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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

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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Bibliographic Info

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

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  1. Peter Temin & Hans-Joachim Voth, 2003. "Banking as an Emerging Technology: Hoares Bank 1702-1742," Working Papers 93, Barcelona Graduate School of Economics.
  2. Hugh Rockoff, 2003. "Prodigals and Projecture: An Economic History of Usury Laws in the United States from Colonial Times to 1900," NBER Working Papers 9742, National Bureau of Economic Research, Inc.
  3. Koenker,Roger, 2005. "Quantile Regression," Cambridge Books, Cambridge University Press, number 9780521608275.
  4. Peter L. Rousseau & Richard Sylla, 2001. "Financial Systems, Economic Growth, and Globalization," NBER Working Papers 8323, National Bureau of Economic Research, Inc.
  5. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  6. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 1999. "Banks as Liquidity Providers: An Explanation for the Co-Existence of Lending and Deposit-Taking," NBER Working Papers 6962, National Bureau of Economic Research, Inc.
  7. Alessie, Rob & Hochguertel, Stefan & Weber, Guglielmo, 2001. "Consumer Credit: Evidence from Italian Micro Data," CEPR Discussion Papers 3071, C.E.P.R. Discussion Papers.
  8. Heckman, James J & Ichimura, Hidehiko & Todd, Petra, 1998. "Matching as an Econometric Evaluation Estimator," Review of Economic Studies, Wiley Blackwell, vol. 65(2), pages 261-94, April.
  9. Quinn, Stephen, 2001. "The Glorious Revolution'S Effect On English Private Finance: A Microhistory, 1680 1705," The Journal of Economic History, Cambridge University Press, vol. 61(03), pages 593-615, September.
  10. North, Douglass C. & Weingast, Barry R., 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 803-832, December.
  11. 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.
  12. Paul Wachtel, 2003. "How much do we really know about growth and finance?," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 33-47.
  13. repec:cup:jechis:v:44:y:1984:i:03:p:687-712_03 is not listed on IDEAS
  14. 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.
  15. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  16. Gropp, Reint & Scholz, John Karl & White, Michelle J, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 217-51, February.
  17. Greif, Avner, 1998. "Historical and Comparative Institutional Analysis," American Economic Review, American Economic Association, vol. 88(2), pages 80-84, May.
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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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