, because of the time required to compile them."
Though still a nascent publication, The Controller was already grappling with an industry/government tug-of-war that would last into the next century. The June 1934 issue continued the prescient reportage with three similarly ominous articles: "Controllers Protest Against Numerous Reports for Government," "Questions Concerning New Depreciation Ruling Answered" and "Complex Regulations Costly to Corporations." A case of deja vu all over again?
In the larger economic picture, despite Roosevelt's New Deal, the economy remained all but comatose co·ma·tose
1. Of, relating to, or affected with coma.
2. Marked by lethargy; torpid.
comatose (kō´m , and Roosevelt continued brewing his alphabet soup of federal agencies and programs. The Federal Housing Administration Federal Housing Administration (FHA)
Federally sponsored agency chartered in 1934 whose stock is currently owned by savings institutions across the United States. The agency buys residential mortgages that meet certain requirements, sells these mortgages in packages, and insures (FHA See Federal Housing Administration.
See Federal Housing Administration (FHA). ) provided mortgage relief; the Federal Emergency Relief Administration (FERA FERA
Federal Emergency Relief Administration ) directed grants to states; the Civilian Conservation Corps Civilian Conservation Corps (CCC), established in 1933 by the U.S. Congress as a measure of the New Deal program. The CCC provided work and vocational training for unemployed single young men through conserving and developing the country's natural resources. (CCC CCC
A very speculative grade assigned to a debt obligation by a rating agency. Such a rating indicates default or considerable doubt that interest will be paid or principal repaid. Also called Caa. ) made work for thousands of young men; the Tennessee Valley Authority Tennessee Valley Authority (TVA), independent U.S. government corporate agency, created in 1933 by act of Congress; it is responsible for the integrated development of the Tennessee River basin. (TVA TVA: see Tennessee Valley Authority. ) created jobs by controlling flooding, improving river navigation and building dams; and the Rural Electric Administration (REA REA Rural Electrification Administration
REA Rural Electric Association
REA Railway Express Agency
REA Repertorio Economico Amministrativo
REA Rapid Environmental Assessment
REA Resident Evil: Apocalypse (movie) ) expanded the nation's power grid.
Economic collapse is always an invitation for political threats. In Russia, chronic poverty had helped spark the Bolshevik revolution, and in Germany, the hyperinflation Hyperinflation
Extremely rapid or out of control inflation.
There is no precise numerical definition to hyperinflation. This is a situation where price increases are so out of control that the concept of inflation is meaningless. following World War I was a rallying cry for the up-and-coming Nazi party. These foreign developments were not unnoticed in American boardrooms. The September 1934 issue of The Controller recognized the threat with: "Business Men Called on to Stop Drift into Communism or Fascism."
Then, a new wave of legislation in 1935--the Second New Deal--brought more reforms and programs. The National Labor Relations Act The National Labor Relations Act (or Wagner Act) is a 1935 United States federal law that protects the rights of most workers in the private sector to organize labor unions, to engage in collective bargaining, and to take part in strikes and other forms of concerted of 1935 (NLRA NLRA National Labor Relations Act
NLRA Northern Late-model Racing Association ), also known as the Wagner Act, gave federal protection to collective bargaining; The Public Utility Holding Company Act Public Utility Holding Company Act
The 1935 act that gives the SEC authority over the security issues, the accounting systems, the corporate structures, and the intercompany transactions of public utilities. (PUHCA PUHCA Public Utility Holding Company Act ) limited the size and practices of utilities and their parent companies; the Social Security Act of 1935 (SSA (Serial Storage Architecture) A fault tolerant peripheral interface from IBM that transfers data at 80 and 160 Mbytes/sec. SSA uses SCSI commands, allowing existing software to drive SSA peripherals, which are typically disk drives. ) started not only a retirement fund and unemployment insurance but the principles of what some would later call the "welfare state."
In January of that year an article in The Controller again identified a problem that would plague the profession for decades: "A Public Accountant's Views as to Duties and Rank of Controller," authored by a CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. in Chicago, a Mr. Arthur Andersen. The first sentence of his article read: "During the past five years, most businessmen have had reason to doubt the theories and principles of business conduct which previously served them as dependable guides, and many concepts have perforce been changed."
Issues of The Controller continued with articles that would resonate through the decades. In February: "What Is Material Fact, What Is Prudent Investor?" In March: "complicated Laws Weak Feature of Federal Tax System." In October: "What Is [the] Most Satisfactory Form of Reports to Stockholders?" In November: "When Controller's Ethical Standards Differ from His Company's."
As the New Deal agencies created new rules and regulations, executives wrestled with the vagaries of financial reporting. The Controller reported the frustrations of controlling the indefinable. In February 1936: "Writing of Reports to Stockholders an Art, Says Controller." In February 1937: "Law Requires Controller to Guess at Best Financial Policies." In March 1937: "What Are 'Accepted' Accounting Principles, Attorney Inquires."
The Fair Labor Standards Act Fair Labor Standards Act or Wages and Hours Act, passed by the U.S. Congress in 1938 to establish minimum living standards for workers engaged directly or indirectly in interstate commerce, including those involved in production of goods bound of 1938 (FLSA FLSA Fair Labor Standards Act
FLSA Fedora Legacy Security Advisory ), mandating minimum wages and maximum hours, was about the last of the New Deal legislation. That year was also the year that Roosevelt decided to try a little Keynesian economics. His first attempts at deficit spending were too conservative to work, but by the end of the decade, he had no choice. With the Nazis declaring their intent to take over Europe first and then the world, and with the Japanese invading China, he had to build an "arsenal of democracy The Great Arsenal of Democracy is one of the most famous of 30 fireside chats broadcast on the radio by United States President Franklin Delano Roosevelt. It was read on December 29, 1940, at a time when Nazi Germany had conquered much of Europe and threatened Britain. ," and the money for financing would have to come from the mint, not from pockets of impoverished taxpayers.
Ironically, the September 1939 issue of The Controller went to press on the first of the month carrying an article under the headline "Controller Just Back from Europe Believes There Will Be No War." Before its ink had dried, German tanks were rolling into Poland, and America's financial executives were about to face a problem that made the New Deal and Great Depression look easy.
In June of 1940, the Council of National Defense called for top-level financial executives to help with war-related business, and 16 members of The Controllers Institute of America immediately stepped up to respond. The Depression was behind them. Now it was a time of war.
Thus, the economic crucible of the 1930s gave birth to a new kind of government, a new kind of business environment and a new kind of organization linking the two. Over the next 75 years, The Controllers Institute would expand to become Financial Executives International (FEI FEI
Fédération Équestre Internationale. ), a global organization continually striving to provide professional and ethical leadership and become the voice of those it serves before regulators in Washington, D.C.
The next FEI at 75 feature: Globalization of Business.
Glenn Alan Cheney (email@example.com) writes on finance, accounting and business issues, and is a frequent contributor to Financial Executive.
How The Controllers Institute of America Grew in Early Years Number of Members Date 30 December 1931 100 April 1932 200 November 1933 300 June 1934 400 April 1935 500 January 1936 666 August 1936