It is at this point, during this final phase of the wild and furious multiplication of these units of value, that speculation reaches its most danger aspects. Sales propaganda, particularly in the form of boosting speculative prices to induce buying through pool manipulation, becomes fast and furious and reckless beyond belief. And the outpouring of these vastly increased units prolongs and intensifies the subsequent panic and depression. For the larger and wilder the outpouring of new units of speculation, the more acute and distressing is the consequent panic. And, what is most significant, it is precisely as to this wild tendency to multiply the units of speculation that responsibility can be fixed.
The recovery from a panic passes through somewhat similar phases—each phase, however, representing a reverse process. The decline of earnings and the collapse of prices convince everyone that a new economic phase of disaster has come into existence. Where, as happened in 1928 and 1929, the consumer buys luxuries on credit and spends furiously, in reliance upon the paper profits made from speculation, the economic disturbance becomes more labored. The capacity to consume is submerged for a time beneath the dark waters of debt. And during the time consumed in paying off debts and accumulating funds the facts of falling prices and of declining earnings are again more potent than logic, in the same manner as during the beginning of a boom the facts of rising prices increasing earnings overwhelm logic. Again, just as there arises in the second stage of a boom a conviction that there is an urgent scarcity of units of speculation, there comes in the second phase of recovery from a panic a conviction of an apparently permanent oversupply of units of speculation—commodities or lands or securities. And just as the controlling feature of a boom is the multiplication of the units of speculation, so the controlling factor in the recovery from a depression is the absorption of these excess units of speculation.
Usually in land speculation, as was true in the case of Florida, the oversupply of lots is so great that absorption into useful occupancy is impossible. So land booms do not tend to recover; there is, instead, an abandonment of the units of speculation and a finis of complete disaster. Unless the inflow of population is steady and persistent, a start, if ever made, must be made from the very beginning. In the case of commodities, of course, low prices encourage increased consumption as well as the wasteful use of existing supplies; but, what is more important, low prices decrease production, and an equilibrium, once production is checked, is quickly reached.
In the case of securities, we are reminded once more of the familiar and apt phrase of the older Morgan—‘undigested securities.’ The pains of digestion involved, of course, are many and severe. In order for this digestive process to be effective, time must elapse for investors to pay off debts, accumulate earnings, and regain courage. Prices, moreover, must fall low enough to attract the larger and more conservative financial interests to the extent where they are willing to utilize their resources both in capital and in borrowing power to acquire such securities. And finally, the recovery from speculative excesses in securities, in its last phase, is usually retarded by a despair that comes because of the very delay in recovery. The final segment of the oversupply of units of security speculation is the most difficult to absorb. The delayed recovery convinces many that a disastrous phase of the economic moon shines down upon man and his world. Just as the duration of a boom convinces everyone that logic is wrong and that the boom will never end, so the protracted duration of a panic convinces everyone that logic is wrong and that the panic will never work itself out.