Why was the yield curve inverted before WWI?

I recently came across a surprising graph:

It’s hard to read here, but if you go to the link and click on the graph, you’ll see a much bigger version.

There are some technical issues with its construction, which are discussed in the article. But when I looked at the raw data it seems plausible to me that the yield curve really was inverted during most of the 40 years before WWI.

Does anyone know why?



56 Responses to “Why was the yield curve inverted before WWI?”

  1. Gravatar of Matthias Goergens Matthias Goergens
    21. August 2019 at 05:20

    Just speculating: their graph starts at 1871. So perhaps it might have something to do with the US paying down their civil war debt in some weird way?

    (It would be interesting to see the same yield curve measure for eg the UK.)

  2. Gravatar of Garrett Garrett
    21. August 2019 at 05:26

    Perhaps the demand for longer dated bonds from insurance companies was enough to keep it persistently inverted. Those investors would not be interested in trying to take advantage of an inverted curve by buying short and selling long if it meant that their asset duration meaningfully departed from their liability duration.

  3. Gravatar of Ironman Ironman
    21. August 2019 at 05:27

    Very cool chart!

    Answering your question might require answering a different question first: Is the yield curve really providing an indication of the expectations for either disinflationary (falling inflation) or deflationary (negative inflation) conditions in the future?

    Also note that you might really be asking a different question: Why was the yield curve inverted before the Fed came into existence? Since the Federal Reserve Act wasn’t passed into law until 23 December 1913, while World War I began on 28 July 1914, the timing of WWI is perhaps very coincidental, especially if you ask why didn’t disinflationary or deflationary conditions prevail in the period following the beginning of the Fed (or WWI).

  4. Gravatar of Benjamin Cole Benjamin Cole
    21. August 2019 at 05:39

    1880 through 1920 was the period with the lowest 10-year Treasury rates on record, until now and a brief fling in World War II, so short-term rates did not have to be that high to be higher than long-term rates.

    My guess is that to issue bonds long-term, an issuer had to have a very high credit rating, such as a railroad bond or government. Lesser credits issued short-term debt.

    To issue short-term debt, the government had to compete against other short-term issuers who were offering higher rates. Perhaps credit analysis was iffy in those days. Perhaps buyers of short-term debts faced some sort of transaction costs.

  5. Gravatar of Brian Donohue Brian Donohue
    21. August 2019 at 05:47


  6. Gravatar of Alex S. Alex S.
    21. August 2019 at 06:06

    Perhaps it is because there was no inflation premium for longer-term bonds. E.g. the gold standard arrangement differed from that which followed WW1 and preceded the Great Depression and also there was probably greater price/wage flexibility in the short-run before unionization started to really take hold after WW1.

    As a result, the variability of inflation in the short-term would cause short-term bond yields to be higher than long-term bond yields when the inflation rate was credibly pegged at nearly 0%.

  7. Gravatar of Carl Carl
    21. August 2019 at 06:19

    Good deflation?

  8. Gravatar of Kevin Erdmann Kevin Erdmann
    21. August 2019 at 06:29

    I think it may also be the case that short term rates were more stable then and long term rates were more volatile.

  9. Gravatar of Tom Stewart Tom Stewart
    21. August 2019 at 06:49

    Wow amazing to see an inverted yield curve preceded every recession even before WW1!

  10. Gravatar of Carl Carl
    21. August 2019 at 09:02

    Some evidence to back Mathias Georgens speculation. The Funding Act of 1866 authorized contraction of the currency. Then the Public Credit Act of 1869 pledged the government to repay all its debts in coin, settling the concerns about default or repayment in greenbacks. The next year the Treasury was authorized to issue $500 million in 10 year bonds at 5 percent, $300 million in 15 year bonds at 4.5 percent, and $1 billion in 30 year bonds at 4 percent.

    These factors could explain the clear demarcation of a period of inversion. It could have then been sustained by the rapid growth in productivity of the late Industrial Revolution.

  11. Gravatar of George George
    21. August 2019 at 09:21

    The Satan worshiping central banksters and their puppets in DC definitely had an impact.

  12. Gravatar of George George
    21. August 2019 at 11:58


    He’s right again you know

  13. Gravatar of Doug Bates Doug Bates
    21. August 2019 at 13:07

    The series is not comparing government debt to government debt in the earlier years. This is not a valid yield spread for those earlier years. It is the spread between short term apples and long term oranges — pretty much useless.

  14. Gravatar of Milljas Milljas
    21. August 2019 at 13:28

    Grumpy commented on this as being a natural state and provided support that it is really hard to get a model to produce an inverted curve.

    If price expectations are well anchored then why would you have a positive real yield?

  15. Gravatar of Milljas Milljas
    21. August 2019 at 13:29

    Typo. Upward sloping curve.

  16. Gravatar of ssumner ssumner
    21. August 2019 at 13:36

    Matthias and Carl, I don’t see why that would cause an inversion.

    Garrett, But I’d expect insurance company demand to be even higher today—assuming insurance is a luxury good.

    Ironman, The 1920s are also an interesting period—flat, on average.

    Brian, Why would deflation cause the yield curve to invert?

    Kevin, I think long term rates were pretty stable. In the 3% to 4% range throughout the period.

    Doug, I know that, but you’d get basically the same result using long term railroad bond yields.

  17. Gravatar of Michael Sandifer Michael Sandifer
    21. August 2019 at 16:41


    I’m surprised I’m the first to mention the Long Depression. That might explain much of it.

  18. Gravatar of GEORGE GEORGE
    21. August 2019 at 18:34


    Educate yourselves

  19. Gravatar of George George
    22. August 2019 at 03:56

    Another reason POTUS brought attention to Greenland:



  20. Gravatar of George George
    22. August 2019 at 04:03

    Leftists can’t manage ANY city or ANY country without rampant crime and evil.

    Why is that?

  21. Gravatar of George George
    22. August 2019 at 04:25


    This is what communists do to control the minds of their sheep. They reword and reword until nothing means anything anymore.

    Needles and human feces covering the streets wasn’t enough.

    S#!thole state ruled by psychopaths

  22. Gravatar of Randomize Randomize
    22. August 2019 at 06:53

    I love that there’s a commenter here that calls central bankers Satan worshippers. Wrong blog, buddy.

  23. Gravatar of myb6 myb6
    22. August 2019 at 07:06

    I haven’t meaningfully studied 19thC US financial history. But I did recently foray into the French Revolution and the late Ancien Regime had a permanently-inverted yield curve, the explanation was default risk. Rentes and other long-term bonds were perceived as untouchable but shorter-term debt was expected to be the first “adjusted” in any restructuring.

  24. Gravatar of myb6 myb6
    22. August 2019 at 07:08

    Also, +1 to Doug Bates. I have to bet the 19thC US Commercial Paper market was a little wilder than the modern.

  25. Gravatar of Michael Sandifer Michael Sandifer
    22. August 2019 at 07:53

    I assume Brian was referring to expected deflation.

  26. Gravatar of George George
    22. August 2019 at 09:33


    You being triggered at an uncomfortable truth is only more evidence that I posted it in the RIGHT blog. “Buddy”.


    Ancient Egyptians considered gold “the skin of the gods” — specifically the sun god Ra — and often used it to craft objects of spiritual significance.

    Why is this relevant?

    Vladimir Putin: “The New World Order Worships Satan”

    You think this is a joke little sheep?

  27. Gravatar of George George
    22. August 2019 at 09:36

    What is a cult?

    Epstein island.

    What is a temple?

    What occurs in a temple?


    Why is the temple on top of a mountain?

    How many levels might exist below?

    What is the significance of the colors, design and symbol above the dome?

    Why is this relevant?

    Who are the puppet masters?

    Have the puppet masters traveled to this island?

    When? How often? Why?

  28. Gravatar of Randomize Randomize
    22. August 2019 at 10:37

    Dr. Sumner,

    Deflation could explain inversion but only if deflation expectations were greater in the long-term than they are in the short term, right?

    With or without deflation, it sure looks like perpetually tight money during that period. Cut rates enough and that inversion should clear up. You’re FAR more knowledgeable of the prewar macro environment than I am; does tight money jive with reality?

  29. Gravatar of Carl Carl
    22. August 2019 at 12:23

    I was just reversing the logic that applies under the Fed monetary regime era where inflation is the norm. I figured that when there was a monetary regime under which the price level was dropping and productivity was increasing (good deflation), such as occurred from the end of the civil war to the first decade of the 20th Century, investors would be comfortable buying longer term bonds with lower nominal yields because of their high real yields.

    It’s not a perfect match by any means since the price level started picking up around the turn of the century, https://fred.stlouisfed.org/series/M04051USM324NNBR, but in your graph, the regular inversions continued for another 7 years.

  30. Gravatar of Christian List Christian List
    22. August 2019 at 12:42

    So is an inverted yield curve actually more “natural” and “normal” than the other way round? Or at least not “unnatural”?

    My bet is deflation as well.

  31. Gravatar of Carl Carl
    22. August 2019 at 13:00

    I just want to say that you are really on your game today. Those are all excellent questions. I mean, really, what is a temple? And my favorite question of yours, “why is this relevant?” That one sure has me stumped. .

  32. Gravatar of ssumner ssumner
    22. August 2019 at 13:26

    Michael, The yield curve was not inverted during the depression of the 1930s.

    Indeed yield curves are generally not inverted during recessions.

    Randomize, I don’t think money was tight from 1898 to 1913.

  33. Gravatar of tpeach tpeach
    22. August 2019 at 14:40

    Could it be that the late stage of the industrial revolution coincided with an abundance of capital?

  34. Gravatar of Michael Sandifer Michael Sandifer
    22. August 2019 at 15:31


    Yes, but just based on my reading, there were periods of deflation throughout most of the period you reference, the first in the US blamed on factors that caused the US to switch from a bimetallic standard to the gold standard, in an era in which gold was relatively scarce.

  35. Gravatar of George George
    22. August 2019 at 15:50

    tpeach is proof the blog author attracts Marxoid commies like flies on s#!t

  36. Gravatar of George George
    22. August 2019 at 15:58


    I was asking those questions all the way back in Nov 2017 while you had no idea who pedophile Jeffrey Epstein was, nor that rapist Bill Clinton traveled to his pedo island 26 times.

    “Let’s hope the Dems win in 2020” is my favorite blog author quote.

  37. Gravatar of Carl Carl
    22. August 2019 at 20:12

    I’m embarrassed to admit that I did not know that Bill Clinton had gone to Pedophile Island 26 times. I keep ending up at boring blogs like this where people are absolutely clueless about pedophilia. Maybe you can share some of your favorite sites for keeping up on Pedophile Island next time you’re sharing your favorite quotes.

  38. Gravatar of Julius Probst Julius Probst
    22. August 2019 at 23:42

    Scott, after reading this interesting blog post, I decided to calculate the yield curve myself – once using Shiller’s data and once using the Jorda, Schularick and Taylor database (they use deposit rates for the hisotric short-term interest rate).
    The results are actually quite different!
    You can check it out here:


    If you write me an email, I can also send you the graphs/data.

  39. Gravatar of Michael Sandifer Michael Sandifer
    23. August 2019 at 01:26

    Julius clearly has the best answer to the question.

  40. Gravatar of ssumner ssumner
    23. August 2019 at 05:29

    Michael, The period from 1898 to 1920 was a period of inflation.

    Thanks Julius, That’s quite interesting. As they say, “further research is necessary”.

  41. Gravatar of Matthew Waters Matthew Waters
    23. August 2019 at 07:55

    Maybe investors feared a possibility of future new T-bill issues would be paid in greenbacks, but US still honored old bond commitments in gold?

    Were there more transaction costs with rolling over T-bills? If investors had to go to the bank, redeem a bill, and then reinvest it, there are clear advantages of bonds for long-term investors.

  42. Gravatar of George Selgin George Selgin
    23. August 2019 at 08:03

    One theory: its the deflationary version of the Gibson paradox, arising from the workings of the gold standard.See Barsky and Sumners: https://www.researchgate.net/profile/Robert_Barsky/publication/24108581_Gibson%27s_Paradox_and_the_Gold_Standard/links/5567f1e108aeccd777378e91.pdf

  43. Gravatar of George George
    23. August 2019 at 08:28

    The Deep State – REVEALED

    Elite child trafficking – EXPOSED

    The Banking Cartel – SPOTLIGHTED

    The Hollywood Illusion – SHATTERED

    The Media Empire – CRUMBLING

    We’re watching the death of The Control Matrix in real time.

    And it’s glorious.

  44. Gravatar of George George
    23. August 2019 at 08:44

    The Gibson ‘Paradox’ was only called such only because most economic theorists at the time predicted that the correlation would be negative.

    It makes total sense why slower money growth would depress interest rates.

    With slower money growth, the aggregate rate of profit decreases (not necessarily temporally and visually as declining rates from one day to the next, only lower than it otherwise would have been).

    By way of incentives and competition, lower rates of profit throughout the economic system in turn then put downward pressure on nominal interest rates, as lenders can’t consistently ask for rates that are more expensive than what borrowers can afford out of their lowered profits.

    Costs always fall with a time lag, due to such things as depreciation charges being a function of past expenses. So it never was a ‘paradox’ that a lower rate of increase in aggregate nominal demand (which slower money growth brings about) would be positively correlated with lower interest rates.

    Reality doesn’t have any paradoxes. Yet for some reason self-righteous economists love ‘identifying’ them because the truth of their own ignorance and mistakes was too much for them to have to admit. They’d rather call reality a problem instead of their own muddled and often politicized beliefs.

    Speaking of Larry Summers, why was his name on the flight logs to the pedophile Jeffrey Epstein’s island of evil? What was he doing there?

    Is this why he was obedient to the interests of Obama and had that cushy ‘advisor’ job?

  45. Gravatar of George George
    23. August 2019 at 08:54

    The Fed was created by international bankers in 1913 to enslave the worlds population via perpetual debt & to control presidents through threats of monetary policy changes. Hard to swallow, unfortunately that’s the real world. They extract wealth from the serfs, everyone here on this blog reading this right now. Same purpose of a parasite.

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    The FED and the IRS

    FACT: US Federal Reserve is a privately-owned company, sitting on its very own patch of land, immune to the US laws.

  46. Gravatar of George George
    23. August 2019 at 08:57

    Here comes the ‘conspiracy conspiracy conspiracy’ as the sheep were trained to believe by Operation Mockingbird MSM and Fakewood.

    Facts matter!

  47. Gravatar of George Selgin George Selgin
    23. August 2019 at 08:57

    Of course Scott I didn’t mean that one can explain thse early yield curves, or anything else, by referring to a paradox itself lacking an explanation. I meant that one explanation for the supposed paradox also might explain the pre-1914 yield curve observations.

    I don’t know what those flight logs signify, but I don’t suppose they bear on the merits of Barsky and Summers paper, which of course could be wrong nonetheless. I wonder what you make of that paper. (I know you’ve written on the Gibson Paradox but I don’t know whether you’ve referred to this particular account.

  48. Gravatar of George George
    23. August 2019 at 08:58

    Hard to swallow.
    Important to progress.
    Who are the puppet masters?
    House of Saud (6+++) – $4 Trillion+
    Rothschild (6++) – $2 Trillion+
    Soros (6+) – $1 Trillion+
    Focus on above (3).
    Public wealth disclosures – False.
    Many governments of the world feed the ‘Eye’.
    Think slush funds (feeder).
    Think war (feeder).
    Think environmental pacts (feeder).
    Triangle has (3) sides.
    Eye of Providence.
    Follow the bloodlines.
    What is the keystone?
    Does Satan exist?
    Does the ‘thought’ of Satan exist?
    Who worships Satan?
    What is a cult?
    Epstein island.
    What is a temple?
    What occurs in a temple?
    Why is the temple on top of a mountain?
    How many levels might exist below?
    What is the significance of the colors, design and symbol above the dome?
    Why is this relevant?
    Who are the puppet masters?
    Have the puppet masters traveled to this island?
    When? How often? Why?
    Vladimir Putin: “The New World Order Worships Satan”

  49. Gravatar of George J George J
    23. August 2019 at 13:30

    Hi Scott,

    One possible explanation that crossed my mind after seeing this would be that gold standard implied deflation over the (very) long term but there was sizeable variability in inflation rates in the short / medium term.

    Under gold standard, one can reasonably assume that in 10 yrs purchasing power of one dollar will be more than now. But next year? Or the year after? It may as well be lower than now. Hence investors demanded positive inflation premium on the shorter end whilst demanding lower, negative indeed, inflation premium on the longer end of the yield curve. All due to inflation uncertainty over short/medium term.

    Let me know what you think about this.

    PS: I’m not sure what rates were used as proxies back in 19th century. I don’t think there were any 3mo bills back then.

  50. Gravatar of Matthew Waters Matthew Waters
    23. August 2019 at 17:16

    Reading the Barksy/Summers paper, it’s a good model for real interest rates and gold prices, and thus general price level. Yield inversion is not suggested by the model though.

    Digging into the source, I believe there is an inherent issue with using New York Commercial Paper rates before the Fed. Before the Fed, CP ran the risk of not merely default but also suspended deposit withdrawals. The post-1920 differentials between CP and Treasury Bills may not reflect the pre-1913 risk of suspended withdrawals.

  51. Gravatar of George Selgin George Selgin
    23. August 2019 at 19:53

    Apologies for writing “Scott” when I meant “George” (the other George) in my previous comment.

  52. Gravatar of George J George J
    23. August 2019 at 23:55

    @Matthew Waters

    That sounds more plausible, bad proxies for the short term risk free rate of interest would explain this perfectly.

  53. Gravatar of Julius Probst Julius Probst
    24. August 2019 at 00:34

    @ George J

    You should check out my blog post.
    I used two different data sets to plot the US yield curve from 1870 to 1940 and got vastly different results. Shiller seems to use a bad proxy for short-rates. I then use the Jorda, Schularick and Taylor Macrohistory data who take the deposit rate instead, which is probably a better but certainly not perfect proxy.


  54. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    27. August 2019 at 01:54

    Maybe change of international law had effect on future’s expectation?


  55. Gravatar of John Hall John Hall
    13. September 2019 at 13:02

    John Cochrane had a good post on the subject recently


  56. Gravatar of John Hall John Hall
    13. September 2019 at 13:04

    As a follow-up, his explanation is basically the same as Alex S.’s above. Stable long-run inflation expectations meant that the inflation risk premium was higher for the short-run than the long-run.

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