The role of savings in an economy is crucial. Savers’ surpluses fund investment elsewhere in an economy. In a sort of ‘Robinson Crusoe’ economy, with only one person, this link is obvious and the single actor must save, put off immediate consumption, if he is going to accumulate a stock of capital that might enhance his productivity in the future. The saver here saves because of the available investment opportunities and their own effect on his future prosperity. However, when saving is intermediated by an entity like a bank, and the savings are put to use by someone other than the saver, this explanation may seem inadequate. So, why and how do ordinary people save and how did they do so in an era of accelerating financial intermediation, the 19th century in Europe and America?
Why People Save
Multiple models have been formulated to explain saving habits. One is life cycle theory, advocated by Franco Modigliani and Richard Brumberg. This theory holds that people save in order to distribute consumption over their lives in a manner different than their income alone would allow. People might save more in middle age to consume as normal in retirement, for example. However, in the early part of their working lives, when income is lower, people save less.
The theory held that the ultimate aim was to maximize consumption so that an increase in income, even a temporary one, would increase the amount of expected consumption over one’s lifetime. This extra consumption afforded by a higher income might be evenly distributed over one’s life, rather than immediate, which requires saving most of the money. Otherwise, an increase in income beyond what was needed to meet future consumption desires, such as in retirement, would be spent on consumption now. Life cycle theory implies it is a shortfall in judgement, or an unfortunate development, that would cause income to go unspent by the time someone dies.
Not all thought life cycle theory explained the tradeoff between consumption and saving correctly. Milton Friedman developed a ‘permanent income hypothesis’. It was similar to life cycle theory in that it also held that people save to smooth consumption over time. However, Friedman held that people consume only to the extent that their more reliable income, namely their ‘permanent income’, would allow.
One practical difference in permanent income theory is that people do not treat every income equally; people are not likely to spend through a sudden windfall, such as an inheritance or a capital gain on the sale of a house, because it is temporary and so could not support a permanent change in consumption. These windfall amounts would thus be saved rather than spent. Further, unlike as life cycle theory implies, consumers might never spend these savings in the future because their permanent income might not support such a lifestyle. In a sense, the permanent income hypothesis paints a somewhat thriftier picture of the average person only spending what their recurring income would allow.
Working Class Americans
The manner in which people save can be uncovered by study of savings data, ranging from surveys to bank records. This can be done with very old records too. The New Jersey Bureau of Statistics of Labor and Industries surveyed workers in the state of New Jersey about employment, wages, saving, and other topics. Surveys conducted between 1883 and 1888 revealed that a typical working class household income at the time would have been between $600 and $700 and saving rates, estimated simply as income minus expenses, averaged 8.1%. Modifying this statistic to consider life insurance premium payments, beneficial societies dues, and mortgage payments towards a house as forms of saving rather than expenses, then one arrives at an average saving rate of 14.8%.
In a study of this data by Howard Bodenhorn, several patterns were uncovered. Firstly, he observed that saving rates were higher for those in careers that tended to be shorter, typically those in jobs that were more dangerous or physically taxing, than for those in careers where people can work for longer. This finding corresponds to life cycle theory which would offer a good explanation for why someone in a shorter-term career might want to save more.
Further, as children in a household grew up, the family tended to save more, suggesting people did save more money as they approached retirement. Curiously, the surveys did not ask for the age of respondents themselves but did ask about their children, so this must be used as a proxy for the age of the breadwinner. Households with only teen children, and no younger children, had saving rates 10.2% above those of households without children. By contrast, those with only young children saved no more or less than those households without children at all. This also corresponds to life cycle theory.
Britain
Bank data has been used to determine the saving habits of Englishmen, and women, in the same century. The average deposit account at a British savings bank, banks designed for the working classes, was just £29 in 1875. Most of these accounts had deposit and withdrawal activity suggesting they were used to smooth consumption over shorter periods of time.
Looking at the data though, one is likely to realize that they may have been at risk of underestimating the role of women in consumption and saving decisions. Over the 19th century, the proportion of accounts maintained by women, and particularly married women, grew. By the 1860s, the proportion of accounts held by adult women exceeded those held by adult men at the Limehouse Savings Bank in the East End of London. Studies of working-class households at this time show that household finances were typically handled quite equitably between husbands and wives and that if there was any control in the hands of one person, it was more often wives and not husbands that were given control over the money.
At the savings banks, there were also accounts that were used to accumulate savings almost exclusively, with very few withdrawals. Interestingly, these were not held equally by all kinds of customers. For example, research by Josephine Maltby and Linda Perriton shows that single women were most likely to hold these sorts of accounts because of the frequency of domestic servant work among these customers of the savings banks.
Domestic servants were more likely to live with employers and pay nothing for rent or meals; so, they could accumulate savings without too much difficulty. Conversely, women were also more likely to hold accounts from which amounts were only withdrawn, with few or no deposits after the account was funded. These were used by widows of course, but married (non-widow) women were also likely to have such accounts, suggesting widespread saving of gifts and inheritances by them.
Sweden
A study of Bredsjö ironworkers in Sweden by Mats Larsson examined workers in a very different economy, a company town where workers were paid in a form of company scrip recorded on a ledger. Almost everything they purchased they bought from a company store against a personal bookkeeping account from which would be debited the value of the purchase. These workers saved by earning more from the ironworks than they paid for goods and rent. Unfortunately, workers were often in debt to the company. Still, the company functioned as a very generous banker, paying 5% interest on these savings but charging nothing on overdrafts.
In keeping with life cycle theory, saving trends were correlated to age. Workers aged 25-35 were more likely to be in debt to the company than to have any savings. From then, workers repaid their debts and had positive net savings, though the accumulation seems to have peaked, on average, by the time workers were approximately 60 years old.
Permanent income theory could also be put to the test. There were certain years when wages at the Bredsjö ironworks were unusually high, such as during the Franco-Prussian War and its aftermath, approximately 1870 through 1874. The ledgers of the company show workers saved some of this windfall but not all of it. The fact some of the abnormally higher earnings were spent might seem to refute Milton Friedman’s theory in this setting but it isn’t clear to what extent workers thought the change in income in these years was permanent. If they thought it was, they may have perceived it safe to increase their planned consumption. In any case, it was not permanent and the late 1870s brought far leaner times.
Where Savings Went
People can provide for their futures without banks but banks do make this easier. From the 1810s on, mutual savings banks raised deposits from the savings of working-class people in America. In America as in Britain, these banks were often formed with philanthropic rather than commercial intent; commercial banks did not desire small deposits. The average account in a New Jersey savings bank in the 1880s had approximately $260 in it, or about 40% of a working-class annual household income.
The British savings bank movement got underway almost simultaneously with that in America. Minimum deposits were typically around one shilling; smaller depositors were directed towards ‘penny banks’ serving poorer customers. The small savings banks of Britain were eventually replaced by the Post Office Savings Bank which offered more convenient services.
There were still other places in which to put one’s extra money. Building and loan associations, beneficial societies, and insurance companies offered other avenues to save money for a rainy day or for a longer-term objective. In the mid-1890s, the forty largest American beneficial societies, essentially mutual insurance schemes, had 1.7 million members. Perhaps around five million participated in such programs by the end of the century.
Then there is insurance. The Prudential Insurance Company of New Jersey introduced small industrial life insurance policies to the United States. The number of such policies in force among the four largest such insurers in the country grew from about 230,000 in 1880 to nearly 2.3 million in 1887. Indeed, insurance even became the most common form of working class saving. It was common for working class people to have insurance policies larger than their savings kept with banks.
The accumulation of savings in banks or other organizations provided capital for all sorts of public and private projects. In the late 1880s, New Jersey’s banks and insurance companies both invested in mortgages with the funds they raised from customers. Otherwise, their portfolios differed with savings banks holding more municipal and federal government bonds whereas insurance companies bought more railroad bonds, funding private investment.
Lesson
Some innovations take a long time to shape society to their fullest extent. In the 19th century, financial institutions that had already existed became more relevant to the lives of ordinary people. Banks had already transformed commercial life and now were reshaping personal finance. The history of these organizations is most often told from the point of view of the institutions themselves with considerable attention paid to how they worked. However, the effect of banking on ordinary peoples’ lives is often neglected.
More from the Tontine Coffee-House
Read about the what the ledgers of Victorian banks can reveal about savers and the development of postal savings systems. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
1. Bodenhorn, Howard. “The Forgotten Half of Finance: Working-class Saving in Late Nineteenth-century New Jersey.” Research in economic history, 2018, pp. 35–65.
2. Larsson, Mats. “Savers and Borrowers in the Swedish Working Class During the 19th Century—A Life Cycle Perspective.” Journal of Family History, vol. 49, no. 3, Oct. 2023, pp. 273–94.
3. Perriton, Linda, and Josephine Maltby. “Working-Class Households and Savings in England, 1850–1880.” Enterprise & Society, vol. 16, no. 2, Apr. 2015, pp. 413–45.
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John Graham