Causes of the Panic

35

prices necessarily brought a huge increase in the earnings
 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 public
 confidence in the rate of earnings was established,
there began a movement of revalorization that naturally
 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 previously
 been undervalued—overvalued, I should say,
because it is clear that we have as yet seen no-readjustment
 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 overvalued
 precedent to the crash, and that this overvaluation
 was one of its immediate factors. There
is a measure of truth, also, in the judgment pro-