Business & Real Estate

Do we have the lowest interest rates in the past 5,000 years?

Most everyone is probably aware that interest rates today in the U.S. are at historic lows.

To a large extent, this is due to the quantitative easing strategy that the U.S. Federal Reserve has followed since the depression of 2008. The Fed’s goal was to suppress interest rates to make borrowing easier to stimulate the economy after its biggest collapse since the Great Depression of the 1930s. Central banks in many other countries followed suit, and today the phenomenon is fairly widespread across much of the developed world.

But just how low are current rates from a longer historical perspective?

WealthVest, a Bozeman, Mont., financial services firm that specializes in annuities, researched this question and developed an estimate of rates going back thousands of years – well before the first U.S. national bank was created in 1864.

WealthVest determined that annual interest rates for barley in ancient Sumer were as high as 33 percent. By the time Greece became a world power in 300 B.C., its well-established financial system – coupled with the much broader use of credit – had driven rates down to as low as 6 percent.

Moving forward approximately 600 years, the decline of the Roman Empire caused rates to soar to as high as 13 percent until Emperor Justinian established his Code, which (among other things) lowered the maximum legal rate to 8 percent. During the subsequent Dark Ages in Europe, recordkeeping was so poor that it’s virtually impossible to determine lending rates with any degree of accuracy.

The founding of the Bank of England in 1694 could be considered the start of the modern age of banking. From its inception all the way through the 1970s, the Bank of England’s interest rates never exceeded 8 percent nor fell below 2 percent. Once the U.S. founded its national bank in 1864, rates also fluctuated between those two extremes for the next century, though with less volatility. In Japan, from the 1880s through the 1970s, rates ranged between 3 and 9 percent. In Germany after World War II, they ranged between 3 and 8 percent.

The 1980s saw a huge jump in interest rates in the U.S. and the U.K., peaking at more than 14 and 16 percent, respectively, followed by one of the most protracted declines in history, culminating in the crash of 2008.

Making the best of the situation

Based on all this data, assuming that it is valid, we could assert that interest rates today are actually lower than they’ve ever been over the last 5,000 years.

But does it really matter? Yes, because this situation is impacting the future investment returns we can expect to get.

The low-interest-rate environment (which results in high bond prices), coupled with the historically high valuations in stock prices, is unprecedented. There has never been a period of time when prices of both bonds and stocks have been high at the same time. This makes it difficult to construct diversified portfolios that can generate historical returns while still effectively managing volatility and downside risk. As a professional investment manager, I find it much more challenging these days to select and allocate fixed-income investments than stock investments.

Practically speaking, we don’t have the option of pulling all of our money out of bond funds and waiting until the Fed allows rates to rise to a more market-based level. We have to make the best of the situation, which means carefully selecting investments from among the many fixed-income asset classes.

But if you’ve been used to getting 8-10 percent returns from a well-diversified portfolio in the past, you might want to temper those expectations for the foreseeable future.

Los Altos resident Artie Green is a Certified Financial Planner and principal at Cognizant Wealth Advisors. For more information, call 209-4062 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

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