Interest Rate Restrictions in a Natural Experiment: Loan Allocation and the Change in the Usury Laws in 1714

27 Pages Posted: 11 Dec 2006

See all articles by Peter Temin

Peter Temin

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

Hans-Joachim Voth

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

Abstract

This paper studies the effects of interest rate restrictions on loan allocation. In 1714, the British government tightened the usury laws, reducing the maximum permissible interest rate from 6 to 5 percent. A sample of individual loan transactions from a goldsmith bank allows us to examine how interest rate restrictions affected loan allocation. Average loan size and minimum loan size increased strongly. Access to credit for those of noble origin improved, while it worsened for those with less "social capital." Collateralized credits, which had accounted for a declining share of total lending, returned to their former role of prominence. While we have no direct evidence that loans were misallocated, the discontinuity in loan receipts makes this likely. Our results suggest that the usury laws distorted credit markets significantly. We find no evidence that they offered a form of Pareto-improving social insurance.

Keywords: Credit rationing, financial repression, usury laws, natural experiment, lending decisions

JEL Classification: O16, G21, N23

Suggested Citation

Temin, Peter and Voth, Hans-Joachim, Interest Rate Restrictions in a Natural Experiment: Loan Allocation and the Change in the Usury Laws in 1714. Economic Journal, 2007. Available at SSRN: https://ssrn.com/abstract=950527

Peter Temin

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

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National Bureau of Economic Research (NBER)

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Hans-Joachim Voth (Contact Author)

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

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Zuerich, 8006
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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