Interest Rate Caps and Credit Supply: Locking Out the Small Borrower in the Great Depression

Interest rate caps are a contentious tool with limited causal evidence. We study New Jersey during the Great Depression, when the cap on small loan brokers was reduced and then raised within three years. Novel archival data show that the lower cap substantially reduced broker lending relative to banks, while the relaxation partially reversed the decline even as the Depression deepened. The lower cap disproportionately drove out brokers that charged higher rates, shrinking the market and increasing concentration. Because banks did not expand to replace the lost broker loans, the cap substantially reduced credit for the most vulnerable borrowers.