To see how this worked, let's go back to the South Sea Bubble of 1720. It should be remembered that South Sea shares traded around u100 before the bubble began, which was equivalent to about $500 in 1720. One factor that allowed the Bubble to occur was that "investors" were allowed to pay for their shares in installments.a The initial purchase required only 10% down with the rest of the payments spread over the rest of 1720.a This was the eighteenth-century version of buying on margin. It encouraged buying because speculators, as always, thought they could make a profit before the next payment was due. It was the eighteenth-century equivalent of flipping houses. Many of them, no doubt, knew they didn't have the full amount of money for a share, but they did have enough to get in the game.a Unfortunately, the game got them.
Without the speculative allure of buying in down payments, trading remained quiet in London for the next 100 years.a Speculation only returned during the Canal Bubble of the 1810s, the South America and Mining boom of the 1820s and the railroad boom of the 1840s.a The difference between how stocks traded in the 1840s and today is particularly striking.a Again, the difference is what I call, buying on the installment plan.
The par value of most stocks was u100 or about $486 using the fixed, gold exchange rate. This was almost a year's income for the average person.a Of course, the average person wasn't investing, and most investors were people who had an endowment they had to live off of.a The problem was, if you want to build a railroad and raise large amounts of money, how do you get people to part with their money?a As in 1720, the answer was to pay on the installment plan.