Plowed-Back Earnings 67 
annual rate plowed-back for the six years—ig2a- 
1927, inclusive, was over 9 per cent per annum; in 
fact, if the dividends to start with were half the earn- 
ings, the earnings plowed-back amounted to 11.2 
per cent. 
Edgar L. Smith, in his book Common Stocks as 
Long Term Investments, made a study of the stock 
market, in which he found a material increase in 
prices of common stocks of between 2 to 3 per cent 
per annum on the average, and sometimes a far 
greater increase. He inferred that this must be 
mainly due to plowing-back. 
Why Stocks Rise Faster Than Earnings 
The report on Recent Economic Changes includes 
the record of an advance in the prices of industrial 
stocks, 1922-1927, at a rate of 14.1 per cent a year, 
which for that period exceeds the rate of gain in 
dividend payments and of increase in profits. Yet 
an important element in the increase in the level of 
common stock prices was undoubtedly this increased 
rate at which profits were achieved and plowed-back 
into industrial undertakings. The percentage in- 
crease in prices of stocks should be equal to the per- 
centage increase in earnings per share if the ratio 
of price to earnings were to remain constant. For 
common stock this would be faster than the total 
profits of the company, which were 9 per cent. As 
the rate of return on preferred stocks, being fixed 
by contract, cannot increase during prosperity, their 
share of it is absorbed by the equity shares, which