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Financial Repression in a Natural Experiment: Loan Allocation and the Change in the Usury Laws in 1714

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  • Peter Temin
  • Hans-Joachim Voth

Abstract

If financial deepening aids economic growth, then financial repression should be harmful. We use a natural experiment in the change in the English usury laws in 1714 to analyze the effects of interest rate restrictions. We use a sample of individual loan transactions to demonstrate how the reduction of the legal maximum rate of interest affected the supply and demand for credit. Average loan size and minimum loan size increased strongly, and access to credit worsened for those with little "social capital." While we have no direct evidence that loans were misallocated, the discontinuity in loan receipts makes this highly likely. We conclude that financial repression can undermine the positive effects of financial deepening.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 209.

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Date of creation: Jun 2005
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Handle: RePEc:bge:wpaper:209

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Keywords: Economic development; banking; financial repression; usury laws; credit rationing; natural experiments; lending decisions;

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Cited by:
  1. Bodenhorn, Howard, 2007. "Usury ceilings and bank lending behavior: Evidence from nineteenth century New York," Explorations in Economic History, Elsevier, vol. 44(2), pages 179-202, April.

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