The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 45

High Interest Rates Have Been a Recurring Nightmare

“Oh, for the good old days.” You've often heard it said. Perhaps you thought high American interest rates were a phenomenon unique to the post-Vietnam era. Not so. While many folks believe that interest rates had never risen over 10 percent before World War II, this graph gives you a quick overview of a financial America few can conceive. This chart may convince you that high short-term interest rates were so high so often in the 19th century that high rates may be more normal than not—and perhaps you should prepare for their return.

The chart shows interest rates on short-term commercial paper from 1841 through 1918. Commercial paper is the class of short-term notes from the largest and best-financed corporations and is highly competitive with, and a good proxy for, short-term interest rates in general.

Look at arrows A, which shows that for brief periods, like just before the Civil War and again in the 1870s, short-term annual interest rates got as high as 25 to 35 percent. Even more interesting, from 1845 until 1875, there was rarely a year where short-term interest rates didn't exceed 10 percent at some time. Look at the length of time covered by brace B.

Why were rates high? Partly because it was a very risky world—wars, booms and busts, poor communication, plaguelike fatal diseases, and little regulation or insurance. High risk made lenders want to be well paid. But perhaps the main reason was high demand for money. ...