Frank Albert Fetter · 1937
Frank Albert Fetter’s journal article, originally published in the Accounting Review in 1937 and reprinted in 1977, proposes a common conceptual language for economics and accounting. Its five sections move from disciplinary disagreement through the historical formation of “capital,” then examine “income” and conclude with recommendations for accounting practice. The supporting notes document competing definitions in economic and accounting literature. Fetter’s central contention is that confusion arises not from an unavoidable difference between the disciplines, but from inherited terminology that mixes physical goods, monetary valuations, corporate assets, and individual ownership.
Fetter acknowledges that economics addresses social questions beyond accounting’s scope. Where both disciplines examine private enterprise, however, their concepts should coincide. He assigns economists much of the blame: accountants have borrowed definitions whose inconsistencies become apparent under business conditions.
Economists often with impunity may be arm-chair theorists; accountants are on the firing line of business, and their weapons of theory feel the full shock of the battle.
The contrast explains both his criticism of economic orthodoxy and his respect for accounting’s practical constraints. Statutes governing legal capital and dividends can compel accountants to follow inconsistent categories. Nevertheless, professional responsibility includes improving the law’s economic conceptions, not merely complying with its terminology.
The longest section reconstructs how capital acquired its conflicting meanings. Beginning with the principal of a medieval money loan, the term expanded to cover receivables, merchants’ investments, and the monetary worth of business resources. A financial conception became entangled with the physical meanings of “stock” and “substance.” Permanent corporate investment introduced another ambiguity: capital could designate shareholders’ ownership, the corporation’s assets, or a legally stated nominal amount. Fetter uses the development of the East India Company’s permanent stock to show how institutional changes complicated an originally individual conception.
Economic theory compounded the problem. Adam Smith’s overlapping uses of stock and capital transmitted uncertainty, while Smith and the Ricardians distinguished fixed from circulating capital by different criteria. The Ricardian definition of capital as labor-produced means of production then excluded natural agents, despite their investment value. Fetter argues that economists repeatedly abandon this physical definition when discussing valuation. His history is deliberately critical: Böhm-Bawerk returned to the produced-goods conception, whereas John Bates Clark advanced a value conception without completing the necessary reform.
Fetter’s alternative separates wealth from capital. Wealth can exist outside exchange; capital belongs to the price system and expresses investors’ purchasing power and the present market valuation of their rights to income. The distinction between assets and ownership is decisive:
The corporation owns the assets but the shareholders own the capital. The same thing cannot be owned at the same time and in the same sense by two different owners.
Corporate capital, on this account, is a derivative legal construction rather than capital owned by a second independent capitalist. Fetter invokes capital’s appearance on the liability side of the balance sheet to reinforce the distinction. Valuation must also look forward: a theory of capitalization should explain present worth through anticipated incomes, rather than derive present value from past production costs. The notes explicitly distinguish this capitalization process from issuing shares in nominal amounts.
The treatment of income develops the same distinction between persons and enterprises. Income broadly means newly acquired goods or valuable rights available for consumption without depleting an existing stock or capital fund. Its scope therefore exceeds money receipts. Fetter objects to the comparatively recent extension of “income” to corporations, because it obscures the difference between business results and returns accruing to people.
A corporation if successful has profits which when distributed are incomes to the receivers; but a corporation is a creature of the law once vividly described as having “neither a body to be kicked nor a soul to be damned.”
This distinction connects terminology to enjoyment and consumption. An enterprise yields profits; individuals receive income. Fetter’s example of a subsistence economy further separates physical accumulation from financial capital. Goods withheld from consumption become a stock of wealth. Subsequent income must be distinguished from depletion of that stock. He calls the initial withholding accumulative saving and its continued preservation conservative saving. Once exchange gives stocks monetary valuations, comparisons between current income and retained resources become comparisons with capital values representing anticipated incomes.
The final section translates these distinctions into a proposed accounting sequence. Accountants should begin with classified receipts and disbursements, establish departmental balances, and then combine operating results with outside revenues, taxes, and capital changes to determine enterprise profits. Accumulated profits and capital values establish investors’ net worth; income appears as the return accruing or distributed to individual investors.
The accountant has the hard task of analyzing and recording true market valuations, expressed in terms of prices and the monetary standard. He cannot escape the difficulties by tying capital value to original cost.
Fetter recognizes the risks of revaluation but denies that historical cost eliminates judgment or deception: depreciation, depletion, and obsolescence already require estimates. He leaves overhead costs and adjustments for changes in money’s purchasing power unresolved. The article’s contribution is thus a conceptual framework, not a complete accounting procedure. Its relevance lies in joining capitalization theory to financial reporting while insisting that assets, ownership claims, enterprise profits, and personal income remain distinct. Reliable accounting requires coherent categories, current valuation, and professional honesty together.
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