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 secure differential advantage in the case is that due to the relatively slow advance in the cost of labor during an era of prosperity. Wages ordinarily are not advanced at all for a considerable period after such an era of prosperity has set in; and so long as the eventual advance of wages does not overtake the advance in prices (which in the common run of cases it never does in full measure), so long, of course, a differential gain in the selling price accrues, other things equal, to virtually all business enterprises engaged in the industries affected by the prosperity.
There are, further, certain (outlying) lines of industry, as, e.g., farming, which may not be drawn into the movement in any appreciable degree, and the price of supplies drawn from these outlying industries need not rise; particularly they need not advance in a degree proportionate to the advance in the prices of the goods into which they enter as an element of their expenses of production. To an uncertain but commonly appreciable extent there is also a progressive cheapening of the processes of production during such an era, and this cheapening, particularly in so far as it affects the production of the goods contracted for, as contrasted with the appliances of production, serves also to maintain the differential advantage between the contracted sale price and the expenses of production of the goods contracted for.
In the ordinary course, however, the necessary expenses of production presently overtake or nearly overtake the prospective selling price of the output. The differential advantage, on which business prosperity rests, then fails; the rate of earnings falls off. the enhanced capitalization based on enhanced putative earnings proves greater than the earnings realized or in prospect on the basis of an enhanced scale of expenses of production; the collateral consequently shrinks to a point where it will not support the credit extension resting on it in the way of outstanding contracts and loans; and liquidation ensues, after the manner frequently set forth by those who have written on these subjects.118
At some point in the system of investment and business extension will be found some branches of industry which have gradually lost what differential advantage they started out with when they entered on the era of prosperity; and if these are involved in large contracts and undertakings which are carried over into the phase of the movement at which this particular branch of industry has ceased to have a differential advantage in the price of its output over the cost of its supplies of material or labor, then what may have been a conservative capitalization of their holdings at an early phase, while their earning-capacity rested on a large differential advantage, will become an excessive capitalization after their earning-capacity has declined through loss of their differential advantage. Some branch or branches and some firms or class of firms necessarily fall into this position in the course of a period of phenomenally brisk times. A business concern so placed necessarily becomes a debtor, and its liabilities necessarily become, in some degree, bad debts. It is forced by circumstances to deliver its output at prices which preclude its obtaining such a margin as its extension of business presupposed. That is to say, its capitalization becomes excessive through shrinkage of its earning-capacity (as counted in terms of price). A concern of this class which is a debtor is precluded from meeting its obligations out of its current earnings; and if, as commonly happens in an appreciable proportion of cases, its obligations have already been augmented to the extent which its recent earning-capacity would warrant, then the concern is insolvent for the time being. If the claims against it
