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 principle,
 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. People
 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 earnings
 in the increased “tempo” of business and industry.
 This increased rate of activity is manifest in