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

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.

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

This article studies the effects of interest rate restrictions on loan allocation. The British governmenttightened the usury laws in 1714, reducing the maximum permissible interest rate from 6% to5%. A sample of individual loan transactions reveals that average loan size and minimum loan sizeincreased strongly, while access to credit worsened for those with little social capital. Collateralisedcredits, which had accounted for a declining share of total lending, returned to their former role ofprominence. Our results suggest that the usury laws distorted credit markets significantly; we findno evidence that they offered a form of Pareto-improving social insurance.

[Archives de la Parole]. , The [Parable of] the Prodigal son : in Khariā / [Sir George Grierson], éd. ; Linguistic survey of India ; Voix parlée

[Traditions. Asie. Inde. Chotā Nāgpur]

[Archives de la Parole]. , Parable of the prodigal son in Parjé [i.e. parji], from Bastar (C.P) [i.e. Central Provinces] : dravidien, Linguistic survey of India, [Sir George] Grierson / [Sir George Grierson], éd. ; Linguistic survey of India ; [Bhima Parjā], voix

[Traditions. Asie. Inde. Madhya Pradesh. Chhattisgarh]

[Archives de la Parole]. , Parable of the prodigal son : in Kodaku, from Surguja / [Sir George Grierson], éd. ; Linguistic survey of India ; [Jūthan Koḍākū], voix

[Traditions. Asie. Inde. Madhya Pradesh. Chhattisgarh]