Q: What were rates on savings accounts like in the 1930s?
A: That's an interesting question given the super-low level of rates today and the worsening economic climate. A comparison with the 1930s could lend some perspective on whether rates have ever been any lower, and whether rates could get worse if the economy slips into a prolonged recession (or worse).
In the absence of any comprehensive data on savings accounts stretching back to the 1930s, we can use T-Bills as a proxy for short-term interest rates. Based on the Ibbotson SBBI Yearbook, which is an excellent source of historic market data, here are some observations about short-term interest rates in the 1930s:
- For the decade of the 1930s, 1-month T-bills averaged a return of just 0.6 percent a year.
- In the second half of the decade, T-bills averaged only 0.1 percent per year.
- In 1938 and 1939, T-bill returns for the year were 0.0 percent. This continued in 1940.
Sounds pretty grim, doesn't it? Now flash forward to the current day:
- Yields on 1-month T-bills are once again close to zero, at 0.01 percent (according to the Federal Reserve).
- At 0.12 percent (according to the FDIC), the average rate on savings accounts is a little better than T-bills, but not much.
A crucial difference between the 1930s and now is the inflation environment. Deflation reigned throughout much of the 1930s. According to Ibbotson, inflation averaged -2.0 percent a year during the decade, so even with an average nominal return of 0.6 percent, T-bills provided a respectable real return. In contrast, inflation is currently at 3.8 percent, well above the yields on T-bills and savings accounts.
So could conditions for interest rates on savings accounts get any worse today than they were in the 1930s? If you factor in both interest rates and inflation, they already are.
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