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 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.