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The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century

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  • EFRAIM BENMELECH
  • TOBIAS J. MOSKOWITZ

Abstract

Financial regulation was as hotly debated a political issue in the 19th century as it is today. We study the political economy of state usury laws in 19th century America. Exploiting the wide variation in regulation, enforcement, and economic conditions across states and time, we find that usury laws when binding reduce credit and economic activity, especially for smaller firms. We examine the motives of regulation and find that usury laws coincide with other economic and political policies favoring wealthy political incumbents, particularly when they have more voting power. The evidence suggests financial regulation is driven by private interests capturing rents from others rather than public interests protecting the underserved.

Suggested Citation

  • Efraim Benmelech & Tobias J. Moskowitz, 2010. "The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century," Journal of Finance, American Finance Association, vol. 65(3), pages 1029-1073, June.
    • Handle: RePEc:bla:jfinan:v:65:y:2010:i:3:p:1029-1073
    DOI: 10.1111/j.1540-6261.2010.01560.x
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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • N2 - Economic History - - Financial Markets and Institutions
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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