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




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    • Benmelech and Moskowitz are from the Department of Economics, Harvard University and NBER and Booth School of Business, University of Chicago, and NBER. We have benefited from the suggestions and comments of Alberto Alesina; Howard Bodenhorn; Michael Bordo; John Cochrane; Mark Flannery; Claudia Goldin; Richard Grossman; Campbell Harvey (the editor); Naomi Lamoreaux; Sam Peltzman; Joshua Rauh; Antoinette Schoar; Andrei Shleifer; Kenneth Sokoloff; Jeremy Stein; Arvind Subramanian; Amir Sufi; Peter Temin; Luigi Zingales; an anonymous referee; and seminar participants at the 2007 AFA meetings in Chicago, Berkeley, Boston University, Cornell, Dartmouth, Harvard Economics, the 2008 IMF Conference on the Causes and Consequences of Structural Reforms, the NBER Corporate Finance meeting, the NBER Political Economy meeting, Northwestern (Economics and Kellogg School of Management), the Stanford Institute for Theoretical Economics summer 2008 workshop, University of Chicago, University of Texas (Austin), The 2006 Conference on Bank Structure and Competition at the Federal Reserve Bank of Chicago, UCLA, and Washington University. We thank Matthew Gentzkow for providing historical newspaper circulation data and Anda Borden, Brian Melzer, and Roni Kisin for providing excellent research assistance. Moskowitz thanks the Center for Research in Security Prices; the Neubauer Family Faculty Fellowship; the Fama Family Chair; and the Initiative on Global Markets center at the University of Chicago, Booth School for financial support.


Financial regulation was as hotly debated a political issue in the 19th century as it is today. We study the political economy of state usury laws in 19th century America. Exploiting the wide variation in regulation, enforcement, and economic conditions across states and time, we find that usury laws when binding reduce credit and economic activity, especially for smaller firms. We examine the motives of regulation and find that usury laws coincide with other economic and political policies favoring wealthy political incumbents, particularly when they have more voting power. The evidence suggests financial regulation is driven by private interests capturing rents from others rather than public interests protecting the underserved.