The White House has recently called for a one-year cap that would limit credit-card interest rates to 10 percent. Capping interest rates is an age-old idea that always sounds good in hard times. The argument is simple. Interest rates feel painfully high, families are struggling, and something should be done to protect consumers from unfair lending practices.
Yet relatively speaking, even though they feel painfully high, interest rates are not excessively high. They are higher than the extreme lows of the 2010s and early 2020s, but they remain significantly below the peaks experienced in the 1970s and 1980s when inflation was very high.
A basic rule of economics is that price controls cause shortages. This is not a partisan opinion; it’s how markets work. When government sets a maximum price below what the market requires, fewer sellers are willing to offer the product. This applies to rent, gasoline, and food. It also applies to credit, because an interest rate is the price of borrowing money.
Interest rates do not exist to punish borrowers. They exist to price risk. When lenders are told they can’t charge more than 10 percent, even when the market risk calls for a higher rate, they don’t suddenly become more generous. They become more selective. The first borrowers to be denied credit are those with weaker credit histories, unstable income, or fewer assets. The people who are most supposed to be helped by an interest rate cap are often the first ones locked out.
For much of U.S. history, states enforced usury laws that capped interest rates. Those laws did not create abundant cheap credit. They limited it. Banks either avoided certain borrowers, charged high fees to make up the difference, or found legal ways around the caps.
In 1978, the Supreme Court ruled that national banks were allowed to charge the interest rate permitted in their home state, even when lending across state lines. That ruling helped dismantle state caps that no longer matched economic reality. Soon after, Congress intentionally loosened interest-rate controls to stabilize credit markets during high inflation.
Here’s the simple truth. When you cap interest rates below what market risk demands, lenders pull back. So why do people who believe in free markets sometimes support interest-rate caps? Why are elected officials who once championed free markets now doing an about face?
Because money is emotional.
When someone sees a 25 or 30 percent interest rate on a statement, fear and anxiety can flood the system. It feels personal. Anger kicks in, and anger wants a clear villain and a quick fix. A cap promises relief without tradeoffs, feels like taking control, and reduces anxiety for both consumers and elected officials.
But top-down directives like price controls are not free-market solutions. They assume officials can dictate prices without consequences. History clearly says otherwise.
You cannot legislate affordable credit into existence. Governments can subsidize payments. They can guarantee repayment. They can disguise the cost with high fees. But they cannot cap prices and expect supply to remain unchanged.
A free market is honest and emotionally neutral. Prices carry information. Distorting that information by limiting prices does not eliminate pain but moves it, usually onto those least able to absorb it.
Interest rate caps are the opposite of freedom, which is the stated goal of many who now embrace them. A free market system that allows for both compassion and freedom requires competition, transparency, financial education, and responsible lending standards. Providing those does not offer quick moral victories, but it builds systems that last.
Price controls may feel and look good in the short term. In the long term, free markets work better.
