Installment Plans and StocksCauses of the Great Depression

Part 1: Installment Plans (continued)

Who supplied money for installment plans?

•People usually borrowed money from the banks

Another name for Installment plans

•Buying on margin or credit

How do installment plans connect to the American Dream?•Installment plans helped people achieve part of the American Dream (home ownership)

•It also helped people own cars

Why are installment plans good (besides the American dream)?•They were good for people selling things. It created more buyers

•They were good for people buying things. They can buy things they can’t otherwise buy

When do installment plans become dangerous?

•When people can’t pay back the loans (this is key!)

Who worries about installment plans?•Sellers are worried about whether the buyer can pay off the loan

•Buyers thought the economy would always get better and that the buyers could always pay back the loan

2008 Connection• The most recent economic crisis was

caused by people buying houses in ways that were like installment plans

•People bought houses they could not afford by paying small amounts up front and paying the rest later. Usually the later amount was an amount they could not afford

Part 2: Stocks

• Buying a stock means you are buying ownership in a company

• Companies sell stocks to raise money

• People buy stocks because they think the value of their money will grow faster in the stock market than depositing it in a bank

• At the same time, stocks grow faster because people are taking a bigger risk than putting it in a bank (as shown by the Great Depression)

How do stocks get their value?

• Stock value (just like the value of a house) depends on what people are willing to pay for it

• If people won’t or cannot afford to buy a stock at a particular price, the stock will lose value, and may, in the extreme, be worth nothing

Where did people get the money for stocks?

•A loan from the bank (just like the installment plans)

How did people use stocks?•As money to buy more stocks

•They went back to the bank for more loans

Why is using stocks in this way dangerous? (This is key!)•People assume stock prices will just keep going up

•People were acting like stock prices were definite while they actually were not

This is called “excessive speculation”

•Speculation is basing a price on what you predict about the future (even though it is not guaranteed)

Where was the government? Why were they not doing anything?• Lack of regulation

• Laissez-faire economic policy

• This changed because of the Great Depression. Politicians have argued about the role of government in the economy ever since