When President Trump called for a one‑year cap on credit card interest rates at 10 percent — about half the current average of 22 percent — it reignited a familiar debate. Should the government step in to protect consumers from what many see as exploitative lending practices, or do such interventions ultimately harm the very people they’re meant to help?

This isn’t a new question. Nearly a century ago, policymakers grappled with the same dilemma during the Great Depression, and the lessons from that era offer crucial insights for today’s debate.

As economic storm clouds gathered in 1929, New Jersey lawmakers were convinced that small loan companies were gouging desperate borrowers with excessive interest rates. Their solution seemed straightforward: slash the maximum permitted rate from 3 percent per month (about 43 percent annually) to just 1.5 percent per month (roughly 20 percent annually).

The results were swift and stark. Legal lending dried up almost immediately. Many licensed lenders simply closed their doors, unable to operate profitably under the new constraints. Recognizing their mistake, New Jersey legislators partially reversed course in 1932, raising the cap to 2.5 percent per month. Licensed lenders gradually returned, but the damage was done. The brief experiment with low-rate caps had permanently altered the lending landscape, with fewer competitors and reduced access to credit for vulnerable borrowers.

Caps Reduce Lending

Our analysis of this historical episode reveals the complex dynamics at play when governments impose interest rate caps. By comparing small loan brokers (who were subject to the rate caps) with commercial banks (who weren’t), we measure the impact of this policy. The findings are revealing. When caps were lowered, small loan brokers dramatically reduced their lending compared to commercial banks. When caps were raised again, brokers saw much larger increases in lending activity. Most importantly, commercial banks didn’t step in to fill the gap left by departing brokers—meaning borrowers were simply shut out of legal credit markets entirely.

We also show that lenders charging higher rates before the cap was implemented were most likely to close permanently. Even among survivors, those previously charging higher rates saw the steepest declines in lending. This suggests the caps didn’t just temporarily disrupt the market—they permanently reduced competition and credit availability.

The parallels to today’s credit card debate are unmistakable. Advocates for the new 10 percent cap argue, as they did in 1929, that aggressive rate limits are necessary to protect vulnerable consumers from predatory lending practices. They point to credit card companies’ substantial profits and market power as evidence that current rates are excessive. Trump said lower credit card rates will help people save for a home.

Lenders Need to Price Risk

Critics counter that caps will force lenders to reduce credit availability, potentially harming the very low-income households the policy aims to protect. JP Morgan Chase & Co. Chief Executive Officer Jamie Dimon said caps would be an “economic disaster’’ for ordinary Americans, retailers, schools, and other entities that use short-term credit to complete payments. Dimon made the comments at the World Economic Forum in Davos, Switzerland, Jan 21.

The historical evidence suggests both sides have valid points. Rate caps can indeed protect consumers from exploitation—but only if they’re set thoughtfully, with careful attention to market realities. When caps are set too low, they don’t eliminate the underlying demand for credit; they simply push it underground or leave borrowers without options entirely.

This doesn’t mean rate caps are inherently bad policy. Rather, it highlights the delicate balance policymakers must strike. Effective consumer protection requires understanding how lenders actually operate and how borrowers behave when their preferred options disappear.

The key insight from New Jersey’s Depression-era experiment is that lenders need some ability to price for risk and cover their operational costs. When prevented from doing so, they may simply exit the market rather than operate at a loss. The borrowers left behind—often those with lower credit scores or riskier profiles—face a cruel irony: the very people rate caps are designed to protect may find themselves with no legal credit options at all.

As today’s policymakers consider the proposed 10 percent cap, they would do well to remember the lessons of the 1930s. Consumer protection is a worthy goal, but achieving it requires more nuance than simply imposing price controls. Effective policy must account for market realities, unintended consequences, and the complex ways that lenders and borrowers respond to regulatory changes. The question isn’t whether to protect consumers from exploitative lending—it’s how to do so without inadvertently making their situations worse.

Competition, Markets, Transparency

The Great Depression taught us many lessons about economic policy. When it comes to interest rate caps, the message is clear: good intentions alone aren’t enough. We need policies that work for the people they’re meant to help rather than kneejerk reactions. Policymakers have tools to release pressure on interest rates. Here are two:

Increase competition: Allow more fintech and other non-traditional banks to compete with revolving credit or short-term loans. For instance, there was a push by the Office of the Comptroller of the Currency at the end of the first Trump administration to allow fintech and crypto companies to obtain formal bank charters. Setting clear lending standards that allow more financial institutions to compete for such consumer loans would increase credit availability while keeping out more questionable institutions.

Deepen Markets: Cut restrictions on the secondary market for loans so that banks can have more liquid markets to sell loans to investors throughout the country. By separating the functions of loan origination and holding, commercial banks can initiate loans in markets where they have an informational advantage but then securitize and sell off those loans to institutions. This would enable banks to increase lending and borrowers to receive a lower fixed contracted rate while allowing non-banks and investors to diversify their investment portfolios with loans. Right now, this market is being limited by state-level lending restrictions, and states have even sued to prevent loans from being sold within their borders.