I had a different interpretation. To me, this sounded more like a warning against bad personal epistemic hygiene and about the tradeoff between epistemic and instrumental rationality, not what happens when you reach the upper bound of your memory capacity. Now that I think about it, your interpretation is probably closer to what Doyle had in mind (what with his 19th century pop-psychology and all).
In the book this quote is in, Holmes uses it to justify refusing to remember that the Earth goes around the Sun.
Here's the new thread for posting quotes, with the usual rules: