27. Interest Rates

0:00Interest Rates Sidney Homer writes in his monumental History of Interest Rates, 2000 B.C. to the present, that quote, during the last two decades of the 19th century, 1880 to 1900, long-term bond yields in the United States declined almost steadily. The nation entered its first period of low long-term interest rates, end quote, To gauge long-term rates of the day, it is best not to use the long-term government bonds we would use today as a measure. The National Banking Acts of 1863 to 1864 stipulated that these bonds had to be used to secure banknotes.

0:51This created such a demand for them that, as Homer says, quote, By the mid-1870s, it put government bond prices up to levels where their yields were far below acceptable rates of long-term interest. End quote. But the Commerce Department tracks the unadjusted index of yields of American railroad bonds. For 1878, the year before gold, the yield was 6.45 percent. For 1879, 5.98% and 1889, 4.43%. We stress that with consumer prices about 7% lower in 1889 than they had been the decade before, the real rate of return by decades end was well into double-digit range, a bonanza for savers and lenders.

1:37Short-term rates during the last century were considerably more skittish than long-term rates. Even here, the decennial averages of annual averages of both 3- to 6-month commercial paper rates and overnight call money during the 1880s declined from what it had been the previous decades. Average commercial paper rates fell from 6.46% for the decade of 1870-1879 to 5.14% for the decade of 1880-1889. These call money rates fell from 5.73% for the decade of 1870 to 1879 to 3.98% for the decade of 1880 to 1889.