It is not an exaggeration to claim that a history of interest rate increases is a history of the economic health of the society. Rates follow the general trends of the economy and send signals to investors as to the cost of money. Rate hikes suggest that the banking elites want investment to slow or inflation to decrease. Cheap money means that economic growth, hiring and investment are now the main goals of the banks and government. In 20th century America, interest rates have clearly followed economic trends and political events.
In the beginning of American industrialization and expansion before World war II, interest rates were very stable. Loans were normally taken out only by economic elites, and most Americans lived on cash. Credit cards were a much later development. After World War II, a slow growth in rates was the norm. American industrial growth was phenomenal, and “buying on time” was a more common practice of the typical American consumer. Economic growth began to suffer strain by the end of the Vietnam War, as American capital became more openly global and international. The late 1970s saw a skyrocketing of rates that reached the record high of 21.5 percent in December of 1980 from a bit over 9 percent in June of 1978.
Rates continually lowered after the Reagan revolution increased economic growth and lowered rates to about 7.5 percent in August of 1986. By March of 1994, these had been lowered to 6.25. The late 80s, however, saw rates slowly rise, reaching 11 percent by early 1989, and about 10 percent the following year as consumer debt continued to increase. Outsourcing, concerns about manufacturing jobs moving overseas, uncontrollable federal and private debt all did their part to dampen enthusiasm for investment. Rates remained relatively stable in the 1990s.
The different hikes in the prime rate in 20th century America have been tightly bound to political and economic events. Bar none, the highest group of increases came at the very end of the 1970s and continued into the 1980s. The transition from the Carter to the Reagan administration saw a bottoming out of American productivity. This era ushered in a very high rate of inflation, a decline in productivity and a large set of rate hikes from 9.75 percent in September of 1978 to over 20 percent in the last few months in 1980. Rates more than doubled in this period. Interest rates both caused and were caused by increases in unemployment and a lack of investor confidence. Increasing costs of oil and high taxes helped cause this long recession.
Mortgage rates have traditionally been high in 20th century America. Like everything, the late 80s saw these rise to astronomical heights, and remain unstable throughout the high-spending 1980s. Mortgage rates fell to their historical lowest point around the turn of the third millennium, and Americans went on a refinancing spree that sent housing prices very high. Mortgage rates had inched up after the implosion of the housing market around 2006-2007. Mortgage rates have, in 2011, remained steady at about 4 percent for the 30-year variety.
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