Long Term Real Ex Post Interest Rates around the Great Depression

I was wondering how long real long term (ex post) interest rates remained negative after the onset of the Great Depression. This is obviously interesting given the large amount of slack currently in the global economy, and the rampant fears of crowding out (see [1]) as governments continue to run deficits (and are likely to continue as leaders refuse to raise tax revenues). Fortunately, Lawrence Officer and Sam Williamson have done the profession an enormous service by compiling online historical series on many variables, including interest rates and price, at Measuring Worth. It turns out ex post real rates were really low for a very long time…


Figure 1: Long term interest rates minus 20 year inflation (blue, left axis), and output gap (red, right axis), both in decimal form. Long term interest rate is interest rate on prime corporate bonds with at least 20 years to maturity (see Officer (undated), page 86); inflation is 20 year log difference of CPI divided by 20; output gap is the cycle component from Hodrick-Prescott filtered log real GDP in 2005$ estimated over the entire 1794-2010 period. Source: GDP, CPI, interest rates from Measuring Worth; and author’s calculations.

Of course, the ex ante real interest rate is what matters. If rational expectations holds, then these ex post rates are unbiased observations on the ex ante.


The output gap goes negative in 1930, and remains negative. Ex post real interest rates go negative in 1930 and remain in negative territory until 1947. Of course, we go into a war in 1941, so a caveat should apply for the 1941-45 observations (although the war doesn’t stop many others from using those observations, so perhaps I should be similarly undaunted…).

12 thoughts on “Long Term Real Ex Post Interest Rates around the Great Depression

  1. 2slugbaits

    Menzie I’m not following this. Negative real interest rates could come about because of very low nominal interest rates or very high inflation, or some combination of the two. The Measuring Worth site shows very low and declining interest rates throughout the 1930s along with actual deflation. Doesn’t that drive up the real interest rate? Put another way, a near zero short term rate (or even a very low long term rate) alongside a large output gap implies that the natural interest rate is strongly negative, which means that for investment purposes the nominal near zero rate is very high. What am I not getting here?

  2. MAS

    Your first paragraph “Measuring Worth” hyperlink does not work (the second under Figure 1 does).
    It should come as no surprise that the US government should install Statist financial repression to pay for massive fiscal deficits after a major banking (excess credit) crisis… Check out Carmen Reinhart’s point of view at ” the Peterson Institute for International Economics.

  3. David Pearson

    Same question as 2slugbaits: why doesn’t the blue line spike in 1930 when the price level begins to crash?

  4. David Pearson

    Never mind — I see that spike begins in 1910 as the 20yr period begins to capture 1930. An odd way of presenting things. Do you really think ex-ante expectations in 1910 included the GD price level crash? And ex-ante in 1933 incorporated the expectation that we would leave the gold standard and enter into a war?
    Rational expectations implies that predictions are systematically unbiased all forecast errors are random; is the random component small or large over a twenty year period?

  5. Bryce

    Is there evidence of extended negative real interest rates before the creation of the Fed? [other than perhaps the Civil War?]

  6. Menzie Chinn

    2slugbaits: I think you are calculating i[t,k]-pi[t], where pi[t] is the annual inflation rate up to time t, and i[t] is the interest rate at time t for k period horizon. I am calculating i[t,k]-pi[t+k], where pi[t+k] is the inflation rate between period t and period k.

    MAS: Thanks; link fixed.

    Bryce: Using the same calculation, I get negative interest rates 1898-1909.

  7. 2slugbaits

    Menzie Okay, thanks. I’ve always been more of an adaptive expectations kinda guy.

  8. brad

    Williamson–was he at University of Miami when Paul Ryan was studying as an econ major? If so, 2slugs should tell us that anything Williamson does is crap…….since he claims that Miami should revoke Ryan’s econ degree.
    So, why give any credence to Williamson……per this POS 2slugs?

  9. brad

    If OBAMAcare gets declared unconstitutional, I think the University of Harvard should revoke Barry’s law degree since this so-called “constitutional” scholar apparently knows nothing about the Constitution.
    I’m sure the 2slugger will agree ….since he is a leftist hack who called on Sam Williamson’s University of Miami to revoke Ryan’s econ degree.

  10. 2slugbaits

    brad Actually, I should have said Miami University rather than University of Miami. My mistake. I don’t know anything about Prof. Sam Williamson, except that his bio says he’s also affiliated with the Univ of Illinois-Chicago Circle campus, and that can’t be all bad.
    As to Obama qua constitutional scholar, anyone who finds himself on the other side of a constitutional argument with Antonin Scalia can’t be wrong. Poor hapless Scalia didn’t even recognize his own words regarding a 2005 commerce clause case when they were thrown back at him. But I was surprised to hear that Scalia knew about brocolli. Just looking at his rather portly physique I would have guess he thought the four foodgroups included pasta, pizza, fried chicken and Twinkies. It’s a wonder that Scalia doesn’t have first hand experience with healthcare issues.
    per this POS 2slugs Sounds like you’ve been talking to my teenage daughter. She shares the same opinion.

  11. Ricardo

    Most people take this claims of deflation during the Great Depression as given without ever really looking at the facts. Milton Friedman did much to perpetuate this idea when he emphasized his M2 calculations over base money creation by the FED.
    Here you will find interesting graphs of the quantity of base money during the Great Depression. What is also interesting it to compare these graphs with graphs of base money from 2000-current. Both graphs can be reproduced from the ST. Louis FRED graphs. Does a change in the base money supply have an impact on interest rates?

  12. Sam Williamson

    As a clarification, The Miami University, which is in Ohio was founded in 1809, ten years before the US acquired Florida from the Spanish.
    We created MeasuringWorth as a place to present long range historical data and a set of calculators that compute relative worth, growth rates, etc. I like our graphing program as you can compare two series both in numeric and logarithmic scales. We are not a bank or research institute, so we operate on a small budget.
    If you have any comments or questions, please send them.
    Samuel H. Williamson
    President of MeasuringWorth
    [email protected]

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