What was the reason for the high interest rates on savings accounts in the 1970's and why don't we see better interest today?

It’s called stupid banker syndrome. And it’s still with us. Up until the 70’s banks were restricted on the rates they could pay for interest on accounts. Nixon removed the restrictions, allowing the banks to pay whatever they wanted. Some used their heads, others went crazy. I was a lender for 12 years, I know how few really have any common sense.

Back in the 70’s : inflation. Prices of everything were going up, bond yields were high, stock market was climbing. You couldn’t help make a “profit” most places you parked your money. Except those interest rates were taken away by huge inflation, especially in the housing market.

Now, recession. It’s hard enough to keep your principle safe. Also, banking in the US has consolidated remarkably, despite all the problems with the ‘too big to fail’ institutions, and there are signs of passive collusion, so competition for your retail deposit is pale.

Inflation. The banks paid high interest because they could charge high interest for loans. Remember, the banks have the cash so they have control of what they will charge.
In the mid-70s the rates were going up so quickly it was difficult to keep up. In 1975, I had an unused line off credit that offered an introductory consolidation loan rate of 5% for 3 years. The bank down the street was offering a 7% rate for 2 years for new deposits. I maxed out my credit limit from one bank and put it all in the other bank. When the rates changed, I immediately paid it all off with no fees.
That felt great while it lasted.

When inflation is high, people need to be able to invest their money and get a rate of return higher than inflation, or they have to spend their money now, before it loses too much of its value. So banks have to pay high interest rates in order to attract deposits. If they don’t have deposits, then they have no money to loan and no way to make money.

At a time like now, inflation is low, but also banks don’t seem to want to loan. Maybe they can’t make any money, or maybe they don’t trust their ability to evaluate risk. Anyway, there’s no competition for capital, so they pay next to nothing to depositors. At least, that’s how I see it.

For the same reason why mortgage interest rates are historically low. And 0% car loans are available.

The cost of using other people’s money is just really cheap right now… in part because The Fed uses its power to try and keep the economy on track.

Inflation. I wish they would bring a little of it back. It also seems banks take more margin for themselves, but I have no real data on it.

I gotta think that the banks will always take more margin for themselves. That’s profit and it’s what makes business run.

There’s never gonna be a time – inflation, schminflation – where the bank will pay you more for your money (interest on a savings account, CDs, etc.) than you will pay them for their products (mortgages and other loans).

@robmandu More meaning a larger margin than previously. Of course they are always going to take a profit.

Incomes were also rising 15–20% a year, so there was lots of unused money floating around.

Your talking the 1970’s here. That was a period when banks began to flourish as blue collars were finally in a position where they made more in wages than just to sustain the family and pay the bills.. Just like all new products that charges outrageous prices until they reap profits before dropping the cost, enterprises work the same way.. Problem is we allowed them to do this longer than needed and it didn’t change (and in some cases still hasn’t) until competition ruined their wet dream. Certainly they could pay (a pittance) for your money and pay for it out of simple interest alone but profit is profit and the banking industry can’t see profit being given away.. Even their charitable contributions are tax deductible so in essence, when the rich generously donate to a cause in order to make them seem humane, it’s the general population that’s actually footing the bill through the tax write-offs..

I have a different angle for you to consider. Sorry it’s kind of long, but you’ll probably understand at least why these things happen if you bear with me.

Maybe it helps to consider a scenario: I have $100, you need to borrow $100 really badly. You can pay me back tomorrow, plus $10 for my trouble. I’d be like, “Sure, getting $10 plus my $100 back seems totally worth the trouble when dealing with an honest chap like you.” I’m not too worried about the risk, and the gain is significant. So I loan the money, and go play with the Internet.

But what if you need my $100 and can only give me $101 back tomorrow? Suddenly, the deal isn’t looking so good. All I’m getting is a buck back for my trouble, and my money is tied up so I can’t use it. I really may as well keep it and enjoy it today by buying something.

So, the technical explanation: interest rates are regulated by a government agency. When interest rates are high, you make more money by keeping your money. When the government lowers interest rates, it’s saying you’re not going to make as much money from holding onto your money. So, what do you do? You spend your money, either on crap or by investing it. That spending ultimately stimulates the economy, but there are various tradeoffs to that.

It’s outside the scope of your question, but I’ll mention two trade-offs:

1) inflation happens because the money is literally worth less. People aren’t demanding it anymore, but are getting ride of it. When people don’t want something anymore, its price falls. For example, $1 that used to buy a soda now is worth only $1.25/soda.

2) Foreign trade dynamics change. Because people demand your country’s currency less, your goods suddenly become cheaper outside your country due to exchange rate changes. The downside to this is foreign goods get more expensive, and so do things like foreign vacations.

Naturally, either of those things could be good or bad depending on circumstances and policy preferences.

Now you’ve been told several completely contradictory stories. Has this helped at all? What do you believe?

Cheap money from the central banks fueling the derivative casinos on Wall Street and elsewhere.

@wundayatta I don’t see the contradiction in the answers given so far. I didn’t expect there to be just one reason, but I was hoping someone could point me to data relevant to understanding the transformation. Like who’s got records for the interest given in 1972, 1982, 1992, 2012. Today we’re told to shred everything, and that means any found statements from grandpa’s banking are shredded rather than reviewed for how much money he made by putting it into the bank. Without that external documentation, the banks are just telling us that era is a figment of our imagination: no way did they pay out 15% on $25.00 deposits. Which leads me to the cynical: if you can’t prove it actually happened, did it?.

Regulation Q is the answer to your question. Here’s some reading materials if you are really interested.

http://www.openthegovernment.org/sites/default/files/otg/dereg-timeline-2009-07.pdf

http://www.phil.frb.org/research-and-data/publications/business-review/1985/brnd85pc.pdf

http://www.kansascityfed.org/PUBLICAT/ECONREV/econrevarchive/1986/3-4q86cecc.pdf

Interest rates were capped at 5.25 percent until 1986 and the elimination of Regulation Q.