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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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Temin, Peter
Voth, Hans-Joachim

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Abstract

If in general, financial deepening aids economic growth, then financial repression should be harmful. We use a natural experiment – the change in the English usury laws in 1714 – to analyse the effects of interest rate restrictions. Based on a sample of individual loan transactions, we 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; Britain’s disappointing growth during the period 1750-1850 may partly reflect the effects of harmful credit market regulation.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4452.

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Date of creation: Jun 2004
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Handle: RePEc:cpr:ceprdp:4452

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Related research
Keywords: banking; credit rationing; economic development; financial repression; lending decisions; natural experiments; usury laws;

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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  2. Demetriades, Panicos O & Luintel, Kul B, 1996. "Financial Development, Economic Growth and Banker Sector Controls: Evidence from India," Economic Journal, Royal Economic Society, vol. 106(435), pages 359-74, March. [Downloadable!] (restricted)
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  15. Sussman, Nathan & Yafeh, Yishay, 2004. "Constitutions and Commitment: Evidence on the Relation Between Institutions and the Cost of Capital," CEPR Discussion Papers 4404, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Howard Bodenhorn, 2005. "Usury Ceilings, Relationships and Bank Lending Behavior: Evidence from Nineteenth Century," NBER Working Papers 11734, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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