D1984 wrote: ↑Wed Aug 02, 2023 11:11 pm
Except that pre-1934 cash deposits weren't truly "safe" in the modern sense; this was before the FDIC existed. Deposit your money in a bank and you might lose it all in a bank failure/bank run. In any event, silver shows a far higher correlation with gold than does cash; why not run the backtest with silver from 1871 to 1934? That would be a fairer equivalent to gold than would be using cash.
I suspect that such a backtest would show worse returns than using cash (bank deposits) since silver not only doesn't pay any interest but also got killed in the 1921-mid-1920s period and then again during 1930-1933. Whether gold--with its higher "safe havenness" and its being less of an industrial metal than silver would've done better than silver is an open counterfactual but unfortunately, I am not aware of any simulation of gold returns during the 1900-1933 period.
In a era when gold/silver were money, someone with surplus cash, silver dollar coins for instance, I suspect might have found somewhere for that, with modest safety possibly along with interest rather than keeping it all at home.
There was -10% pa type inflation (deflation) in each of those 1920 and 1930's periods.
measuringworth indicates gold remained at 20.67/ounce 1879 to 1932, inflation broadly flat, gold/silver ratio that around doubled, so yes seemingly silver was a poorer asset over that period, more so as measuringworth also indicate 5% type short term rates over those years. Such that if a saver who deposited/invested their gold/silver coins into that sort of return, rather than keeping the coin at home/wherever, in real terms did OK. Indeed pretty much didn't need anything else. "Stocks! Bah! For speculators only!" ... type era.
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You could
NOT get 5% safely during most of the 1879-1934 period. IIRC Measuringworth uses commercial paper rates for its short-term rate during this period; commercial paper was nowhere near a risk free investment during this time (especially before late 1914 or early 1915 when the Federal Reserve started to act as buyer of last resort and as an actual central bank and liquidity provider....but even during the recession of 1920-21 commercial paper did experience some defaults and/or lack of liquidity at times; it was only from the mid-1920s onward that the modern very low risk commercial paper market as we know it came into being. In the early 1900s the closest equivalent of Treasury bills they had (actual short-term US Treasury paper didn't exist until late 1916 and wasn't plentiful until April of 1917 when the US started issuing more of it as part of the massive debt buildup around WWI) back then was 60, 90, or 120 day banker's acceptances/trade acceptances (the safety of these was because they were essentially backed by three separate sources of security; these being the credit of the person or company who originated the acceptance, the guarantee by the issuing bank standing behind it, and the goods backing the acceptance; this was unlike most commercial paper of the time which was essentially an unsecured short-term promissory note.,..again, until maybe 1922/1923 or so commercial paper was not the virtually risk-free instrument it is today); I have yield data on these from January 1915 onward (they existed before then but the Federal Reserve didn't start discounting/buying them until late December 1914 so before then yields/rates on them were not recorded anywhere that I know of...at least for USD-denominated acceptances rather than for pound sterling-denominated ones) and rates on them never hit 5% except for a fairly brief period from late Dec 1919 to early August of 1921
As I mentioned before, bank deposits weren't truly secure until 1934 with the advent of the FDIC so that is out as far as risk-free or low risk investments are concerned.
As such, if you had some money you wanted to put in fairly safe and reasonably liquid (and reasonably free of duration risk) investments you had the following choices:
From 1879 to 1915 - The only data I have for this period for what could be called a low-risk short-term investment is for demand loans/call loans secured by stocks or bonds (bonds--especially high grade railroad issues--were the usual security for these loans; LTVs rarely were more than 45 or 50% and the loan could be called at any time if the lender felt the security was deteriorating in quality; as such, these were pretty secure...certainly more so than commercial paper). Rates on these fluctuated quite a bit--the rate was reset quite often and as such these were more like an ARM that reset every month than like a fixed rate loan--and could soar during times of market stress and then come down just as quickly when things went back to normal....but over the 1879-1915 period they averaged 3.73%.
1915-1917 - Prime banker's acceptances; over this period the rates on these ranged from 2.38% to around 3.90%.
1918 onward to 1934 - Actual short-term Treasury notes--Treasury Certificates of Indebtedness with maturities ranging from two to nine months--for 1918 to 1929 and then actual Treasury Bills from late 1929 onward. Except for a brief period in mid-1920, rates on these never hit 5% or above.
The only other option for short-term "safe" money during this time period would've maybe been buying short-term (less than one year remaining) super-prime grade corporate or municipal/state/local debt (although after 1917 or 1918 municipal yields would've been artificially depressed--vs corporate or Treasury yields--by the tax privileges they offered that other types of bonds didn't; as such, only wealthy high tax bracket investors would've bought state and municipal bonds after that date and thus after then they cease to be a reliable benchmark for rates) which typically carried rates at or maybe just a hair above banker's acceptances rates; rates on these only broke 5% from mid-1919 to very early 1922; otherwise from 1879-1934 they were well below that. Of course, minimum purchases on such bonds were as a general rule either $500 or $1000 dollars (or in some cases higher) since most bond dealers/brokers at the time only dealt in "even lots" or "whole lots" of quantities of 100 bond multiples (i.e. you could easily buy 100 bonds, 200 bonds, 800 bonds, etc but not, say 54 bonds or 9 bonds or 173 bonds, etc) and most bonds carried par face values of $50, $100, or even $1000. FWIW $4 or $5 a day was a pretty good wage for factory work in the 1910s--Henry Ford's auto plants paid $5 a day in 1913 and this was almost double what most other manufacturing jobs typically paid--and farmers generally made less still (Maybe $450 to $700 a year....possibly even less than that in the poorer parts of the US south and west); as such, amassing $500 or $1000 to buy a round 100 bond lot would've been very difficult if not impossible for the average American at the time. If you were lucky maybe you could find a bond dealer operating on "the curb" (i.e. off of and outside of the official exchange) who would sell you an "odd lot" of only a few bonds but if he did, you can bet the commission would probably be ten or twenty percent of the total sale amount.
Because of all of the above factors, most Americans at the time either kept their money in local savings banks (rates on these were typically 2 to 4% on accounts at the banks that were conservative and soundly run....5 or 6% rates and up were almost without exception an indication that the bank was either making risky loans or buying risky bonds--until 1936 banks could invest their entire assets into what we would now call "junk bonds" if they had so desired--which would not be something you would want a part of....remember, this was before FDIC insurance...put your money into an unsound bank and you could lose everything in the blink of an eye if the bank failed) or either as coins/bills under the mattress or in a cookie jar.
Savings and Loans/Building and Loans were another option but until the late 1910s/early 1920s when you bought a "share" in one of them it wasn't anywhere near as liquid as cash held in a savings account (you typically could only cash it out once or twice a year; any time other than that the S&L might buy it back from you but there was no guarantee it would be worth the face value...i..e they might buy back a $100 share for $65 or $70 if money was tight; they didn't have the liquidity that banks had because most of their money was invested in long-term mortgages and there wasn't really a secondary market for most mortgages until the mid-1930s)...also, S&Ls pre-1934 were subject to the same risk banks were in regards to losing all your money if they went belly up.
Finally, after late 1911 you could put it into US Postal Savings (the Postal Savings system existed from mid-1911 to 1967 in the US) which was government-backed and as such as safe as modern FDIC-backed accounts are today but these accounts were capped at $500 at first--by 1918 it had been raised to $2,500--and never paid more than 2% interest at any point.
In short, assuming that a saver in the 1879-1934 era could earn anything approaching a safe 5% return was--except for a brief period in the late 1910s and early 1920s--a fantasy; in order to have the chance of earning 5% or more he/she had to either take bond market risk, stock market risk, commodity risk, or real estate risk.
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Quite the treatise on this subject. Had never before read anything like this.
Tangentially related to the $4 / $5 per day being good pay for a day's work in a factory in the 1910's ...I had a landlord
neighbor tell me that when he was earning $5 a day in the 1930s that was considered a good paying job for then.
In the early 50s my father was earning $50 a week / $10 a day for the local electric company and that, also, was considered a good paying job for then.