Changed Ratio of Prices to Earnings 89 
fact, there had been a careful choice among the gen- 
eral groups of stocks and within those groups. 
In this process the price-earnings ratio might 
properly go up in certain cases because the public 
thought stocks less risky than formerly on account 
of the principle of “safety through diversification” 
or for other reasons, or because the rate of interest 
or its equivalent for stocks as a “basis” of discounted 
future earnings had been reduced, or because the 
public expected a more rapid increase of earnings 
in the future than they did formerly. 
On these accounts the price-earnings ratio for 
common industrial stocks appears to have risen in 
the last few years only from an alleged, traditional 
ten to one, to a 1324 ratio in September, 1929, or 
by only 35 per cent. With so many causes at work, 
the average effect of any one of these causes evi- 
dently does not need to be great in order to account 
for the whole “mystery.” 
The price earnings ratio for industrials fell to 
9.8 in November, 1929, from a high point of 16.2 
in January of that year. This ratio of 9.8 is the 
lowest since May of 1927, the earliest month for 
which such statistics are available. Prior to Novem- 
ber, 1929, the lowest ratio was 11.2 for May, 1927; 
the highest was 16.2 for January, 1929; so that the 
fall in November was to a point 40 per cent below 
the highest recorded. 
Static Conditions Have Given Way 
Thus, except for a few months in 1920 preced-