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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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  • Temin, Peter & Voth, Hans-Joachim, 2004. "Financial Repression in a Natural Experiment: Loan Allocation and the Change in the Usury Laws in 1714," CEPR Discussion Papers 4452, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4452
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    Cited by:

    1. Mauricio Drelichman & Hans-Joachim Voth, 2008. "Debt Sustainability in Historical Perspective: The Role of Fiscal Repression," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 657-667, 04-05.
    2. 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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    More about this item

    Keywords

    Economic development; Banking; Financial repression; Usury laws; Credit rationing; Natural experiments; Lending decisions;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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