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Citizen Savers: Family Economy, Financial Institutions, and Public Policy in the Nineteenth-Century Northeast Wadhwani, R. Daniel. Enterprise & Society, Volume 5, Number 4, December 2004, pp. 617-624 (Article) Published by Oxford University Press

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Citizen Savers: Family Economy, Financial Institutions, and Public Policy in the Nineteenth-Century Northeast R. DANIEL WADHWANI

In the early nineteenth century, few ordinary Americans in the northeastern United States used financial institutions to save and borrow, and account and security holding in these intermediaries was skewed toward the wealthy.1 By the early twentieth century, a host of financial institutions served small savers and borrowers, and households in all segments of the social structure depended on them in managing the family economy. This dissertation examines the nineteenth-century origins, development, and regulation of financial institutions that served the needs of ordinary Americans and explores how the emergence of new opportunities to save and borrow reshaped the family economy. It focuses in particular on a group of savings institutions that were

Enterprise & Society, Vol. 5 No. 4, © the Business History Conference 2004; all rights reserved. doi:10.1093/es/khh081 R. DANIEL WADHWANI is a lecturer at Harvard Business School. Contact Information: 118 Arthur Rock Center, Harvard Business School, Soldiers Field, Boston, MA 02163, USA. E-mail: [email protected] This dissertation was completed at the University of Pennsylvania under the guidance of Walter Licht, Jeffrey Fear, Michael B. Katz, Lynn Hollen Lees, Mark J. Stern, and Thomas Sugrue. I’d like to acknowledge the generous support I received from the Hagley Library, the John E. Rovensky Fellowship in Business and Economic History, the Alfred Sloan Foundation Program on the Corporation as a Social Institution, and the Social Science Research Council. Suggestions and advice on this research would be welcomed. 1. In the early nineteenth century, bank stock ownership was quite widespread among merchants and even among relatively modest tradespeople and artisans. Robert Wright, “Bank Ownership and Lending Patterns in New York and Pennsylvania, 1781–1831,” Business History Review 73 (Spring 1999): 42–48. But rates of security and account holding in these intermediaries were much lower among the bottom two or three quartiles of wealth holders. For the purposes of this summary, “ordinary Americans” will refer to the bottom three quartiles of the population ranked by income and wealth.

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established and regulated specifically for smaller savers. These mutual benefit societies, savings banks, and building and loan associations were the first movers to actively develop the organizational capabilities to serve ordinary households, and they laid the foundations for the eventual entry of commercial banks and other intermediaries into personal finance in the late nineteenth century. In the industrializing northeast, ordinary Americans relied on the reserves that they accumulated in mutual savings banks to weather periods of unemployment and to prepare for old age. They joined benefit societies to insure themselves in case of sickness and death. They used postal savings banks, along with mutual savings banks, to finance migration. They looked to building and loan associations for credit to purchase their homes. And they began to expect their government to regulate these institutions and stabilize them against the uncertainties of the market. In short, savings institutions became an integral part of how ordinary Americans dealt with the risks and pursued the opportunities of the industrial economy. Despite their importance to the family economy in the industrial era, as well as to the long-term development of personal finance, savings institutions have largely slipped through the disciplinary cracks between economic and social history. Though work in financial history has flourished, business and economic historians have devoted little recent attention to savings institutions or to the broader questions they raise about the novel organizational, political, and economic arrangements that drove the expansion in access to financial institutions for ordinary citizens.2 One of the reasons for the lack of attention by business historians likely lies in the limited role of savings institutions in nineteenth-century enterprise finance— hence, their peripheral position in the framework through which historians usually conceive the role of the financial system in economic development.3 Yet, to the extent to which the history of financial 2. A number of important studies of specific savings institutions have been completed. Examples include Lance Davis and Peter Payne, The Savings Bank of Baltimore, 1818–1866: A Historical and Analytical Study (Baltimore, Md., 1956); Alan Olmstead, New York City Mutual Savings Banks, 1819–1861 (Chapel Hill, N.C., 1976); David Mason, “From Building and Loans to Bail-Outs: A History of the American Savings and Loan Industry, 1831–1989” (Ph.D. diss., Ohio State University, 2001). 3. Savings institutions primarily invested in mortgage loans and public debt, though significant regional differences existed. The important role of savings institutions in financing infrastructure development, however, suggests that they did in fact play an important role in the expansion of markets. See, for instance, Alan Olmstead, “Investment Constraints and New York City Mutual Savings Bank Financing of Antebellum Development,” Journal of Economic History 32 (Dec. 1972), 287–311. This dissertation, however, focuses on the savings institutions’ contribution to the development of household capacity to manage risk and opportunity.

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systems raises a different set of developmental concerns—specifically, how access to opportunities for personal saving and borrowing expanded household capacity to manage risks and pursue opportunities—an appreciation of the role of savings institutions is central to our understanding of long-term changes in standards of living. Social historians, of course, have long focused attention on institutional responses to the novel uncertainties and opportunities of the market economy and to the effects of these institutions on household welfare. They have chronicled the emergence in the nineteenth century of what Michael Katz has aptly called “the institutional state”— the wave of organization building (including schools, asylums, hospitals, poorhouses, etc.) designed in part to help ordinary citizens manage the disruptions created by the quickening pace of economic development.4 Yet social historians have paid relatively little attention to the contemporaneous development of savings institutions, despite the fact that the organizational innovations and legal supports that allowed for the creation of new opportunities for personal saving and borrowing constituted one of the most important forms of organized provision for the nondependent population.5 For the many who lived between dependent indigence and relative affluence, savings institutions provided an important new way to manage the personal risks and opportunities one encountered in the industrial economy. I argue that historians should understand savings institutions as an integral part of the broader development of nineteenth-century public policies and institutions that sought to promote household welfare while discouraging public dependence. Policymakers and political economists reasoned that the creation of stable, well-regulated, and self-sustaining financial institutions for the general public could help households save for the risks of unemployment, old age, sickness, injury, and death, and hence promote welfare in the context of disruptive economic change while keeping in check the costs of public relief. Nineteenth-century lawmakers in fact came to see the establishment of savings institutions and the provision of stable opportunities for household saving and borrowing as an important function of the liberal state. State courts and legislatures hence promoted and stabilized savings banks, benefit societies, and building

4. Michael Katz et al., eds., Social Organization of Early Industrial Capitalism (Cambridge, Mass., 1982). 5. One social history that does briefly examine the role of savings banks as part of the development of household strategy in the industrial era is Stephan Thernstrom, Poverty and Progress (Cambridge, Mass., 1964), 122–31. A more recent study is George Alter, Claudia Goldin, and Elyce Rotella, “The Savings of Ordinary Americans: The Philadelphia Saving Fund Society in the Mid-Nineteenth Century,” Journal of Economic History 54 (Dec. 1994): 735–67.

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associations as quasi-public institutions. Sheltered, promoted, and stabilized by the states, savings institutions expanded rapidly so that, by the early twentieth century, most households in the northeast depended on them in managing the resources of the family economy. Even with the eventual entry of trust companies, commercial banks, and other intermediaries into household finance, and the concomitant demise in the special quasi-public status of savings institutions in the early twentieth century, the precedent that had been established for a public role in ensuring ordinary households access to stable opportunities for saving and borrowing persisted in principle and was eventually reframed in the regulatory reforms of the New Deal. Chapter 1 examines the origins of savings institutions, the public policies that gave rise to them, and the organizational innovations that allowed them to serve small savers. As with many other institutional innovations of the period, European policymakers and organization builders took the lead while American public officials followed closely. Benefit societies, savings banks, and building associations grew out of early nineteenth-century efforts to reform the institutions of the old poor law by promoting household welfare while discouraging indiscriminate dependence by the public. Savings institutions that allowed working households to save for unemployment, sickness, and old age were conceived as self-financed organizational alternatives to dependent relief. Thomas Malthus echoed the sentiments of policymakers on both sides of the Atlantic when he wrote that “of all the plans which have yet been proposed for the assistance of the labouring classes, the savings banks, as far as they go, appear to me much the best, and the most likely . . . to effect a permanent improvement in the condition of the lower classes of society.”6 This quasipublic charge, as well as the challenge of serving a multitude of small savers, prompted widespread institutional tinkering, as founders tried to create functioning organizations that served the general public. Savings banks, for instance, introduced a series of organizational innovations that helped promote the expansion of account holding among small savers. First, they introduced a financial instrument— the savings account—that made sense for the household economics of ordinary Americans and was not otherwise available. Savings banks did this not just by lowering the barrier to participation— accounts could be opened with as little as $1—but also by offering accounts that were relatively liquid, a feature that was critical for depositors with notoriously unsteady income. The institutions also introduced new forms of corporate control that helped ensure their 6. Thomas Malthus, An Essay on the Principle of Population (London, 1826), 407–408.

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fidelity to very small savers—who often lacked the time, resources, information, and indeed the literacy to actively monitor the institutions. For example, savings banks were organized as corporate trusteeships on behalf of depositors rather than as joint-stock corporations, hence avoiding possible conflicts of interest between depositors and stockholders. Finally, savings banks found new ways to actively promote the institution and to garner the trust of small savers. Most notably, they did this by creating links to other trusted organizations, such as schools, churches, and employers. However, these organizational innovations in services, corporate control, and marketing explain only part of the institutional structure of household finance that took form over the nineteenth century. As in other parts of the developing world, an important element of the emerging system of savings institutions was a new role for the state in actively promoting the use of the institutions, regulating them on behalf of small savers, and segmenting them from the institutions of commercial finance. Chapter 2 chronicles this emerging role for government. As early as the 1830s, a handful of commercial and private banks had attempted to follow the lead of savings banks by establishing deposit and other services for small savers. But in the decades following the failure of a number of these institutions in the late 1830s, courts, legislatures, and regulators created a web of laws that erected barriers to commercial bank entry and tightened public oversight of savings institutions. Legislatures, for instance, extended control over chartering, set allowable investment categories, regulated interest rates, and set ceilings on individual account sizes and on officer compensation. Courts played just as active a role. Through their common law authority to determine the extent of the powers of a charter, courts fleshed out specific rules about investing and operations. They also set high fiduciary standards for trustees to regulate the safety of the organizations. Far from viewing these interventions as contrary to the principles of a liberal state, most policymakers and intellectuals conceived these regulations as an “elementary duty” of a limited government, as economist Francis Amasa Walker described it.7 By mid-century, then, an extensive set of institutions, policies, and supporting regulations had been created to facilitate saving, borrowing, and insuring by people of modest means. But did this emerging institutional apparatus for household finance have an impact on the family economy? Did opportunities to save and borrow actually matter to people whose weekly budgets were often

7. Francis Amasa Walker, The Wages Question (New York, 1876), 414.

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stretched thin? If so, how exactly did access to savings institutions reshape the strategies and structures of the family economy? Chapters 3 and 4 examine the ways in which ordinary households actually used savings institutions. The first of the two chapters focuses on personal saving. Using depositor records from the Philadelphia Saving Fund Society (PSFS) and other savings banks, covering the years 1835 through 1900, I reconstruct the changing savings patterns of urban households over the nineteenth century.8 The records show rapid growth in account use by Philadelphians in all occupational, gender, and ethnic segments of the population. Although wealthier depositors also began to take advantage of savings accounts, depositor records show that the occupational mix of savers stayed relatively stable. Taking into account the growth of depositors at PSFS and changes in the occupational mix of the population, it becomes clear that PSFS made inroads into account holding in each segment of the social structure over the nineteenth century. Because they provide detailed demographic information, depositor records (when combined with supplementary sources such as court records and labor bureau studies) also help us reconstruct the changing savings strategies of particular segments of the population. The chapter focuses on three such groups: unskilled laborers, working women, and migrants. In each case, I show how access to stable savings institutions helped households manage specific risks and opportunities of the industrial economy: unskilled workers increasingly relied on short-term accumulation in savings banks to weather the seasonal and cyclical underemployment that marked early industrial work patterns; working women came to use their accounts to save for old age, in part because these separate accounts could be sheltered from a husband’s creditors and heirs; and the growing numbers of migrant and immigrant workers used savings accounts for short-term migration-and-accumulation strategies, often remitting savings back to their place of origin. Chapter 4 shifts the focus from personal saving to personal borrowing and examines the impact of the development of long-term credit—specifically mortgage loans by building and loan associations— on family strategies in the late nineteenth and early twentieth centuries. Like savings banks, building and loans were designed to provide ordinary Americans access to small-denomination financial services, in this case housing loans. To the limited extent that mortgage loans were otherwise available to ordinary Americans, they usually covered only half the value of the underlying property, had

8. The methods and sources used in this chapter draw heavily upon the approach developed by Alter, Goldin, and Rotella, “The Savings of Ordinary Americans.”

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relatively short terms, and were designed with a lump sum repayment of the principal at maturity. As a result, urban homeownership in the nineteenth century was usually not attainable until middle age (if at all), because of the need for substantial upfront saving, and even then it placed significant strains on the family economy. In contrast, building associations offered small-denomination housing loans, covering a greater proportion of the value of the property on longer terms and with no lump sum repayment at maturity. Where building and loans were widely established and provided for low down payments and amortized housing loans, borrowers planned the life cycle and allocated family resources in new ways. Using budget study data, the chapter shows how access to these loans began to shape modern family saving and borrowing patterns: homeownership rates increased, first homes became more widely attainable in early adulthood, and mortgage payments increasingly substituted for systematic saving through middle age. Throughout the nineteenth century, savings institutions were established, regulated, and, to some extent, sheltered from competition for what was considered the special quasi-public role they played. Beginning in the late nineteenth century, however, commercial banks and trust companies began to successfully skirt the regulatory barriers that had been erected to separate them from savings institutions. Chapter 5 chronicles the entry of commercial banks into the market for personal saving and borrowing, and documents the eventual demise of the special quasi-public status that savings institutions had enjoyed in the nineteenth century. Commercial banks, emboldened by the relaxation of regulatory requirements created by competition between state and federal authorities during the late National Banking Era, began to move into the expanding markets for individual savings deposits and other household financial services. The simultaneous expansion of the constitutional rights of corporations made it more difficult for states to preserve the special quasi-public privileges and markets that savings institutions had enjoyed. Finally, the rapid proliferation of commercial banks between 1880 and 1920 gave them locational advantages in smaller cities and towns, advantages that savings institutions lacked. Commercial banks’ share of the market for deposits and other transactions by individuals rose rapidly in these decades, at the cost of savings institutions. Alternative paths did exist. In most other developed and developing countries, governments moved to consolidate the public status of savings institutions through outright state ownership, usually through the postal system. Many leading American policymakers and intellectuals advocated the establishment of similar government-owned savings institutions or the expansion of the

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existing system of quasi-public savings banks as an alternative to the growing number of single-unit commercial banks that had begun to offer household financial services. But these bills failed, in part under political pressure from the commercial bankers, creating an increasingly competitive and institutionally fragmented system that signaled the decline of the old regulatory regime by the 1910s and 1920s. The chapter ends with a short epilogue examining New Deal regulations against the backdrop of the declining special role played by savings institutions in the nineteenth century. The new regulatory order recognized the important precedent set in the nineteenth century: government would guarantee the stability of popular banking and ensure opportunities for personal saving and borrowing. But it would do so through a new institutional framework that allowed commercial institutions, rather than specially designated quasi-public ones, to provide financial services to the public. The rise and decline of the special quasi-public role of savings institutions over the long nineteenth century thus shaped the emergence of household finance in several ways. First, savings institutions played a critical historical role as first movers in lowering barriers to participation in the formal financial system. They established a precedent for the viability of serving small savers that would eventually lead insurance companies, commercial banks, and trust companies to develop services for ordinary Americans in the late nineteenth and early twentieth centuries. Second, a novel role for the state emerged in the nineteenth century in promoting and stabilizing financial institutions for small savers. Though the United States did not develop an extensive publicly owned and managed system of personal saving and household finance as did Great Britain, Germany, Japan, and many other countries in the late nineteenth century, a clear legal and political precedent was established for policy-based interventions that ensured access and stability for small savers. And, finally, savings institutions played a critical role as first movers in the long-term development of financial services that expanded household capacity to effectively manage life cycle risks and opportunities. This last point can easily be missed when we account for changing standards of living and household well-being, because our typical measures—household income, consumption, and wealth—do a poor job of capturing the expansion of household capacities to save, borrow, and insure in order to meet needs over the life cycle. Yet, as the use of savings institutions suggests, the extension of financial services to ordinary Americans played a critical role in helping them better manage risks, such as unemployment and old age, and better pursue opportunities, such as migration and homeownership, in the industrializing economy.

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