Changed Ratio of Prices to Earmmngs 99 
ing public during this period had failed to realize 
that stocks should go up in price not only at the rate 
of increase in the level of commodity prices, but 
still higher; because, according to the equity prin- 
ciple, common shares became the residuary legatee, 
so to speak, of the increased earnings which the 
preferred securities could not absorb. 
It was only as the public came to realize, largely 
through the writings of Edgar Lawrence Smith, that 
stocks were to be preferred to bonds during a period 
of dollar depreciation, that the bull market began in 
good earnest to cause a proper valuation of common 
shares. This movement was overdone, at any rate 
during the months immediately preceding the panic. 
As speculation became uncontrolled, stocks rose too 
fast and the investing public entered rapidly the 
phase of marginal overextension. This rendered 
the market subject to apprehension, bear attacks, and 
panics that produced a period of acute liquidation, 
bringing the ratio of stock prices to earnings below 
the proper expectation of future profits. 
Yet the overextension that produced this violent 
reaction was not all foolish. It may even be said 
that the speculation was, chiefly or largely, due to 
eagerness to profit by the great opportunities for 
future earnings that were justifiably expected. Peo- 
ple went into debt to acquire stocks because they had 
sound reasons for these ‘‘great expectations.” 
Succeeding chapters will show the distinguishing 
reasons for the greater expectations of future earn- 
ings in the increased “tempo” of business and indus- 
try. This increased rate of activity is manifest in