Fair value accounting and Austrian business cycle theory: what can we learn from the German crisis of 1873?

Eduard Braun and Florian Follert

Accounting History Review, 2025, vol. 35, issue 3, 259-280

Abstract: This study builds on Austrian business cycle theory and empirical evidence to explore how macroeconomic conditions, investment decisions, and fair value accounting interact and contribute to economic crises. The German crash of 1873 serves as an early example of irrational exuberance, marking the decline of peak classical liberalism in German-speaking countries. We argue that liberal reforms, especially in corporate law, culminated in the abolition of the government concession or licence system in 1870, leading to a fundamental change in accounting rules and the adoption of fair value accounting. Our empirical analysis suggests that this shift led to an increase in dividend payments, paid out of capital instead of realised income. Following the dramatic expansion of the German money supply due to French reparations after the Franco-Prussian War, low interest rates – combined with the market-oriented accounting regime – fuelled unprecedented speculation, ultimately culminating in the system’s collapse in 1873. Our study contributes to the understanding of the interplay of macroeconomics and accounting, offering practical implications for policymakers and standard setters while drawing historical parallels to the 2008 global financial crisis.

Date: 2025
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DOI: 10.1080/21552851.2025.2487258

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