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

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.

Reshaping Contractual Unfairness in England 1670–1900

“…The problem was compounded by the unwillingness of more reputable lenders to lend to individuals when the government was a better risk. 110 These sale or loan arrangements were sometimes seen as a threat which went to the heart of dynastic landholding. In a typical settlement of the time the father held a life estate with a remainder to his eldest son.…”

Harbingers of modernity: monetary injections and European economic growth, 1492–1790

“…were complementary as much as substitutes. 125 Credit was, additionally, subject to usury restrictions that were binding, and may have prevented access to credit, especially for those without access to significant amounts of collateral (Temin and Voth 2008).…”

The Bank of England as Lender of Last Resort: New Historical Evidence from Daily Transactional Data

“…These laws prohibited interest rate charges on short-term bills and promissory notes higher than 6%, between 1660 and 1714, and 5% between 1714 and 1833 (Temin and Voth 2008). As a result, the Bank's discount rate was at this maximum limit for almost the entire eighteenth century.…”