Magazine article The CPA Journal

In GAAP We Trust

Magazine article The CPA Journal

In GAAP We Trust

Article excerpt

News & Views

Personal Viewpoint

The motto "In God We Trust" on every piece of U.S. currency invokes confidence that the medium may be exchanged in perpetuity, with a certainty of value. The Constitution endows Congress with the power "to coin money" and "regulate the value thereof," while prohibiting the states from "coining money, emitting bills of credit and making anything but gold and silver coin a tender in payment of debts." Our national currency, and eventually our national banking system, enabled our citizens to deal with one another across great cultural and geographic distance with assurance that the stored fruits of labor, converted into coin and paper, would be valued as greatly elsewhere as at home.

The illusion that the value of our currency is extrinsically underwritten has been systematically shattered by changes in our economic structure and periodic economic failures. The value of our currency has been transformed as recently as 1971, when then President Nixon allowed our currency to float freely, untethered from the price of an ounce of gold. As it has always been in reality, it is now clear in public understanding that our currency is backed by faith-not in God, not even in the "full faith and credit" of the United States-in the common trust and belief that a dollar can be exchanged for a good or service produced by another. Any currency is a unit of trust in the ability of one individual to exchange the representation of his saved labors and energies for the actual product of another individual's energies, knowledge, skills, or genius, at a rate of exchange that each considers fair and proportionate.

Of course, currency values still fluctuate. As our national productivity increases faster than our international trading partners', the value of the U.S. dollar rises as the euro or yen declines. Correspondingly, we are able to buy more foreign goods and services at a lower cost, while our trading partners find our goods and services relatively more expensive. Inflation is an obvious variant; deflation is equally feared but less frequent. Both reflect distortions not only in monetary policy and interest rates, but also in the relative scarcity of goods and services in light of extant demand.

The value of currency is also affected by unethical behavior, although perhaps less severely than in past years. "Fraud is as old as mankind," a learned jurist once wrote, "and as versatile as human ingenuity" When an undetected rogue currency trader makes increasingly bad bets on the rise of the yen, the financial security of bank depositors appears threatened, however well insured by the FDIC. The risk-averse run for their bank deposits, stressing the banking system, making currency less available at low interest, creating inflationary pressures, and, perhaps, leaving behind them the litter of failed savings institutions.

Since at least 1934,when the Securities and Exchange Act was enacted, stocks, bonds, and their financial off-spring have become another form of currency. Dynegy's aborted bid to buy Enron relied on an exchange of Dynegy's stock for Enron's; the more successful combination of Time Warner and America Online involved a similar exchange; Hewlett Packard's bid for Compaq used shares rather than cash. The more common transaction, whether initiated by a daytrader or a future retiree, involves the exchange of cash for the prospect of future appreciation or dividends. Stocks serve as a form of currency, albeit with a greater risk that the unit of productivity, represented by the cash investment, may ultimately be lost or depreciated, or may be significantly enriched, by the productive endeavors of the issuing corporation.

Much like cash, American investors have come to expect that their saved earnings, converted to stock, will be ultimately convertible to cash. No longer do we save our hard-earned wealth in seemingly well regulated and insured depository institutions; we have taken the risk that greater fortunes may be produced through investment in our national corporate economy. …

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