Financial Repression in a Natural Experiment: Loan Allocation and the Change in the Usury Laws in 1714

30 Pages Posted: 28 Jul 2004

See all articles by Hans-Joachim Voth

Hans-Joachim Voth

University of Zurich - UBS International Center of Economics in Society; Centre for Economic Policy Research (CEPR)

Peter Temin

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 2004

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.

Keywords: Economic development, banking, financial repression, usury laws, credit rationing, natural experiments, lending decisions

JEL Classification: G21, N23, O16

Suggested Citation

Voth, Hans-Joachim and Temin, Peter, Financial Repression in a Natural Experiment: Loan Allocation and the Change in the Usury Laws in 1714 (June 2004). CEPR Discussion Paper No. 4452. Available at SSRN: https://ssrn.com/abstract=570146

Hans-Joachim Voth (Contact Author)

University of Zurich - UBS International Center of Economics in Society ( email )

Raemistrasse 71
Zuerich, 8006
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Peter Temin

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-280a
Cambridge, MA 02142
United States
617-253-3126 (Phone)
617-253-6915 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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