Taking Stock of Bonds
February 17, 2009
What's Money Worth?
Now that we have seen US Treasury rates hit historic lows, while other forms of credit have disappeared or have become more costly, it may be a good idea to peek back in history to look at various forms of credit, attitudes toward debt and credit costs.
Sidney Homer, a former limited partner at Salomon Brothers and general partner in charge of its bond market research, died in 1983. But his “History of Interest Rates” is still in print and gives an idea of how the cost of credit has changed over many years. Like a visit to the British Museum’s “money room” in London, this is a perfect overview of how the issue of credit has been dealt with over the centuries.
What is also interesting is that the notion of a global economy has, in some ways, been around for thousands of years and is not a notion unique to the last couple of decades. Colonial and pre-Civil War American economies, for example, were influenced by events in Europe. Ports on the Mediterranean have, for centuries, been impacted by events that affect prices of goods and borrowing costs.
Looking far back, in Sumeria credit was based on loans of grain by volume and metal by weight. Babylonians and Romans permitted credit but limited interest rates.
Currency was not always in the form of coin. In some parts of India grain was used as a medium of exchange while in 20th century Asia loans were granted in rice. In Northern Siberia, domesticated reindeer were used as money and loans were granted in reindeer.
What gets interesting in Homer’s book is when we get to borrowing in the Greek age: fifth century real estate loans were 8% for city properties and as much as 12% for country properties. The term on these loans ranged from one to five or more years. In 13th century Netherlands, long-term real estate loans were at 8% to 10%. [What exactly is considered long-term is not defined in Homer’s book.] In 1553 London, just over a decade before the birth of William Shakespeare, real estate loans are at 12%.
In Colonial America, the Continental Congress approved in 1776, a $5 million note at 4% payable in three years. A year later, that rate was increased to 6% but only $3.8 million of the debt was sold. By 1900, US government debt yields were at 2%, New England munis had a yield of 3.15% and high grade corporate debt issued from railroads was at 3.18%. New York City real estate mortgage rates were at 5.17%.
For those who think California’s real estate market – the land of subprime and jumbo mortgages – is a bit off these days they may want consider a section in Homer’s book, entitled “Risk rates and eccentric local rates.”
In 1849, the year of the California gold rush, owners of cattle ranches benefited from the jump price for cattle. Many cattle ranch owners “borrowed freely by mortgaging their ranches” and with the collapse in cattle prices they lost their ranches. Their lenders, we learn, included French, Swiss, German and Yankee – meaning New England – speculators.
In 1850, a $10,000 loan for a San Diego borrower had a rate of 48% a year and in 1854, 17,000 acres in southern California were mortgaged for $5,500 and had an annual rate of 60%.
Sort of makes the subprime rates of recent years look reasonable.
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