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 eaming-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 aa 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
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mented to the extent which its recent earnings capacity would warrant, then the concern is insolvent for the time being. If the claims against it are pressed, it has no recourse but liquidation through forced sales or bankruptcy. Either expedient, if the case is one of considerable magnitude, is disastrous to the balanced sequence of credit relations in which the business community is involved. The system of credit relations prevailing at such a time has grown up on the basis of an eaming-capacitj transiently enhanced by a wave of differential price advantage; and when this wave has passed, even if it leaves prices higher all around, the differential advantage of at least most concerns is past. The differential price advantage has come to the several branches or firms in succession, and has, in the typical case, successively left each with an excessive capitalization, and has left many with a body of liabilities out of proportion to their subsequent eamingcapacity. This situation may, evidently, come about in this manner, even without lowering the aggregate (pecuniary) eaming-capacity of the business community to the level at which it stood before the wave of prosperity set in.'