Paper #858

Title:

Interest rate restrictions in a natural experiment: loan allocation and the change in the usury laws in 1714

Authors:

Joachim Voth and Peter Temin

Date:

May 2005

Abstract:

This article studies the effects of interest rate restrictions on loan allocation. The British government tightened the usury laws in 1714, reducing the maximum permissible interest rate from 6% to 5%. A sample of individual loan transactions reveals that average loan size and minimum loan size increased strongly, while access to credit worsened for those with little social capital. Collateralised credits, which had accounted for a declining share of total lending, returned to their former role of prominence. 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:

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

JEL codes:

O16, G21, N23

Area of Research:

Economic and Business History

Published in:

Economic Journal, April 2008, 118, pp. 743-758

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