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Usury Ceilings, Relationships and Bank Lending Behavior: Evidence from Nineteenth Century

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Author Info
Howard Bodenhorn
Abstract

Few pieces of economic regulation are ubiquitous as usury limits. Similarly, few economic principles are as widely accepted as the belief that interference with freely contracted prices leads to market distortions, and many studies of financial markets find that usury limits negatively affect credit availability. This study shows that when no regulatory authority monitors and stands ready to punish violators of the usury limit when intermediaries and borrowers form long-term relationships, banks and borrowers regularly contract for interest rates in excess of the usury ceiling. Time series analysis reveals limited effects on credit availability when market rates exceed the usury ceiling. Cross-sectional analysis of individual loan contracts also shows that the positive effect of a long-term relationship offsets the negative effect of the usury limit on credit availability.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11734.

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Date of creation: Nov 2005
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Handle: RePEc:nbr:nberwo:11734

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N2 - Economic History - - Financial Markets and Institutions
N8 - Economic History - - Micro-Business History
G2 - Financial Economics - - Financial Institutions and Services

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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. Joachim Voth & Peter Temin, 2005. "Interest Rate Restrictions in a Natural Experiment: Loan Allocation and the Change in the Usury Laws in 1714," Economics Working Papers 858, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  2. Elyasiani, Elyas & Goldberg, Lawrence G., 2004. "Relationship lending: a survey of the literature," Journal of Economics and Business, Elsevier, vol. 56(4), pages 315-330. [Downloadable!] (restricted)
  3. Ostas, James R, 1976. "Effects of Usury Ceilings in the Mortgage Market," Journal of Finance, American Finance Association, vol. 31(3), pages 821-34, June. [Downloadable!] (restricted)
  4. Boyes, W J & Furnish, Dale Beck, 1984. "A Note on the Use of Incorporation as an Escape from Usury Ceilings," Journal of Industrial Economics, Blackwell Publishing, vol. 32(3), pages 367-72, March. [Downloadable!] (restricted)
  5. Jaffee, Dwight M & Modigliani, Franco, 1969. "A Theory and Test of Credit Rationing," American Economic Review, American Economic Association, vol. 59(5), pages 850-72, December. [Downloadable!] (restricted)
  6. Wolken, John D & Navratil, Frank J, 1981. "The Economic Impact of the Federal Credit Union Usury Ceiling," Journal of Finance, American Finance Association, vol. 36(5), pages 1157-68, December. [Downloadable!] (restricted)
  7. Donato Masciandaro, 2001. "In Offense of Usury Laws: Microfoundations of Illegal Credit Contracts," European Journal of Law and Economics, Springer, vol. 12(3), pages 193-215, November. [Downloadable!] (restricted)
  8. Marco Espinosa & William C. Hunter, 1994. "Financial repression and economic development," Economic Review, Federal Reserve Bank of Atlanta, issue Sep, pages 1-11.
  9. Howard Bodenhorn, 2006. "Bank Chartering and Political Corruption in Antebellum New York. Free Banking as Reform," NBER Chapters, in: Corruption and Reform: Lessons from America's Economic History, pages 231-258 National Bureau of Economic Research, Inc. [Downloadable!]
  10. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-87, September. [Downloadable!] (restricted)
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  11. Gary S. Becker, 1968. "Crime and Punishment: An Economic Approach," Journal of Political Economy, University of Chicago Press, vol. 76, pages 169. [Downloadable!] (restricted)
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  12. Elsas, Ralf, 2005. "Empirical determinants of relationship lending," Journal of Financial Intermediation, Elsevier, vol. 14(1), pages 32-57, January. [Downloadable!] (restricted)
  13. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January. [Downloadable!] (restricted)
  14. Stiglitz, Joseph E, 1987. "The Causes and Consequences of the Dependence of Quality on Price," Journal of Economic Literature, American Economic Association, vol. 25(1), pages 1-48, March. [Downloadable!] (restricted)
  15. von Thadden, Ernst-Ludwig, 1995. "Long-Term Contracts, Short-Term Investment and Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 62(4), pages 557-75, October. [Downloadable!] (restricted)
  16. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September. [Downloadable!] (restricted)
  17. Peterson, Richard L, 1983. " Usury Laws and Consumer Credit: A Note," Journal of Finance, American Finance Association, vol. 38(4), pages 1299-1304, September. [Downloadable!] (restricted)
  18. Bodenhorn, Howard, 1992. "Capital Mobility and Financial Integration in Antebellum America," The Journal of Economic History, Cambridge University Press, vol. 52(03), pages 585-610, September. [Downloadable!]
  19. Rudolph C. Blitz & Millard F. Long, 1965. "The Economics of Usury Regulation," Journal of Political Economy, University of Chicago Press, vol. 73, pages 608. [Downloadable!] (restricted)
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  1. Efraim Benmelech & Tobias J. Moskowitz, 2007. "The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century," NBER Working Papers 12851, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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