Click to enlarge chart

Source: Bianco Research LLC
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Fascinating chart from Jim Bianco, looking at interest rates back nearly 2 centuries.

Category: Fixed Income/Interest Rates

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

24 Responses to “Interest Rates: 1831-2011”

  1. machinehead says:

    Essential insights:

    1. Pre-Fed, short rates had a de facto floor of 3%. During crises (e.g., 1873 and 1893, visible on the chart), they spiked HIGHER.

    2. Post-Fed (e.g., today), rates PLUNGE TOWARD ZERO in a crisis. This is an utterly unnatural reaction to crisis. After all, rates should rise when risk is higher. Central planning stands the natural order on its head.

    3. Not shown in this chart, but well known to a capable market historian like Jim Bianco, is that the pre-Fed yield curve was, on average, FLAT. Post-Fed, it is nearly always upward sloping. This is how the bank cartel subsidizes itself to borrow short (cheaply) and lend long (dearly).

    CONCLUSION: Abolish the freaking Fed! It is an anti-market abomination.

  2. JackCCrawford says:

    I was 22 when rates hit their peak. Bought my first home with VA loan at 12%. Would have been better off renting at the time.
    Nevertheless, we are at the bottom of the cycle and huge rate increases lie ahead. Younger people don’t grasp this yet … “experience bias.”
    Get ready, it’s gonna be a rough night.

  3. willid3 says:

    sure every body really wants go back to 20 year depressions. and recessions just like clock work
    the reason the Fed became so active after 1932. was there was a very strong chance that capitalism was going to be shown the exit. when the majority don’t feel like they gain any thing from it, it could be gone. and that was back then when people had a lot more patience. today they might let it stay around with those conditions. for a few years. but tell then it will be 20+ years? they will want it gone.
    and the ‘market’ could care less.
    since the real interest rate has had very little to do with what the Fed has set it to be.
    consider credit cards. barely has any relationship to it.
    or mortgages, almost no relationship
    or auto loans , almost no relationship

    the only ones getting any advantage at all, are banks and wall street.
    every one else., not so much

  4. stateless says:

    @ machinehead

    Why does “natural order” = good?

    In the “natural” world it is 15 degrees outside right now. However, I’m in a building with walls, windows, and heat where it is a comfy 72.

    I’ll take a managed environment for both my economy and physiological needs.

  5. BennyProfane says:

    I’ll never forget my father chuckling over the fact that he just bought two 15% five year CDs at two different banks that day in 1980. Doubled his money in five years, 100% government guaranteed. Those were the days.

  6. silverBUG says:

    “Abolish the fed” and do what? Return to the gold standard? Why?

    There are three incompatible objectives for an ideal currancy, based on Robert Mundell’s work in 1963.
    • Fixed exchange rates against currencies of major trading partners.
    • Free capital flows, no restrictions on currency convertibility.
    • Independent monetary policy

    You can set policy to achieve only two, there are three option in this “Trilema”.

    Under the gold standard and fixed exchange rate systems (including intra Euro zone countries) you achieve free capital flows and of course fix the exchange rate but there is no independent monetary policy.

    Under Bretton Woods and policy today in China and India you achieve fixed exchange rates between trading partners and have independent monetary policy but there are no free capital flows.

    Under a floating exchange rate you achieve free capital flows and gain independent monetary policy but now have exchange rate risk.

    Why would you choose either of the other two options over what we currently have today?

  7. leeward says:

    Choice with content of all kinds is a trend and the internet is taking us there….and all media will follow dutifully, eventually. Media companies will drag feet while the old guys & gals complain about the good old days a little longer but Choice is exactly what the interactive digital ecosystem promises and there is no going back. Even the click whores will eventually fall in line. The graphics above are all great but they are backward looking in a sense. Media now must increasingly go through digital content and all digital content is subject to Choice. The radio still sounds great in the car but how long before Choice makes the economics of long commercial stop sets unrealistic? How long before the economics of cable TV are seen for what they are…a bubble. How long before each click is assigned value more appropriately? I think it is all just a wait-and-see set of circumstances. Too much is built upon generalizations and if capital of all kinds is to be allocated properly, then that will have to change.

  8. gordo365 says:

    Willid3 – why do you think the market will act the same now without the fed – as it did when 90% of economy was agrarian?

    You should read Tom Friedman’s “world is flat” to get a sense of how things have changed since the time when most of us worked on farms. Things are a bit different now to say the least…

  9. rd says:

    Mathematival approaches to economcis started in about 1870. A lot of the fundamentals of modern economic thought dates from the 1930s to 1950s.

    It appears that 1870 marks a break point where the super high interest rate spikes stop, so it appears that modern economcis has some benefits over pure guess work. However, it is not clear to me that the 1930 to 2011 period has a more stable financial and economic structure as represented by interest rates than the 1870 to 1930 period.

    I think we need mor evidence that an economics degree is more valuable to society than using the diploma for firestarter.

  10. wally says:

    Not a very stable history! Even some times when it looks relative stable were actually bad economic times (1873-1893).

  11. MidlifeNocrisis says:

    Yep….. thanks for reminding me. Graduated from college in 1979. Bought my first house in 1982. Interest rate was 11.5something.

  12. victor says:

    @machinehead;”This is how the bank cartel subsidizes itself to borrow short (cheaply) and lend long (dearly).” Actually this has been going on since the Phoenicians invented lending for profit, i.e that money has a time value. Abolish the Fed? The Europeans wished they’d had one right now. There is almost no mention in our political arena of the plight of those who are on fixed income: mostly seniors who have been quietly undergoing pauperization, just one of the many prices we collectively are paying for the mistakes of “just a few scoundrels” to quote John Bogle.

  13. Lyle says:

    It appears that the rates are NY rates, various books I have read about the 1880 suggest that out west rates where in the 12-20% range at the same time. This is because the NY banks were the reserve banks for the country (see National Bank act of the time for details)

    I do suspect that some of the leveling after 1870 came about because the US went on the gold standard and the greenback was backed by gold, this was after Jay Gould et.al. did the corner on the US government in 1869 on gold. We ceased to have 2 kinds of money gold money and greenbacks at the time.

    Of course the rates during the Civil War must be New York rates, as in the south the rates were undoubtedly higher.

  14. “…were actually bad economic times (1873-1893)…”

    seemingly, ~Everybody loves that ‘Factoid’ ..

    anyone care to Show some Empirical Proof?

  15. SecondLook says:

    Re: The Long depression

    The following should give you all a better idea of what happened during that period, and perhaps why some see distinct parallels to now.

    “Figures from Milton Friedman and Anna Schwartz show net national product increased 3 percent per year from 1869 to 1879 and real national product grew at 6.8 percent per year during that time frame.[22] However, since between 1869 and 1879 the population of the United States increased by over seventeen and one-half percent,[23] per capita NNP growth was lower.”

    The Long Depression was a good example of a serious economic recession where the contraction in economic variables was felt internationally. Many economic historians have strong feelings about the Long Depression, often claiming that it was not a depression at all, due to the strict formal definition of a recession which requires distinctly shrinking gross domestic product, a factor missing for much of this period.

    Historically, however, citizens of this time period certainly referred to the period as a depression. In fact, until the Great Depression in 1929 (coming up next!) took over, the Long Depression was referred to as the Great Depression.

    As GDP was clearly growing during this period, this was not a recession or contraction of production; production was still growing. However, prices mark this as a clear contraction; a tight monetary policy in the United States (as part of the effort to return to the gold standard level maintained prior to the speculative economy that grew out of the Civil War (1861-1865)) and the collapse of the Austria-based Vienna Stock Exchange, the world’s oldest stock exchange, and at the time most important, caused a limited availability of funds to facilitate trade.

    Rampant fraud and speculation growing in the railroad industry, particularly in the failed construction of the Union Pacific Railway caused a speculative bubble to pop in this market along side of the collapse of the Exchange, and all the other factors building up in 1873.

    The 1870s one started in Germany with a major selloff of silver after the Franco-Prussian War that then spread to the rest of the world, hitting the US most dramatically in a crash on May 9, 1873 arising from financing problems in the US railroad industry, particularly the failure of the Cooke Company after the failure of its bond issue for building the Northern Pacific, the second transcontinental railway. This was particularly important in that the railroad industry was the largest employer in the US economy outside of agriculture, and its leading sector.

    The data is most dramatically seen in railroad consturction itself. In fact, the post-Civil War boom in such construction had peaked in 1871, but the decline in production accelerated, going from 6,000 miles worth in 1872 to just over 4000 miles worth in 1873, then plunging to barely over 2000 miles worth in 1872, and dropping further to under 2000 miles in 1875, the bottom.

    Now here is where the similarity to the present day becomes clearest, despite the carrying on by some in the marginal revolution discussion to the effect that after 1875 everything was just fine. It wasn’t, and it is no accident that the period to 1879 is viewed as depressed. Yes, railroad construction began to recover, just as output did in the US starting in late 2009. But it did so only fitfully and basically remained flat and low during the 1876-78 period, fluctuating around 3000 miles of construction, much as we have seen a very weak recovery since the bottom in 2009. Only in 1879 did construction surge again up to 5000 miles, followed then by the biggest surge of all as the 1880s would prove to be by far the leading decade of rail construction, only to be followed by a nearly total collapse in the 1890s, the decade that gave us the populist movement.

  16. V says:

    @SecondLook

    I’m always interested in reading analysis of history, but it’s depressing that there are so many versions that differ!

  17. SecondLook says:

    To sum up the above:

    A prolonged financial crisis. Exacerbated by major fraud and speculation.

    A collapse of the leading industry, railroads. Think the high tech bubble and real estate, combined.

    A decline in real per-capita income for years. Along with the unprecedented rise (in American history) of the fabulously wealthy.

    Add very high levels of unemployment – peaking at 14% in 1876, and chronically high, from a historical perspective, for another decade.

    Oh, speaking of perspective; Even before the American Revolution, Americans had higher income and lower unemployment than their English counterparts (and even more so than Europeans). One of the major reasons why the British fought so hard prevent us from leaving – they were losing not only a quarter of their population, but arguably, the richest provinces.

  18. rd says:

    An interesting comparison with the 1870s and today.

    The railroad bubble resulted in serious over-construction of that infrastructure based on the economic needs of the time. However, the country used that infrastructure for the next century as the backbone of the transportation system for moving goods, resources, and people long distances inexpensively and quickly. These long, linear corridors alos became the backbone of the telegraph and telephone system for the country. This didn’t change until the Interstate system was built in the 1960s and 1970s.

    The 1990s saw a similar massive construction of information age infrastructure, especially the construction of massive fiber-optic networks. Much of the rapidly declining costs of communication over the past decade is because of the cheap available network bandwidth. It will be interesting to see how long this infrastructure lasts.

  19. Greg0658 says:

    Lyle .. thanks for reminding me to remind us .. the other 11 FedBanks need to do their jobs for their constituents too

    happy happy inter-relationships gets ya a MFGlobal

    and then the rest of the thread reminds me how much I hate this 6000+ year old system

    I’d play “the Last Resort” by the Eagles … but last I checked they dont play that game
    (.. and gave WalMart an exclusive with Long Road out of Eden)

  20. golfer1john says:

    It is interesting that on this graph every recession (and the Great Depression) during the Fed era has been immediately preceded by a spike in the interest rate, and every spike in the interest rate has been followed by a recession or depression.

    Maybe we need a law restraining the Fed from these violent swings.

  21. machinehead says:

    @ stateless: ‘In the “natural” world it is 15 degrees outside right now. However, I’m in a building with walls, windows, and heat where it is a comfy 72. I’ll take a managed environment for both my economy and physiological needs.’

    If the Federal Reserve were ‘protecting’ us from seasonal winter the same way they ‘protect’ us from economic winter, they would orbit a giant parabolic mirror to warm the atmosphere, then nuke the sun to stoke its heat output. That’s their version of ‘natural order.’

  22. ElSid says:

    Nice chart/post. Love the Fed line. What a dramatic difference.

  23. victor says:

    I still agree with Rukeyser’s suggestion that the Fed be replaced by a computer. If Deep Blue beat world chess champion Kasparov and another IBM product named Watson can process 200 million pages of content in 3 seconds, similar software packages could surely beat Uncle Ben’s Chrystal ball.