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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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Author Info
Joachim Voth ()
Peter Temin

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Abstract

If 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 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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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 858.

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Date of creation: May 2005
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Handle: RePEc:upf:upfgen:858

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

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

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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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