The Political Economy of Financial Regulation : Evidence from U.S. State Usury Laws in the 18th and 19th Century

We study the political economy of financial regulation by examining the determinants and effects of U.S. state usury laws during the 18th and 19th centuries. We argue that regulation is the outcome of private interests using the coercive power of the state to extract rents from other groups. We find that strictness of usury coexists with other exclusionary policies such as suffrage laws and lack of general incorporation or free banking laws, which also respond less to competitive pressures for repeal. Furthermore, the same determinants of financial regulation that favor one group and limit access to others, are associated with lower future economic growth rates, highlighting the endogeneity of financial development and growth