MeasuringWorth uses a dozen interest-rate series obtained as follows: two countries, three interest-rate concepts, and two standpoints. A detailed exposition follows.
The two countries are the United Kingdom and the United States. The reasons for this selection are the importance of these countries in world economic and monetary history, the availability of U.K. and U.S. interest-rate data over long periods and continuing to the present, the selection of these countries to manifest data elsewhere on this site and, quite frankly, the fact that the author has done most of his recent scholarly work on the experience of these countries.
The encounters of most people with interest rates occur in the context of events such as obtaining a mortgage for the purchase of a home, paying a credit-card bill, buying an automobile on credit, borrowing from a bank or the federal government for college expenses, or receiving interest on a bank account. The interest rates used in MeasuringWorth are not concerned with these common experiences. Rather, the interest rates presented are those that set the tone for the wide array of ordinary interest rates. The interest rates here play a major role in determining ordinary interest rates. By obtaining these series for specific years or periods of years, the user is deriving information about the behavior of the entire constellation of ordinary interest rates during these years or time periods.
Two of the interest-rate concepts are short-term in nature, referring to borrowings that are repaid within a year. The short-term interest rate for ordinary funds emanates from the normal course of business of financial institutions, for example, the ordinary lending of funds by commercial banks for a short time period. The short-term interest rate for surplus funds involves the short-term (in fact, very short-term) lending or borrowing of surplus funds, that is, funds that are considered excess by the lending institution and are required for immediate temporary use by the borrowing entity.
The third concept is the long-term interest rate. This concept is the yield on long-term bonds, those that mature in at least 15 or 20 years, or perhaps have no predetermined maturity date (“perpetual bonds”). The bonds on which the interest rate was selected to represent the long-term interest rate must have a low risk of default, that is, of the bond-issuer failing to make interest payments and principal repayment.
The contemporary series are for historical observation. These are interest rates actually experienced, or as near as representation can be made of actually experienced rates. The contemporary series would be used, for example, by authors of historical novels or by anyone who wants to know the actual level of interest rates at particular times in the past. In contrast, the consistent series involves “smoothing” of the corresponding contemporary series. The consistent series would be used by the scholar who wishes to examine the level or movement of interest rates over time, for example.
Looked at another way, the contemporary series presents the pertinent interest rate from the standpoint of a contemporary observer, meaning an observer living in the year or years for which the interest rate is requested. No adjustment is made to a particular-year’s value of the interest rate to bring that value to a present-day perspective—in spite of the fact that the value pertains to a year in the past, perhaps far in the past.
In contrast, the consistent series shows the interest rate from the standpoint of the year-present observer. All earlier components of the series are re-expressed in terms of the year-present component. A contemporary observer generally would not recognize the interest-rate figures obtained. However, the year-present observer would be able to interpret past interest-rate figures as consistent with the year-present figure for that interest rate.
For each interest-rate series and each country, the time span ends in the present and is carried back into the past annually and continuously (that is, with no gaps of missing figures) as far as data permit. The resulting coverage is as follows.
Short-Term Interest Rate: Ordinary Funds
United Kingdom: 1790-present
United States: 1831-present
Short-Term Interest Rate: Surplus Funds
United Kingdom: 1855-present
United States: 1857-present
Long-Term Interest Rate
United Kingdom: 1729-present
United States: 1798-present
The interest rate on a specific asset or instrument is used to represent a given interest-rate concept. This asset is selected for maximum representativeness, but then the asset changes over time—so that the representativeness of the series is maintained. The component assets and their applicable time periods for the interest-rate series are as follows.
Short-Term Interest Rate: Ordinary Funds
United Kingdom: bill of exchange, 1790-1918
Treasury bill, 1919-present
United States: commercial paper, 1831-1930
Treasury bill, 1931-present
Short-Term Interest Rate: Surplus Funds
United Kingdom: call money, 1855-1967
interbank deposit, 1968-present
United States: call loan, 1857-1954
federal funds, 1955-present
Long-Term Interest Rate
United Kingdom: annuities, 1729-1752
consols, 1753-1918
British-government securities, 1919-present
United States: U.S.-government securities, 1798-1861
New-England municipal bonds, 1862-1898
corporate bonds, 1899-present
Further to enhance representativeness, the data source for the selected asset varies over time. For example, the U.S. corporate-bond yield for 1899-1918 has a different source from that for 1919-present. The consistent series corrects not only for a change in asset but also for a change in data source, as needed for a consistent series over time.
Source Document For an explination of the sources of the data see "Interest Rate Sources"
For a thorough description of the characteristics and generation of the interest-rate series used in MeasuringWorth one may consult the monograph "What Was the Interest Rate Then? A Data Study." (382K PDF)
An excellent readable history of interest rates over the entire world, from the distant past to near the end of the 20th century, and with much attention to data, is Sidney Homer and Richard Sylla, A History of Interest Rates (Rutgers University Press). Originally written by Sidney Homer alone, the third edition was published in 1991 and revised slightly in 1996.