collateral which is, in the apprehension of his creditor, insufficient to secure ready liquidation, either by a shifting of the loan or by a sale of the collateral. The collateral is commonly a block of securities representing capitalized wealth, and the apprehension of the creator may be formulated as a doubt of the conservative character of the effective capitalization on which it rests. In other words, there is an apprehension that the property represented by the collateral is over-capitalized, as tested by the current quotations, or by the apprehended future quotations, of the securities in question. The market capitalization of the collateral has taken place on the basis of high prices and brisk trade which prevail in such a period of business exaltation as always precedes an acute crisis. When such a call comes upon a given debtor, the call is passed along to the debtors farther along in the sequence of liabilities, and the sequence of liquidations thereby gets under way, with the effect, notorious through unbroken experience, that the collateral all along the line declines in the market. The crisis is thereby in action, and the further consequences follow as a wellknown matter of course. All this is familiar matter, known to business men and students by common notoriety.
The immediate occasion of such a crisis, then, is that there arises a practical discrepancy between the earlier effective capitalization on which the collateral has been accepted by the creditors, and the subsequent effective capitalization of the same collateral shown by quotations and sales of the securities on the market. But since the earlier capitalization commonly, in the normal case, comes out of a period of business prosperity, the point of inquiry is as to the ground and method of this effective capitalization of collateral during the period of prosperity that goes before a crisis, and this, in turn, involves the question of the nature and causes of a period of prosperity.
The manner in which the capitalization of collateral, and thereby the discrepancy between the putative and actual earning-capacity of capital, is increased by loan credit during an era of prosperity has been indicated in some detail in Chapter V above. But it may serve to enforce the view there taken, if it can be shown on similar lines that a period of prosperity will bring on a like discrepancy between putative and actual earning-capacity, and therefore between putative and eventual capitalization of collateral, even independently of the expansion effected by loan credit.
A period of prosperity is no more a matter of course than a crisis. It has its beginning in some specific combination of circumstances. It takes its rise from some traceable favorable disturbance of the course of business. In such a period the potent fact which serves as incentive to the acceleration of business is a rise of prices. This rise of prices presently becomes general as prosperity progresses and becomes an habitual fact, but it takes its start from some specific initial disturbance of prices. That is to say, prices rise first in some one industry or line of industries.115
By new investments, as well as by extending the operations of the plants already employed, business men forthwith endeavor to take advantage of such a rise. The endeavor to market an increased supply of the things for which there is an enlarged demand, brings on an increased demand and an advance of prices in those lines of industry from which the concerns that had the initial advantage draw their supplies. In part by actual increase of demand and in part through a lively anticipation of an advanced demand, aggressive business enterprise extends its ventures and pushes up prices in remoter lines of industry. This transmission of the favorable disturbance of business (substantially a psychological phenomenon) follows very promptly under modern conditions, so that any differential advantage that accrues at the outset to the particular line of industry upon which the initial disturbance falls is presently lost or greatly lessened. In the meantime extensive contracts for future performance are entered into in all directions, and this extensive implication of the various lines of industry serves, of itself, to maintain the prosperity for the time being. If the original favorable disturbance of demand and prices, to which the prosperity owes its rise, falls off to the earlier level of demand, the era of prosperity has thereby a term set to its run; although the date of its termination is always at some distance in the future, beyond the time when the original demand has ceased to act. The reason for this retardation, whereby the close of an era of prosperity is always delayed, other things equal, beyond the lapse of the cause from which it has arisen, is (1) the habit of buoyancy, or speculative recklessness, which grows up in any business community under such circumstances, (2) the continued life of a considerable body of contracts for future performance, which acts to keep up the demand for such things as are required in order to fill these contracts and thereby keeps up prices in so far. In general it may be said that after the failure of the favorable price disturbance to which it is due, an era of prosperity will continue for that (indefinite) further period during which the fringe of outstanding contracts continues to dominate the business situation. Some further, new contracts will always continue to be made during this period, and some unfilled contracts will always be left standing over when the liquidation sets in; but, broadly speaking, the wind-up comes, not when this body of outstanding contracts have run out or been filled, but when the business of filling them and of filling the orders to which they give rise no longer occupies the attention of the business community in greater measure than the rest of current business.
The run of business exigencies on which an era of prosperity goes forward may be sketched in its general features somewhat as follows: Increased demand and enhanced prices, with the large contracts which follow from such a state of the market, increase the prospective earnings of the several concerns engaged. These prospective earnings may eventually be realized in full measure, or they may turn out to have been putative earnings, only. that is largely a question of how far in the future the liquidation lies. The business effect of increased prospective earnings, however, is much the same whether the event proves the expectation of increased earnings to have been well grounded or not. The expectation in either case leads the business men to bid high for equipment and supplies. Thereby the effective (market) capitalization is increased to answer to the increased prospective earnings. This recapitalization of industrial property, on the basis of heightened expectation, increases the value of this property as collateral. The inflated property becomes, in effect, collateral even without a formal extension of credit in the way of loans; because, in effect, the contracts entered into are a credit extension, and because the property of the contracting parties is liable to be drawn into liquidation in case of non-fulfilment of the contracts. But during the free swing of that buoyant enterprise that characterizes an era of prosperity contracts are entered into with a somewhat easy scrutiny of the property values available to secure a contract. So that as regards this point not only is the capitalization of the industrial property inflated on the basis of expectation, but in the making of contracts the margin of security is less closely looked after than it is in the making of loans on collateral. There results a discrepancy between the effective capitalization during prosperity and the capitalization as it stood before the prosperity set in, and the heightened capitalization becomes the basis of an extensive ramification of credit in the way of contracts (orders); at the same time the volume of loan credit, in set form, is also greatly increased during an era of prosperity.116
An era of prosperity is an era of rising prices. When prices cease to rise prosperity is on the wane, although it may not promptly terminate at that juncture. This follows from the fact that the putative increase of earnings on which prosperity rests is in substance an apprehended differential gain in increased selling price of the output over the expenses of production of the output. Only so long as the selling price of the output realizes such a differential gain over the expenses of production, is the putative increased rate of earnings realized; and so soon as such a differential advantage ceases, the era of prosperity enters on its closing phase.
Such a differential advantage arises mainly from two causes: (1) The lines of industry which are remote, industrially speaking, from the point of initial disturbance, - from which, that is to say, the lines of industry first and chiefly affected by the rise draw supplies of one kind or another, - these remote lines of industry are less promptly and less acutely affected by the favorable disturbance of the price level; this retardation of the disturbance affords the industries nearer the seat of disturbance a differential advantage, which grows less the farther removed the given enterprise is from the point of initial disturbance.117 (2) The chief and most
