Laws to cap interest rates emerge frequently, and an executive order limiting credit card interest to 10% annual percentage rate (APR) is on the docket. To central planners, this ceiling seems an obvious way to relieve lendees from snowballing debt.
In reality, although lopping off the top of the iceberg looks like success, supporters cannot spare an economic ship from a crash this way. Both theory and history indicate legislative rate manipulation exacerbates credit crises, especially for the most vulnerable.
Ample literature explains the futility of legislating loan interest. A recent working paper by Anderson and Jaremski gives particularly compelling arguments by showing how caps harmed the most desperate during the most devastating economic lesson in America’s history: The Great Depression.
The Mythical Ideal Rate
In 1914, legislatures began touting the supposed virtues of a 36% rate cap on small personal loans, which are typically utilized by lower-income individuals with small capital reserves. Over several decades, it spread through 34 state legislatures, and it remains an almost revered ideal.
A 2013 paper titled “Why 36%?” defended this figure, insisting it was “not just an arbitrary number.” The impression that the author “doth protest too much” grew throughout the paper, which offered virtually no supporting evidence, merely arguing the number had “a long and well-recognized history in America.”
The weakness of this bafflingly ubiquitous defense cannot be overstated, and this in itself should lead legislators to doubt it truly reflects any “fundamental values,” as the author claims.
Less Than Ideal
The 2025 paper immediately calls into question the validity of the ideal 36%, noting that at the beginning of the Depression, New Jersey’s legislature attempted to ease debt burdens by lowering permissible monthly loan rates from 3% to 1.5% (roughly 36% to 19% APR), and the caps only applied to small personal loans (a controversial distinction with more dubious defenses). Within two years, it bumped the monthly limit up to 2.5%.
Not only did 36% evidently not perform consistently, it also changed multiple times during the Depression, the very length of which made clear the folly of this rate manipulation practice.
Supporters of this years-long musical chairs game claimed the changes were responses to changing borrower and lender needs, but that argument ironically illustrates the very ineffectiveness of centrally planned rates.
Legislators, regardless of intent, are often the last to understand and address citizens’ needs. It cannot be stated in firm enough terms that legislators lack insight held solely by individual borrowers and loaners. Furthermore, even if they could analyze each circumstance and the proposed solution had broad support, their urgent bills would likely stall for years.
In 2023, Sen. Josh Hawley (R-MO) introduced a bill to cap credit card interest at 18%. It floundered, and in 2025, he and Sen. Bernie Sanders (I-VT) introduced a bill to cap it at 10%.
No magical rate for every lender/lendee relationship exists, and if it could, it would have changed by the time the government implemented it.
The True Cost Of Caps
Struggling business owners immediately know they had a bad week and need to prevent an oncoming disaster with a short-term loan. A loan business owner knows these customers, both individually and collectively, are high risk and likely to default. He will likely not be repaid in some cases, and he needs to charge higher interest to make up the difference.
As Anderson and Jaremski explain, “Caps hinder lenders’ ability to adjust rates based on borrower risk and operational costs… [undermining] the profitability of lending to certain customer segments….”
They conclude, “Rate caps set below market-clearing levels can make lending to high-risk populations unviable.”
Translation: The frantic would-be borrower, the one legislators are ostensibly protecting, will get no loan.
Across the length and breadth of the Great Depression, that meant no food, no home, and no train ticket to find work for millions of people. It meant another hurdle in a nationwide crisis.
Conclusion: The Real “Magic” Rate
Anderson and Jaremski found, as expected, that broker loans “plummeted” as the caps did, then rebounded when the cap did likewise, “even as wider economic conditions deteriorated.”
Credit is a sellable good like any other. If a customer is willing and able, at most, to afford 20%, and the lender is willing and able, at least, to keep it to 20%, they have agreed on a price. This agreement must extend to penalties, fees, and other measures used to clinch the business deal, and any outside force will drive one or both parties out of both this business agreement and those in the future. Sadly, many businesses on both sides never recover, as evidenced in the aftermath of the Depression. The same promises to be the consequence if current caps become law.
The free market rate is the one and only real “magic” rate, and politicians cannot codify it into law.
To learn more about interest rate caps, join the New York Fed’s free webinar, “Who Really Benefits from Rate Caps? The Hidden Reallocation Effects of Usury Laws,” on January 29th at 2 pm ET (register HERE).