Causes of the Panic 
35 
prices necessarily brought a huge increase in the earn- 
ings of common shares, and this naturally forced a 
valorization of these shares in terms of something 
like a 57-cent dollar. 
“On the basis of this higher price level, stocks, 
through, say, the 1919-1924 period, were, as now 
seems clear, seriously undervalued. As soon as pub- 
lic confidence in the rate of earnings was established, 
there began a movement of revalorization that natu- 
rally swung to wild extremes, as stock markets always 
do. With this came a recurrence of the familiar ‘new 
era’ theory, which seems to blossom about once in 
a generation with unfailing regularity. All this 
brought what appears to have been as serious an 
overvaluation of common stocks as they had pre- 
viously been undervalued—overvalued, I should say, 
because it is clear that we have as yet seen no-read- 
justment of long-term interest rates and bond yields 
to what look like permanently lower levels. And 
would not this be inevitable if the high prices 
attained by the average of stocks were to continue?” 
It is not clear why long-term interest rates and 
bond yields should seek “permanently lower levels” 
—they might properly remain at permanently higher 
levels, if, because of increases in science and the 
arts, the “tempo” of business justifies expectation of 
higher profits and greater real income. But it seems 
measurably true that common stocks were over- 
valued precedent to the crash, and that this over- 
valuation was one of its immediate factors. There 
is a measure of truth, also, in the judgment pro-