poverty relief and financial inclusion: savings banks … · 2016-12-09 · chris de noose wsbi and...

The Voice ofSavings and Retail Banking

POVERTY RELIEF AND FINANCIALINCLUSION: SAVINGS BANKS INNINETEENTH CENTURY GERMANYCarolin Thol

November 2016

A Study awarded with the 2016 Savingsand Retail Banking History Award

2016

SAVINGS & RETAIL BANKINGHISTORY AWARD

TABLE OF CONTENT

SAVINGS AND RETAIL BANKING HISTORY AWARD 3

EXECUTIVE SUMMARY 4

1. INTRODUCTION 5

2. OPPORTUNITIES FOR DESIGNING PRO-YOUTH PRODUCTS 6

3. SAXONY DURING THE NINETEENTH CENTURY:INDUSTRIAL REVOLUTION, POVERTY AND THE WELFARE STATE 8

3.1 Socio-Political Developments 83.2 The Emergence of Savings Banks 10

4. DATA: THE STATISTICAL JOURNALS OF SAXONY 12

5. ECONOMIC EFFECTS OF SAVINGS BANKS 13

5.1 Targeting Low-Income Households 145.2 Encouraging Saving for the Long Run 155.3 Stimulate Investment and Economic Growth 15

6. DISCUSSION: SAXONY'S SAVINGS BANKSIN INTERNATIONAL PERSPECTIVE 17

7. CONCLUSION 18

8. REFERENCES 19

8.1 Primary sources 198.2 Savings banks data (in chronological order) 198.3 Census data (in chronological order) 198.4 Secondary sources 20

APPENDIX 22

A1. Tables 22A2. Figures 28

This study has been published by WSBI (World Savings and RetailBanking Institute) and ESBG (European Savings and Retail BankingGroup) in the framework of the 2016 edition of the Savings and RetailBanking History Award. The objective of the History Award is tostimulate comparative research projects on the rich historic heritage ofsavings and retail banks all over the world.

The findings, interpretations and conclusions expressed in this paper donot reflect the views of WSBI nor ESBG. Neither WSBI nor ESBGguarantee the accuracy of the data included in this work. The materialin this publication is copyrighted.

POVERTY RELIEF AND FINANCIALINCLUSION: SAVINGS BANKS INNINETEENTH CENTURY GERMANYCarolin Thol1

A Study awarded with the 2016 Savings and Retail Banking History Award

November 2016

A Study awarded with the 2016 Savingsand Retail Banking History Award

SAVINGS AND RETAIL BANKING HISTORY AWARD

Research on the characteristics and specificities of savings and retail banks is important to improve the awareness andincrease appreciation of this important segment of the financial sector. Savings and retail banks cater to the financialneeds of households, SMEs and local authorities. They are anchored in the local economy where they often are trustedfinancial partners for several generations.The History Award that WSBI and ESBG organise since 2004 seek to

n Encourage academic researchn Stimulate thought and discussion on trends and market forcesn Strengthen collaboration among research centres and academia to promote and stimulate future comparative

research projects on savings and retail banks worldwide.

A detailed description of the winners of the previous edition can be found on the WSBI-ESBG website.

Are you ready to take up the challenge and to participate in the next edition of the Savings Banks History Award?Don’t hesitate to contact [email protected] to obtain the exact condition and timing.

In the meantime, I wish you happy reading with the study “POVERTY RELIEF AND FINANCIAL INCLUSION: SAVINGSBANKS IN NINETEENTH CENTURY GERMANY” written by Carolin Thol.

Chris De NooseWSBI and ESBG Managing Director

POVERTY RELIEF AND FINANCIAL INCLUSION: SAVINGS BANKS IN NINETEENTH CENTURY GERMANY4

EXECUTIVE SUMMARY

This paper examines the effects of savings banks on poverty relief and financial inclusion in the German state ofSaxony during the nineteenth century by analysing a newly constructed panel dataset. In the economic literature,there is general consensus about the importance of financial inclusion for economic development, but less is knownabout how this can be achieved. During the nineteenth century, savings banks were introduced as a means to fosterthrift among the poor. This paper finds that they were successful in catering to low-income households, and wereused predominantly for precautionary saving in the short to medium term. Savings banks present an interesting case,because they performed a very limited range of functions, only giving access to savings accounts but not to loans fortheir target group. Therefore, their emergence allows for the study of the effect of savings in isolation from otherfinancial services. Next to the benefits for individuals, savings banks also increased capital mobilization and servedlocal communities through the provision of mortgages. This study finds a positive effect of savings bank deposits onhousing construction. Thus, the savings banks in Saxony constitute an example of an early microfinance institution.

The present research makes a contribution to two strands in the literature. On the one hand, it contributes to thescholarship on the role of banking and finance for industrialization in Europe. The focus there is often solely on largeuniversal banks and asset markets, emphasizing the allocation of capital, but not its mobilization. For Germany, therealready exists considerable research on credit cooperatives, but savings banks have been neglected. This papersuggests that savings banks played an important role as well. On the other hand, the example of savings banksprovides a case study of an early form of a microfinance institution. The fact that they were enthusiastically embracedby a sizeable proportion of the population suggests that a market failure existed before. Establishing a branchnetwork of banks entails high fixed costs that may not be recovered if the margins to be earned by the bank on eachindividual account are small. Today, many banking needs can be fulfilled by mobile phones rather than in a localbranch, making it profitable again to offer financial products even to those with modest funds. During the nineteenthcentury, options to solve this dilemma were limited, but the savings banks nevertheless found ways to extend basicyet important services to their customers.

The savings bank movement cannot be seen in isolation from wider economic circumstances. As an era of fast andfundamental change, the nineteenth century required solutions to new social problems. While family and villagestructures became less important, society at large was in a better position than ever to care for those in need asincome per capita was rising. A school of thought that emphasised the responsibility of individuals to provide forthemselves gained influence in shaping public policy. As new industries emerged and grew quickly, urbanizationgained momentum, setting off changes in demographics and the social fabric. This created new opportunities, butalso risks. The state was finding its new role in a more politically active population. Still, it was rather limited in bothits capacity to act, and the level of state interference that was regarded as desirable. The savings banks contributedto the social safety net that was still under development.

It is a well-studied observation that levels of financial and economic development correlated positively. Yet, there isless consensus about the direction of causality as well as the channels of transmission. Finance could cause economicgrowth by facilitating capital accumulation and consumption smoothing. According to the opposite hypothesis,financial institutions develop where growth is expected to be higher in the future, or develop out of this growth.Savings banks provide a unique example, as they were non-profit organizations and their main activity was thecollection of savings, with capital allocation only coming secondary.

To understand the role of financial institutions, behavioural aspects have to be considered as well. Decisions to saveand consume are made by individuals. It was the goal of the savings banks to help people make better decisions bygiving them an attractive way to store their funds and by fostering thrift. This was supposed to be achieved byexplicitly targeting low-income households. The question is whether the savings banks were actually used by thoselow-income households that were previously excluded from financial intermediation, thus creating additional savings.This question is also important on a macroeconomic level, as it affects the change in aggregate savings, and thereforea society's ability to invest.

1 Originally submitted for the MSc in Economic History (Research) at the London School of Economics and Political Science, academic year 2014/15. I wish to thankLars Boerner for the supervision of this dissertation as well as the whole LSE Economic History Department for support throughout the year. I am extremely gratefulto my mother, Regina Ellefredt-Thol, who digitized most of the data I used. The project would not have been possible without her diligence and endurance.The dissertation benefited from helpful comments from participants at the Oxford Business History Network workshop in June 2015 and the LSE MSc EconomicHistory (Research) Workshop. I want to thank Norma Cohen, Alex Evans, Alex Fraser, Maximilian Gerling, Christian Gonzalez-Rojas, and Anne-Lina Tholen, for helpfulcomments and reading first drafts. All remaining errors are my own.

Using a newly assembled dataset, this paper shows that rather than attracting wealthier individuals over time, savingsbanks' clients became slightly poorer. It can be concluded that savings banks were successful in providing access tofinancial services for individuals that were previously excluded. However, the banks were less likely to have been usedto save for the long run. Rather, they were used to even-out spending over the business cycle on a horizon of only afew years. By mobilizing capital and helping people to smooth consumption in the short run, savings banks had apositive impact on economic growth. The results give some evidence for the hypothesis that deeper financialintermediation, even for the poorest members of society, fosters economic development.

1. INTRODUCTION

Savings banks are an early example of microfinance institutions that catered to the growing class of low-incomehouseholds during the Industrial Revolution in the nineteenth century in Germany. The positive correlation betweenfinancial and economic development is well known, yet the direction of causality as well as the channels oftransmission remain difficult to establish. On the one hand, finance could cause economic growth by facilitatingcapital accumulation. On the other hand, financial institutions could move where they expect higher growth to occurin the future. Savings banks provide a unique example to evaluate these hypotheses, as they were non-profitorganizations and their main activity was the collection of savings.

The focus of scholarship regarding the role of finance in the industrialization of Germany usually rests on the largeuniversal banks. As Gerschenkron (1962) pointed out, these were better able than individual shareholders to evaluaterisks and opportunities by establishing close relationships with companies. Thus, they facilitated the growth ofconglomerates able to undertake large investments. This argument still resonates in the development literature today,as studies on the role of the number of commercial banks in a country or the depth of capital markets show (for areview of the literature, see Levine, 1997).

However, there is another side to the story which focuses more on financial inclusion among individuals within society.Even today, more than half of the world's adult population does not have a bank account. In the Middle East andNorth Africa, less than 20% do, while in high-income countries this proportion is almost 90%. In developing countriestoday, smart phone apps or informal providers often take on the role that local bank branches fulfil in richer countries.Still, one of the largest obstacles to having a bank account and access to financial intermediation more broadlyspeaking, is too little income to cover minimum deposits or administration fees (The Economist, 2014).

Access to financial intermediation is vital for welfare and economic development. In countries with underdevelopedwelfare states and insurance markets, savings accounts provide the opportunity for self-insurance, saving forretirement or the education of children. While the cookie jar is always available, it is not very safe and does not providean incentive to save more, such as even modest interest payments can. Furthermore, money tucked under themattress is not available for investment to the rest of the economy. The mobilization of savings is necessary forindustrial lending to take place. While the savings of the poor tend to be small, they can make a large difference inthe aggregate if enough people participate.

This was certainly the case in Saxony, the German state this paper focuses on. After a modest start in the earlynineteenth century, savings banks experienced rapid growth during the 1850s and 60s. Owned by municipalities andin the beginnings even managed by volunteers, they were seen as part of welfare policy and poverty preventionprogrammes. However, attractive interest rates also appealed to wealthier individuals, which put the banks in aconstant struggle of how to define and develop their business model. Thus, when evaluating the savings banks inlight of their contribution to financial inclusion and economic development, it is important to find out whether theyactually served low-income groups.

A STUDY AWARDED WITH THE 2016 SAVINGS AND RETAIL BANKING HISTORY AWARD 5

6 POVERTY RELIEF AND FINANCIAL INCLUSION: SAVINGS BANKS IN NINETEENTH CENTURY GERMANY

Another question is how the banks were used. How decisions to save and invest are made has frequently beendescribed in economic models. The classical explanation is the life-cycle model, which assumes that people want tomaintain a constant level of consumption throughout their lives by saving for old age during their working years.A rival explanation is the precautionary-savings hypothesis, which acknowledges that unforeseen events may make itnecessary to deplete savings more frequently. These considerations are important as they have different implicationsfor the development of the capital stock.

To investigate these issues, a new dataset including savings bank and census data for Saxony has been assembled forthis paper. The panel includes more than 230 savings banks and population data of additional municipalities.Therefore, it is possible to control for locational and other idiosyncratic factors. Looking at the development ofdeposits on the individual bank level shows that savings banks stuck to their initial target group. However, depositswere used to save in the short run, less so for life-cycle savings. Using housing as a proxy for economic growth yieldsthe conclusion that savings banks did have a positive effect on development. This implies that not only industriallending, but also the mobilization of savings and consumption smoothing are important channels through which thefinancial sector affects the economy.

The paper proceeds as follows. The next section outlines the relation between savings, finance, and economicdevelopment in more detail. Section three introduces the savings banks and the socio-political environment in whichthey developed. Section four presents the data used for an econometric assessment of the effects of the savingsbanks. Section five presents the results. The following discussion puts the results in context with scholarship onsavings banks in other countries. Section seven concludes.

2. FINANCE, SAVINGS AND ECONOMICDEVELOPMENT

In classical economic theory, the decision to save and invest is considered as the outcome of utility maximization bythe individual. In aggregate, these decisions have far reaching consequences for the economy. In imperfect markets,institutions such as banks and insurance companies play an important role in determining the outcome of that trade-off as well. Before going into more detail about the role of savings banks during the Industrial Revolution in Saxony,some background on the nexus of savings, finance, and economic development is warranted.

The work-horse model of economic growth was developed by Solow (1956). In the basic model, total output of theeconomy is determined by the amounts of capital and labour available, as well as their productivity (total factorproductivity, or TFP). If either capital or labour increase, output increases as well. The amount of investment each yearis determined by the savings rate, as investment has to equal savings in the absence of international capital flows.This creates a direct link between the ability of a society to create and mobilize savings and its welfare.

The savings rate is determined by how much of their income individuals choose to save. The classic explanation forsavings is the life-cycle model, which postulates that people aim to smooth their consumption over the course of theirlives, saving for retirement during working age. This model has often been criticized, as it is hard to test empirically.Other reasons for saving may be more plausible in reality, as constraints such as involuntary unemployment and capitalmarket constraints complicate the application of the life-cycle model in practice (King, 1983). These constraintssuggest that other models, such as precautionary saving (for bad times) or target saving (to be able to buy a certaingood) may be more accurate (Alter et al., 1994). These imply that consumers build up buffers during good timeswhich they can live off during bad times. Due to the countercyclical character of this form of saving, it produces lessaggregate savings, as assets are frequently depleted (Deaton, 1991).

These considerations serve as the backdrop of an inquiry into the role of early savings banks. Lacking a well-developedsocial safety net, low-income groups were vulnerable to unemployment and other adverse shocks such as sickness.They also lacked access to capital markets for borrowing. As aggregate saving and investment influence economicgrowth, having a large part of the population with no savings can be costly in terms of forgone future income.The actual level of savings also depends on the costs and risks associated with storing funds. This is where thefinancial sector comes into play.

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Financial intermediation is a crucial element of modern economies. Financial institutions act as intermediaries toreduce transaction costs and affect economic growth through higher capital accumulation and a more efficientallocation. While the highly positive correlation between financial depth and economic growth is uncontroversial, thedirection of causality is less clear. Some studies find evidence of a positive effect of finance on economic growth,others contest that financial development occurs when economic growth makes banking more profitable (Levine, 1997).Savings banks during the nineteenth century differed in important respects from other financial institutions: theyoperated on a non-profit basis, mobilized savings from people who were otherwise not eligible for financial servicesand were very limited in the way they invested, thus limiting their impact on the economy on the channel of savingscollection. This makes them an ideal case study to investigate the effect of saving on economic development.

Today, microfinance institutions serve a similar purpose as savings banks did in their early days. Their effect oneconomic development is found to be positive in most case studies. For example, a bank focusing on low-incomeclients in Mexico had a positive impact on employment, income, and entrepreneurship in the regions where brancheswere opened (Bruhn & Love, 2009). In a randomized-trial experiment in rural Kenya, people were willing to pay highfees to access bank accounts and used them for productive investment. Among the self-employed individuals includedin the study, the response was especially high among female market vendors (Dupas & Robinson, 2012). In India,a large-scale extension of bank branches to rural areas over a long stretch of time is found to have reduced povertyin places where banks were opened, which were previously among the poorest. In these places, which had beenunbanked before, capital mobilization and credit disbursement acted as the main mechanisms by which financialintermediation increased income (Burgess & Pande, 2005). These studies show that reduced access to financialintermediation is a factor holding back economic growth in developing countries today. It is the purpose of this studyto investigate whether this already was the case during the nineteenth century.

Savings banks were not only a German phenomenon. In Britain, the Trustee Savings Banks fulfilled a very similar role.They were also established out of charitable motives and seen as part of social policy. These banks faced similarproblems to their German counterparts in keeping the upper classes out, which was especially warranted as the bankswere heavily subsidized by the government. Because the development of the savings banks remained disappointing,the first Post Office Savings Banks were created from 1861, which were more successful in catering to low-incomehouseholds (Fishlow, 1961). Through colonial ties, both of these models were also exported to Australia and NewZealand (Cardow & Wilson, 2015). In the US, mutual savings banks were supposed to encourage self-insurance andthrift (Alter et al., 1994). Similar developments can be observed in France, Italy, Spain, the Netherlands, and Denmark.In Belgium, Greece and Portugal, savings banks were only introduced later, during the late nineteenth and earlytwentieth century (Mura (ed.), 1996).

What are the implications for a study of the first savings banks in Saxony? Looking at savings over time helpsidentifying the motives to save. To gauge the effect on aggregate savings, it is important to know whether thedeposits at savings banks actually comprised an increase in the savings rate or whether they represented a shift outof other asset classes (Alter et al., 1994). The increase in absolute savings will be higher, the more people on lowincomes used the savings banks, as they had few other options to deposit their savings. The level of aggregate savingsalso depends on the time deposits were left with the banks, which provides for the connection between micro motivesto save and macro effects. If the savings banks were successful in mobilizing the savings of more people for investmentand giving them access to financial intermediation, this should be mirrored in more rapid economic development.

Thus, there are three questions the following sections seek to answers. First, were the savings banks successful inincluding more low-income households in financial markets? Second, did they have an effect on aggregate savingsby generating long-term funds? And third, was there an effect on economic development? Savings banks did notoperate in a vacuum and the following section gives some background on the environment in which the banks developed.

A STUDY AWARDED WITH THE 2016 SAVINGS AND RETAIL BANKING HISTORY AWARD


3. SAXONY DURING THE NINETEENTHCENTURY: INDUSTRIAL REVOLUTION,POVERTY AND THE WELFARE STATE

3.1 Socio-Political Developments

In the beginning of the nineteenth century, Saxony, today a state of the Federal Republic of Germany, was a relativelysmall kingdom, bordered by Prussia in the north and Austria in the south. Since the middle ages, Saxony had beenamong the most advanced regions of Germany, drawing in skilled workers (Forberger, 1982). The effects of theIndustrial Revolution, which started in England during the eighteenth century, became undeniable in Germany andespecially Saxony during the nineteenth century. Saxony was the first German state to become predominantlyindustrial, and by 1891, the proportion of the population depending on agriculture had decreased to less than 40%(Forberger, 1982). The spread of industrialization was fuelled by first economic integration and then political andmonetary unification of Germany. Internally, the state was divided into four counties (Regierungsbezirke): Dresden inthe centre, Bautzen in the east, Zwickau in the south-west and Leipzig in the north-west. Among the four, Bautzenremained the most agricultural region. The other regions were rapidly industrializing, especially around the urbancores of Dresden and Chemnitz (county of Zwickau) and more rural in the peripheries of these cities. While notboasting a lot of industry, Leipzig was also highly developed and constituted the state's centre of trade andcommerce. Population growth was not only apparent in the urban cores, but agglomeration also started in the areasaround them (see the map in Figure 1 in the appendix).

Social and political change went hand in hand and proceeded rapidly. At the beginning of the nineteenth century,Saxony had the highest population density in Germany, and also among the highest in all of Europe (Stat. Bureau,1861). Moreover, the population was growing as life expectancies increased. While a modern, urban society emerged,political structures needed some time to keep up with these developments. Until the early nineteenth century, Saxonywas organized around a feudal order with a powerful nobility. This was dismantled by the freeing of labour from thebonds to their employers and the introduction of universal male suffrage. The powers of the prince elector (Kurfürst),whose status was close to that of an absolute ruler, were put in check by a new constitution inaugurated in 1831(Forberger, 1982). Power was redistributed from central government away to the municipalities. While this took someinfluence from the nobility, it bore problems of accountability in itself, as Treitschke (1915) notes: “Towns, too, lookedupon themselves as states within the state: their councils perpetuated themselves by cooptation.” However, the daysof this political order were counted. Social change was facilitated by changes in the regulation of the economy.

Economic freedom laws undermined the power of the guilds by allowing anybody to start their own business. As peasantswere no longer bound to land owners, and apprentices no longer to their masters, the population became much moremobile. Old societal structures vanished and new ones emerged as people flocked into the industrial cities to work inthe newly established factories. The emergence of factory production came largely to the expense of small workshopsand did not develop out of them. Thus, the newly established class of factory owners was fundamentally differentfrom the previously influential handicraft masters (Forberger, 1982). One sign of the changing working environmentwere soup kitchens that emerged in industrial areas, providing cheap meals for workers. While they were regardedas modern, efficient and hygienic, they also undermined the role of the domestic kitchen as the centre of social life(Stat. Bureau, 1857). Thus, the influence of industrialization stretched far beyond the economy into all aspects of life.

The financial sector played a decisive role for industrialization by financing industry and infrastructure investments.Large-scale credit banks constitute the famous universal banks that Gerschenkron (1962) invoked as the facilitatorsbehind the emergence of modern corporations and conglomerates. Using their close ties to businesses, these bankswere well suited to monitor and process information at lower costs than individual investors would have been ableto. However, more recent studies question this view and see the development of large-scale banks more as anoutcome of economic growth that was already under way (Fohlin, 1999). Other forms of banks are often overlookedin this context. With their peculiar set-up of focusing on the collection of deposits rather than lending, savings banksacted to mobilize savings and to diversify risks of private households. However, all of this happened on a rather smallscale. Only a few years after the first savings banks, credit cooperatives emerged that pooled the savings of theirmembers, often farmers and artisans, and forwarded loans to fund their businesses. By forming cohesive groups,cooperatives were able to overcome information asymmetries and impose sanctions on defaulters. This enabled themto include borrowers that would not have been able to obtain loans from other banks.

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Yet, acting on a strictly local basis, the cooperatives hindered the integration of capital markets across regions to someextent (Guinanne, 2001). Nevertheless, both of these forms of financial institutions were widespread and playedinteresting roles in the industrialization process.

After economic integration of Germany was set off by the Zollverein, a customs union, in 1834, political unificationproceeded as well. In 1871, Saxony became part of the German Empire. From then on, most of its politics were determinedby the federal government. This also meant monetary unification. Following political unification, the Prussian Bank,which used to be the de-facto central bank of Prussia was turned into the Reichsbank, the central bank for theEmpire. Although there were some advocates for free banking, it was eventually concluded to base the monetaryregime on the English model with a strong central bank. The new coin introduced, the Mark, was put on the goldstandard, which had emerged as the universal international monetary regime. Coinage became the sole privilege ofthe Reichsbank, meaning that individuals were no longer allowed to take precious metals to the mint and have themmade into coins. Moreover, the supply of bills by banks other than the Reichsbank was heavily restricted (Holtfrerich,1989). Hence, from around 1873, Germany was fully united with unified labour and capital markets as well as fiscaland monetary union.

Economic policy at the time was governed by laissez-faire. As a small economy, Saxony had never pursued mercantilistpolicies and had operated an open trade regime (Treitschke, 1915). The industrialization was actively supportedby improved provision of education, chiefly in the new schools for industry (Industrieschulen) (Forberger, 1982).While the new economic order brought new opportunities and freedoms, risk and uncertainty also increased. Strong bondsbetween employers and employees no longer existed and workers frequently changed jobs. Individuals were takingmore risks to pursue new opportunities. This of course entailed the chance of failure. The concept of unemploymentemerged as less people worked in agriculture (Cummins, 2015). As the state remained rather passive in supportingthe growing number of urban poor, civic engagement proliferated and private organizations provided the services thatwould later be covered by the welfare state. Examples include poor associations (Armenvereine) who ran shelters andworked to prevent poverty, the soup kitchens that were often run on a non-profit basis, and the savings banks thatin their early years were largely managed by volunteers (Stat. Bureau, 1861).

The combination of increased vulnerability to poverty and increased political power of the working classes made anexpansion of the welfare state inevitable. Before joining the German Empire, relief provision in Saxony was mainlygoverned by the poor law with an emphasize on self-help. This doctrine remained even after 1871 when the welfarestate in all of Germany expanded, which left an important role for savings banks. The poor law of 1840 made themunicipalities responsible for relief provision in Saxony. Eligible for relief were those who, due to circumstances outof their control, were not able to earn a basic living income and were not provided for by other responsible parties(such as family or workers' associations). Municipalities were required to provide relief in cash or in kind, shelter andschooling for children. Furthermore, they were required to work on the prevention of poverty, for example by findingwork for those at risk. The funds were provided from general local revenue, but also donations. The administrationwas run by poor associations (Armenverein), which often included volunteers from the general public. Their main taskwas to prevent begging and “self-inflicted poverty" (Stat. Bureau, 1861). In 1861, the Statistical Journal notes thatwhile the number of poor associations was growing over recent years, which it counted as a positive sign for betterservice provision, shelters were by no means overcrowded, so that in general the incidence of poverty did not seemto have increased. Around that time, the people most likely to live in a shelter were single, elderly people who wereno longer able to work. Among the younger ones, those without any profession, day labourers, manual workers andservants were the most affected by poverty. Factory workers, on the other hand, only very rarely were forced to livein shelters. Nevertheless, the social problems and working conditions were issues of major concern in public debates.

Further important developments happened in the field of insurance. In Saxony, already in the first half of thenineteenth century, basic products such as fire insurance and life and old age insurance (although mainly for stateemployees) were widely available (Stat. Bureau, 1857). The development gained much more momentum after theformation of the German Empire. The movement started with the provision of accident insurance, which entitledemployees to compensation no matter if the accident was due to negligence on part of the employer or not. By 1884,insurance became compulsory for workers and was funded jointly from employers' and workers' contributions(Hennock, 2007). The next step was the provision of sickness, invalidity and old age insurance. This development canbe seen in conjunction with the implementation of universal male suffrage as well as the emergence of tradeunionism which gave more political clout to the growing group of the workers. Some provision of invalidity and oldage insurance already existed before in the form of provident funds, and sickness insurance was compulsory since1876. While there were still vast regional differences, legislation was unified a few years later and insurance becameadministered on the federal level.



Even later in the century, Bismarck pushed the efforts to also make invalidity and old age insurance universal andcompulsory. This was less in consideration of the strained poor funds than as a move against the surging socialistinfluence among workers who had become a powerful political force (Hennock, 2007). Thus, there were importantadvances of the welfare state during the nineteenth century.

As an era of fast and fundamental change, the nineteenth century required solutions to new social problems.While family or village structures became less important, society at large was in a better position than ever to care forthose in need as income per capita was rising. Additionally, the responsibility of the individual to provide forthemselves was also emphasized and became an important doctrine underlying social policy.

3.2 The Emergence of Savings Banks

The savings movement was the outcome of a long development to transform thrift from a vice into a virtue.Historically, saving was seen as a zero-sum-game: What one person saved reduced the income of others and thusdecreased the welfare of the community. The catholic church actively discouraged saving by banning interestpayments and accumulation of assets was regarded as decadence. This only changed when the Reformation spreadthe famous “protestant work ethics” as pointed out by Max Weber. The cultivation of thrift was driven by religiousgroups such as the Calvinists and classical economists alike. Underlying this was the idea that economic growth wasdriven by capital accumulation and investment. By the nineteenth century, thrift and frugality were regarded asvirtuous character traits and characters such as Benjamin Franklin were role models in the promotion of thrift all overthe western world. The importance of consumption was only pointed out again by the likes of John-Maynard Keynesin the first half of the twentieth century (Garon, 2011). During the Industrial Revolution the promotion of savingsgained new momentum as a way of self-insurance. Thus, in rapidly industrializing Saxony, the idea of savings banksfell on fertile ground.

Although by the mid-nineteenth century, many contingencies of life were provided for by the welfare state, there werestill considerable uncertainties. Regional differences in benefit levels prevailed as they were tied to average incomes.There was a gap between the end of sickness insurance and the eligibility of invalidity insurance that was only closedin the twentieth century. Unemployment was not covered at all in most places and insurance only emerged in 1896,becoming more widespread during the twentieth century. Also the extension of benefits to dependants, widows andorphans was only included in the twentieth century (Hennock, 2007). In any case, most of these developments onlytook place in the last quarter of the nineteenth century. This is the environment where the savings movement tookoff. With the emphasize on civic engagement in a laissez-faire state, it is likely that the issue of financial inclusion wasalso taken up by private initiative.

The first savings bank in Saxony opened in 1818 in Königsbrück. It was founded as a charitable organization by acount and a group of merchants. The growth of the number of banks was first slow but accelerated during the 1850sand 60s (see Figure 2 in the appendix). At that time, scholarly interest in economics and the conditions of workingclasses grew, leading research bodies such as the “Economic Society Leipzig” and the “Agricultural Association forSaxony” to recommend the founding of more savings banks. Moreover, while the banks were first regarded as riskyundertakings, municipalities soon recognized that risks were rather limited and contrarily, that most banks paid outhandsome profits to their owners. While the development was mainly local, savings banks were endorsed by the stategovernment early on. A decree was released in 1822, recommending municipalities to establish savings banks.This was further encouraged through tax exemptions granted to the banks (Braedt, 1912).

A major obstacle to growth, especially during the early years, was the management by volunteers or part-timers. One resultof this were limited opening hours. Banks were often only open a few times per month and during regular businesshours, when most clients were at work themselves. This was also not alleviated opening hours during the weekendwere explicitly allowed, as volunteers had no incentive to increase accessibility. The lack of the profit motive alsoresulted in low efforts to advertise the new service. People tended to be sceptical of banks, as most did not haveaccess to financial institutions before. Measures to spread the habit were effective, for example the sale of “savingsstamps”, but were often not tried. Another factor that precluded people from opening an account was theconsiderable distance they would have had to travel. However, this problem was greatly reduced after the 1870s,when a bank branch could be found in even most small, rural towns. Accessibility and marketing were therefore themajor obstacle in the growth of the banks.

The regulation of savings banks first fell under areas of the law such as corporate and municipal law as well as regulationson charities. Over time, decrees, provisions and principles were released to guide how they were to be established andmanaged.

The statutes of the banks prescribed in detail essential elements of their business, for example the maximum accountbalances, notice periods and maximum amounts for withdrawals, rate and calculation method of payable interest, andeligible investment classes. These rules were all geared to keeping the total amount of assets manageable andprecluding wealthier individuals from using the banks. A recurring theme in the reports of the Statistical Bureau is theproblem of having the data reported accurately and in due time from the individual banks (e.g. Stat. Bureau, 1869).

As many were still run by volunteers, managers lacked accounting skills. While this was a menace for the statisticians,it must have meant a real obstacle to the development of banks. Although reports about mismanagement and bankfailures are very rare, the efficiency of the banks surely suffered from this lack of professionalism (Stat. Bureau, 1860).In the 1860s, incentive problems in the running of the banks were brought to the attention of the government.As municipalities gained all the surpluses generated by the banks, they had no incentives to increase interest paymentsor increase the reserve fund, which served as a safety cushion. This was a problem because municipal officials oftenconstituted the majorities on banks management and oversight boards. To alleviate this problem, closer attention wasto be paid to compliance with maximum deposit and reserve fund provisions (Braedt, 1912).

The business model of the savings banks was under constant scrutiny, swaying between the status of a charity and afull-bodied financial institution. Already during the late 1850s and early 60s, savings banks demanded more freedomsto act like other commercial banks, for example by abolishing maximum account balances. The margin betweeninterest income, interest payable and administrative costs was quite low (for details on interest paid, see Table 1 inthe appendix). However, the municipalities that guaranteed all deposits vetoed against proposed changes to increaseprofitability. Nevertheless, the banks achieved increases in efficiency themselves and reduced administrative costs from0.4% of deposits outstanding to 0.17% by the twentieth century. The banks imposed more restrictions on themselvesto increase liquidity. Newly founded banks often operated with longer notice periods for withdrawals to safeguardfrom bank runs. To the same end, interest rates were made more flexible. Maintaining liquidity was the major concernof the banks. As they did not regularly borrow, they were anxious to maintain a positive balance of deposits overwithdrawals. The banks were keen on expanding their business, which would have also allowed higher profit margins.However, in 1878, the Ministry of the Interior resolved that the banks were to remain charitable organizationsoperating on a non-profit basis (Stat. Bureau, 1878).

Savings banks were restricted in the way they could invest the savings they collected, and most assets were spreadon sovereign bonds and mortgages. In 1861, about 71% of total savings banks' deposits outstanding were investedin mortgages and only 16% in government bonds. These facts are contrary to most of the literature, which stressesthe importance of government bonds (e.g. Guinnane, 2002), but may also indicate that savings banks in Saxonyinvested slightly different from those in other parts of Germany. The housing boom of the 1860s and 70s in theindustrializing cities was a temptation not only for savings banks, but also insurance companies and newly established“mortgage banks” (Hypothekenbanken). However, real estate markets were also prone to the development ofbubbles and market crashes. The worst of these happened in 1873, where the real estate markets in Vienna and Berlincollapsed, and ushered in a worldwide recession (Nützenadel, 2011) As municipalities became aware of these risksand savings banks themselves became anxious about liquidity, the importance of government bonds tended toincrease over time (Stat. Bureau, 1864).

How and by whom the banks were actually used varied across regions. While banks in rural areas were usually smaller,account balances were on average higher than in urban, industrial areas, which indicates a different clientele.Additionally, more frequent deposits and withdrawals indicate that savings banks were used more like any other bankin rural areas, rather than to save for the long run. This was also because universal banks tended to have branchesonly in larger towns, leaving savings banks as the only financial institution available in the country side. In urban areas,it was harder for banks to be profitable, as total costs were mainly driven by the number of accounts, and not totaldeposits. A large number of small accounts was therefore driving up costs. Deposits kept growing across this periodin all counties (see Figure 3 in the appendix on the development of total deposits outstanding by county). While inabsolute terms savings banks were least active in Bautzen, deposits per capita were in fact quite substantial. In themore industrial county of Zwickau, average deposits per capita were much lower than in the other counties.

Naturally, savings banks were affected by political events. The graph in Figure 4 in the appendix shows some dips inthe otherwise steadily increasing total deposits made at banks in each year. When in 1858, Saxony felt the effects ofthe war in Italy and was engaged in the Austro-Prussian war in 1868, deposits fell and withdrawals increased. At thisearly stage, trust in the savings banks was relatively low, and people rather kept their savings at home at times ofheightened uncertainty (Stat. Bureau, 1861). By the time of the Franco-Prussian war of 1870-71, trust in the bankshad increased to such an extent that deposits even increased as people realised they had to take precautions foruncertainties in the future and that their savings would be safer at the bank (Stat. Bureau, 1874).

11A STUDY AWARDED WITH THE 2016 SAVINGS AND RETAIL BANKING HISTORY AWARD


In the mid-1870s, a worldwide recession hit, which explains the decrease in deposits. Overall, total deposits alwaysexceeded withdrawals, confirming the high levels of liquidity the banks enjoyed on average. Still, individual bankswere forced to incur debt during some years (Böhmert, 1878).

Having witnessed a long era of undisrupted growth, the savings banks and their effectiveness in combating povertycame again under heightened scrutiny in the 1880s. As a response to a speech given by the Emperor in 1880 in whichhe highlighted the social problems created by industrialization, new attention was given to questions of social welfare.A public discussion ensued whether a system of postal savings banks should be established along the lines of theBritish model to replace the savings banks (Braedt, 1912). This would increase the number of branches and alsoincrease their opening hours. Curiously, the statistical office argued against this proposition with the argument thatadministrative costs would increase under this system (Stat. Bureau, 1895). In Britain, quite the opposite was observed(Fishlow, 1961). A more convincing argument is that with the savings stamp system, savings banks had alreadysubstantially increased the options for customers to take their savings to the bank. The system operated as follows:People could buy stamps for as low as 5 Pfennig (0.05 Mark, 0.017 Thaler) and have them accounted towards theirsavings account. Stamps could be bought in all kinds of places such as train stations outside of bank branches.This was to lower the incidence of temptations to spend savings rather than depositing them at the bank. As the StatisticalJournal noted in 1895, “Unfortunately, it is not known well at all that the art of saving preferably consists of avoidingsmall expenditures where possible." Savings stamps were supposed to help avoid these “small expenditures".

The nineteenth century witnessed profound and permanent changes to society and the economy. New industriesdeveloped, industrial as well as public investment increased, people moved into cities, demographics and the social fabricchanged. This created new opportunities, but also risks. The state was finding its new role in a more politically activepopulation. Still, it was rather limited in both its capacity to act as well as the level of state interference that wasregarded as desirable. The savings banks developed as the first financial institution open to almost anybody, providingaccess to financial intermediation as well as a device for capital mobilization and accumulation. The following sectionsinvestigate how the banks were keeping up with these ambitious goals, and what wider economic effects resulted.

4. DATA: THE STATISTICAL JOURNALSOF SAXONY

By increasing the aggregate savings rate, savings banks had the power to increase capital accumulation and therebycontribute to economic growth. Furthermore, they could have contributed to consumption smoothing and loweredtransaction costs. However, a precondition for these effects is that they actually generated additional savings. As itwas their goal to target people previously excluded from financial intermediation, they were in a unique position tohave far reaching effects. These topics will be investigated with the help of a newly assembled dataset that is brieflyintroduced in the following paragraphs.

The Statistical Bureau of Saxony regularly published tables with statistics on the development of the savings banks.I assembled a dataset including the town and county where the bank is based, number of deposits and withdrawalsmade during a given year, the total amounts deposited and withdrawn and total deposits outstanding.2 These data areaugmented with population figures and data on the number of residentially-used houses, obtained from the census.

Working with historical data has certain limitations. The biggest concern is that banks were managed by laymen withlimited knowledge of accounting, especially during the early years. It is therefore likely that reporting of the statisticswas not always accurate. Before the currency reform in 1873, a wide range of different coins was used throughoutSaxony. Hence, a "Thaler" might not have had the same value in all places. For ease of presentation, all values in thispaper are expressed in Thaler. After 1873, monetary values are therefore transformed at a fixed exchange rate of 3Mark = 1 Thaler.

Furthermore, a note on the selection of towns is warranted. For most savings banks, it was easy to find a towncorresponding to them in the census data. This dataset of towns and savings banks is augmented with towns thatnever had a savings banks, serving as a control group.

2 All data as well as documentation on the manipulation and data analysis can be found online at www.savingsbanksproject.wordpress.com.

However, some of the savings banks were located in places not listed as towns, but as rural communities or villages(plattes Land). Unfortunately, data on villages is not available for each year. Furthermore, the villages are so numerousand often so small that including them in the dataset would have meant enormous effort with questionable reward.Therefore, census data is only included for those villages that had a savings bank, which does not significantly distortthe overall picture. On the other extreme, the large cities of Annaberg, Dresden, Leipzig and Pirna each had multiplesavings banks. To match them with the census data, individual savings banks were summed up and treated asbranches of one large savings bank per town.

The census was conducted every three years before 1875 and every five years thereafter. For the years in-between,the number of people and houses is linearly interpolated. After 1870, the census was conducted under the auspicesof the federal government, which brought about minor changes in methodology. Another important factor is thatpeople were counted as residents of the place where they had spent the night before (Stat. Bureau, 1876). This couldpotentially exaggerate the population figures for the larger towns, as these are most likely to have many hotel guestsand temporary visitors.

As an additional control variable to account for the business cycle, real GDP per capita from the Maddison project isincluded (Bolt & van Zanden, 2014). Unfortunately, this variable is not available for Saxony only. However, as Saxonywas well integrated with the rest of Germany through close trade ties, business cycles should have been roughlysynchronized. For most of the analyses conducted, the GDP data were a good fit. However, workers' wages in Leipzigassembled by Allen (2001) are used for additional robustness checks. Using this data instead of GDP per capita doesnot significantly affect the results. Allen (2001) also provides a consumer price index, which was used to deflate allmonetary values in the dataset. Being constructed only for Leipzig, this bears the risk that the index does notaccurately reflect price differences across the state. However, being a small open economy, it can safely be assumedthat the internal market was sufficiently well integrated to allow such comparisons.

The time series start in 1857 and end in 1893 (A summary of the variables is given in Table 2 in the appendix). There isa gap for the years between 1878 and 1888, for which no bank data are available. In total, the dataset comprises241 unique banks. In 1857, only 98 towns in the sample had a savings bank. By 1893, only 16 were left that did not.Towns without savings banks were on average much smaller and more likely to be in rural areas, with an averagepopulation of 3,382 as against 7,849. From 1857 to 1893, the average size of savings banks as measured by totaldeposits outstanding grew substantially from 80,270 to 283,175 Thaler. However, the average size of deposits madefell from 14.03 to 9.65 Thaler. The dataset covers approximately half the total population and the share is fairlyconstant over time (see Figure 5 in the appendix). Over the course of the nineteenth century, Saxony's population wasgrowing steeply. This growth occurred mainly in urban areas. In the beginning of the century, of the people capturedin the dataset, about twice as many lived in urban as opposed to rural areas, and this gap was growing over time.

Despite certain limitations, the dataset covers enough savings banks to account for regional and economic differencesacross towns. While excluding the more rural areas of Saxony, they give a good overview of the geographical marketsthe savings banks operated in.

5. ECONOMIC EFFECTS OF SAVINGS BANKSDecisions to save and consume are made by individuals. It was the goal of the savings banks to help people makemore optimal decisions by giving them an attractive way to store their funds and by fostering thrift in general.This was supposed to be achieved by explicitly targeting low-income households. The question is whether the savingsbanks were actually used by those low-income households that were previously excluded from financialintermediation, and what form of saving they engaged in: life-cycle or precautionary saving. These questions are alsoimportant on a macroeconomic level, as aggregate savings only increase when more people start to save, not whenassets are shifted between institutions, and when assets are saved and accumulated in the long run, not quicklywithdrawn again.



5.1 Targeting Low-Income Households

The problem with financial inclusion, today as in the nineteenth century, is that managing very small savings accountsdoes rarely pay off for banks. For that reason, they charge management fees, or demand minimum deposits oraccount balances. These practices excluded large parts of Saxony's population from accessing bank accounts, a gapthat was only filled by the savings banks. On the contrary, to manifest their status as institutions for the poor, and toavoid low-income households to be pushed out by wealthier individuals, most banks maintained maximum accountbalances and accepted deposits only up to a certain amount (Pohl, 1982). Another strategy to combat poverty wasby targeting the youngest members of society. Saxony was unusual within Germany in having an exceptionally highlevel of school and youth savings banks to establish the habit of saving early on (Stat. Bureau, 1883).

While it was easy to identify the groups who ought to be targeted, it turned out to be more difficult to actually spreadthe habit of saving and to incentivize people to use the savings banks. This was achieved by making it attractive, easyand convenient to have a savings account. All account balances were guaranteed, and interest rates on savingsaccounts were competitive. Savings banks wanted to differentiate themselves from other financial institutionscatering to the poor, for example pawnbrokers who would charge high interest rates and often only exacerbatedpoverty. On the contrary, savings banks hoped to encourage thrift and to enable people to care for themselveswithout depending on the welfare state (Pohl, 1982). Hence, they had a similar mission as the poor associationswhose main task was to prevent poverty and to encourage thrift and diligence. Savings banks did not give out loansto their depositors, but only collected their savings. As they were often peoples' first encounter with financialinstitutions, the universal deposit guarantee was vital to building up trust in them (Guinnane, 2002).

The exclusive targeting of low-income households proved to be difficult. According to the Statistical Journals,maximum account balances were often avoided by opening multiple accounts, despite the fact that only one savingsaccount per person was allowed. This development was met with scepticism from the government, which insistedthat the savings banks should exclusively cater their original target group. The reasons why the government wantedto keep savings banks small are obvious: deposits were guaranteed fully, and a large savings bank in crisis could puta municipality's finances into jeopardy. As charitable organizations, they enjoyed tax benefits, which wealthierindividuals were not supposed to benefit from. However, given the technology available at the time, the attractivenessof savings accounts, as well as the low incentives for bank managers and municipalities to actively try to keep the richout, it was inevitable that savings banks more and more resembled other commercial banks (Stat. Bureau, 1874).However, the economists at the Statistical Bureau did not see this development as problematic. First, it was unlikelythat crowding out of smaller by larger savers took place. Second, having some accounts with large balances was vitalfor banks. Administrative costs were largely driven by the total number of accounts, whereas profits depended ontotal deposits outstanding. Therefore, large accounts increased profitability and made it possible to actually provideservices to those unable to pay for them. Lastly, the popularity of the savings banks across the whole society can beseen as a sign of the attractiveness of the business model and the trust afforded to them (Stat. Bureau, 1860 & 1874).

Still, the question whether targeting low-income households was successful remains important for two reasons.Did the banks address the problems of poverty prevention? Did they generate additional savings or did they merelydivert funds from other financial institutions? Comparing trends in wages and deposits can help answering thesequestions (see Figure 6 in the appendix). Until the mid-1870s, wages were relatively stable and average deposits madewere about a quarter of yearly wages of a worker. However, after 1875, wages started to increase, while depositsremained on the same level and even fell. A quarter of a year's income seems a lot for a deposit. Reassuringly,Alter et al. (1994) find similar levels for a bank in Philadelphia, which was primarily used by servants and workers.In 1862, the median maximum deposit across banks was 50 Thaler (Stat. Bureau, 1864). This is far higher than theaverage deposits observed. Again, this does not support the concern that wealthier individuals used multiple accountsto circumvent maximum deposits.

During the early years of the savings banks, there were less worries that they lost track of their target group. These concernsonly grew over time. If richer individuals used savings banks more, the average amount deposited would have goneup. This was not the case. When controlling for overall income growth, average deposits actually became smaller overtime.3 The possibility that more frequent bank visits to make smaller deposits is driving this trend can also be ruledout. Another objection might be that the decline of average deposits stems from the fact that after 1870 the welfarestate was expanded, so that overall savings behaviour changed. While this might indeed be driving the trends,there is still no evidence that average deposit sizes were rising over time.

3 This finding was derived from multivariate regressions. The results are presented in the appendix, Table 3.

Rather than attracting wealthier individuals over time, savings banks' clients became slightly poorer. This result is atodds with the reports in the Statistical Journals, concerned that the contrary was the case. One reason might be thatthe statisticians were only able to observe nominal amounts, which were rising. Neither did they have a measure ofGDP. Assuming a constant propensity to save, one would expect that deposits would increase at the same rate asincome. According to results presented here, this was not the case. There were probably individual cases of wealthierpeople using the banks, but on average, savings banks were indeed successful in targeting low-income households.

5.2 Encouraging Saving for the Long Run

Regarding the use of the banks, it was envisioned by their founders that over a long span of time, people shoulddeposit small amounts until they would withdraw their savings for a large expense or investment. Hence, depositsshould be frequent and small, and withdrawals infrequent but large. The relation between the two types oftransactions was indeed like this (see Figure 7 in the appendix). However, the gap in frequency and size betweenwithdrawals and deposits grew smaller over time, which indicates that savings accounts were increasingly used likechecking accounts for temporary storage of surplus funds (Stat. Bureau, 1869). Nevertheless, the Statistical Journalalso notes that savings banks facilitated consumption smoothing, as withdrawals grew during economic and politicalcrises, while deposits were higher during boom phases. At times of war the number of savers and total depositsoutstanding grew, as people became more cautious and worried about the future (Stat. Bureau, 1861, 1869, 1874).To investigate this issue further, the following section sheds light on the pattern of savings over the business cycle.Further, it tries to gauge the amount of time savings were kept in an account.

Relating GDP growth to growth in savings account deposits shows that people tended to engage in precautionarysavings.4 When GDP was growing, account balances tended to go up as well. However, this relationship becameweaker over time, suggesting that people turned more to life-cycle saving, which is less affected by short term fluctuations.Interestingly, people behaved differently during recessions. At times of negative GDP growth, they decreased theirsavings less than would have been expected. These findings indicate that people used the banks with considerationto medium- to long-term savings goals.

The duration of savings can also be looked at from another angle. If the banks were used to save for the long run,there should be a considerable gap in timing between deposits and withdrawals. Unfortunately, data for movementsof balances on the individual account level are not available. Still, using common shocks to deposits made, patternsin the relation between deposits and withdrawals become observable. If people engaged in short-term saving, anincrease in deposits during one year should be followed by a decrease shortly after. On the other hand, if people savedfor the long-run, there should be no reaction in withdrawals, or at least only after a longer time horizon.

Statistical techniques are able to estimate how withdrawals would react to a jump in deposits.5 Using thisapproximation of the time horizon for savings, it can be concluded that people did not tend to save for the long run.Following an increase in deposits, the data show an immediate increase of withdrawals as well. The immediate jumpis followed by further slight increases until withdrawals fall again after about four years. This indicates that the timelag between deposits and withdrawals was not particularly long, as the steepest increase occurs already after oneyear. Hence, people seem to have used the savings banks preferably to temporarily store their money.

This section evaluated the use of savings banks on the microeconomic level. Contrary to the frequently expressedconcerns in the Statistical Journal, the income of the average savings bank user probably did not increase over theobservation period. Average deposits made decreased when controlling for GDP per capita growth. However, the bankswere less likely to have been used to save for the long run. Rather, they were used to even out spending over thebusiness cycle over a horizon of a few years.

5.3 Stimulate Investment and Economic Growth

On the macroeconomic level, the savings banks acted to mobilize savings of groups that were previously largelyexcluded from financial markets. As has been shown above, deposits made were rather small throughout, indicatingthat they actually represented an increase in savings and not just the diversion of funds from other institutions. As thenumber of these small amounts grew quickly, the total assets in savings banks grew to a significant size as well (seeFigure 11).


4 The following conclusions are drawn from multivariate regressions. Detailed results can be found in Table 4 in the appendix.5 These conclusions are drawn from panel vector autoregression models. The corresponding impulse response functions are given in the appendix, Figures 8-10.

For a discussion of the method, see Abrigo & Love (2015), and Love & Zicchino (2006).


While there were no exact rules on how savings banks had to invest their assets, every bank had their individual safetyrequirements and the municipalities were tasked with making sure that excessive risk taking was avoided (Stat.Bureau, 1895). In general, savings banks did not borrow, i.e. they did not use leverage as modern banks do.Furthermore, they were required to only invest in the safest assets, while maintaining high liquidity and paying interestrates on all assets of about 3%. No wonder, bank managers were constantly complaining that they needed morefreedom in the conduct of their business to at least fulfil some of these requirements. The safety and liquidity aspectswere especially important. As deposits were guaranteed, municipalities kept a close eye on the solvency of banks.Short notice periods required banks to always have enough cash at hand to pay out depositors. The solution was toinvest more in sovereign bonds. Those, however, only paid low interest rates, which is why the Statistical Bureauadvocated more short-term lending to industry. Yet, this idea was only slowly taken up (Stat. Bureau, 1874).

What banks invested in also depended on their location. For example, banks around Leipzig used the universal bankslocated in the merchant city to invest their assets with them. In Bautzen, a regional bank (Landesbank) was establishedearly on, which pooled savings banks' assets and invested them in mortgages (Stat. Bureau, 1878). In any case,savings banks emerged as important financial institutions for their local economies, often providing the majority ofmortgages. Furthermore, municipalities depended on the profits which were disbursed to them. Therefore, thesignificance of the savings banks for the development of regional economies is investigated in the following,by estimating their effect on the construction of residential houses.

By mobilizing capital, savings banks could have been an important factor for economic development. Unfortunately,for the given period, there is no direct measure of economic growth on a regional basis available. Therefore, housingconstruction is used as a proxy for economic development. This measure is appropriate as overcrowding was a seriousproblem during the Industrial Revolution and building more houses therefore increased welfare. Furthermore, savingsbanks were major providers of mortgages, making it most likely that they had an effect through this channel.

The data show that towns with a savings bank had on average 17.5 houses more than others, after controlling forpopulation.6 Estimating the effect of deposits outstanding is trickier. First, deposits outstanding are potentiallyendogenous to the number of houses in the town. For unobservable reasons, some towns are richer than others,which reflects both on housing conditions as well as the level of savings bank deposits. Second, the number of housesin one year depends strongly on the number of houses in the previous years, as houses are only rarely demolishedand only a few are added each year. A solution to this dilemma is to control for idiosyncratic characteristics of differenttowns, as well as past levels of the housing stock. Making these adjustments, it can be cautiously concluded thatdeposits outstanding are positively associated with an increase in construction activity.

Further testing reveals that towns with and without savings banks should not be grouped together for this kind ofanalysis.7 This result is interesting, as it shows that not only the level of savings was important, but that only thepresence of a savings bank made a difference. It could mean that savings banks affected the economy not only bymobilizing capital, but also by facilitating exchange or decreasing transaction costs in other ways. Indeed, when townswithout savings banks are excluded from the sample, there is nearly no doubt that an increase of deposits isassociated with an increase in the number of houses, again controlling for idiosyncratic town characteristics andpast stock of houses. For every thousand Thaler more in deposits outstanding, a town is estimated to have almost0.9 houses more, after controlling for population size. In 1893, the average bank had total deposits outstanding of273,452 Thaler, and is thus estimated to have about 24 houses more than an equivalent town without a savings bank.

By mobilizing capital and helping people to smooth consumption over the business cycle, savings banks had a positiveimpact on economic growth. Unfortunately, it is not possible to distinguish the channels through which savings banksaffected economic growth, either by facilitating capital accumulation, providing financing for house builders andbusinesses, or all of these. Nevertheless, the results give some evidence for the hypothesis that deeper financialintermediation, even for the poorest members of society fosters economic development.

6 These results are derived from applying different regression techniques. Detailed results can be found in the appendix, Tables 5-6.7 This was formally tested with a Vuong-test. Please find test results and a discussion of the method in Table 7 in the appendix.

6. DISCUSSION: SAXONY'S SAVINGS BANKSIN INTERNATIONAL PERSPECTIVE

This study set out to investigate the effect of savings banks on savings behaviour and economic development ingeneral. The findings are threefold: Savings banks were successful in targeting the poor, they were used to save inthe short to medium term and had a positive effect on economic development. Overall, this is consistent with theexperience of savings banks in other countries at the time.

Savings banks stayed true to their original target group of low-income households. Regression analysis shows thataverage deposits made did not increase over time when controlling for overall economic growth. It can be concludedthat the socio-economic status of savings banks clients did not change over the observation period. As these werelow-income households likely to have been excluded from financial intermediation before, the funds theyaccumulated were likely to constitute an actual increase in the savings rate, not just the diversion of funds from otherinstitutions. This is a similar conclusion as Alter et al. (1994) draw from their study of the Philadelphia saving FundSociety. They find that deposits were usually 10-20% of a male labourers' yearly income, similar to the result obtainedfor Saxony. They are able to observe the occupations of account holders and therefore know that the bank was mainlyused by workers and servants. This diminishes the concern that the overall high level of deposits was due to the factthat the banks were used by wealthier people. Moreover, concerns that the banks were not primarily used by the pooronly grew over the course of the nineteenth century. On the contrary, when controlling for overall GDP per capitagrowth, average deposits actually became smaller over time. The evidence from Britain in this respect is mixed. TheTrustee Savings Banks that dominated the first half of the nineteenth century had difficulties in targeting low-incomehouseholds. This problem was especially large in Ireland, where labourers and servants were only 16% of savers(ÓGráda, 2003). Due to other institutional problems, they were succeeded by Post Office Savings Banks after 1861,which catered to a poorer clientele (Fishlow, 1961). Hence, also this example shows that targeting of low-incomehouseholds was in principle possible.

The banks encouraged mainly precautionary rather than life-cycle saving. Account balances strongly moved with thebusiness cycle, being built up during booms and depleted during downturns. Had people engaged in life-cycle saving,such cyclical swings would not be expected. Furthermore, the time lag between deposits and withdrawals was short,with the largest increase in withdrawals already occurring one year after an increase in deposits. While standardeconomic theory of saving predicts life-cycle saving, precautionary saving is especially likely to occur when there arebarriers to borrowing. This was likely to be the case for the low-income groups that used the banks. Furthermore,most of the development of the public social security safety net only occurred after 1870 or even later. These findingsalso resonate with the findings of Alter et al. (1994). In their sample, most savings accounts were only active for afew years. They find evidence for precautionary savings, and especially among the males also target saving. However,among the female servants, life-cycle saving was widespread. This indicates that savings banks were used differentlyby different groups. Unfortunately, it is not possible to observe individual accounts. This might seriously limit theinterpretation of the results. However, controlling for different counties does not change the results. As countiesdiffered substantially in their industrial profiles, this somewhat controls for differences in usage across social groups.For the average savings bank client in the sample, it seems most likely that they engaged in precautionary saving.

Savings banks had a positive effect on economic activity as measured by the number of houses in a town. Moreover,not only the amounts saved mattered, but also the mere presence of a savings bank, indicated by that fact that thegroups of towns with and without banks should not be pooled. This also explains the somewhat weaker findings inthe sample including only the towns with savings banks, as this does not allow to control for the presence of a bank.The measure of economic development is the building of houses for residential use. However, this also bears the riskthat housing construction is only weakly correlated with overall economic development. Because savings banks onlyrarely engaged in private sector lending, it might be the case that they lowered the efficiency of capital allocation.In Ireland, savings banks were prohibited from lending to the private sector, which contributed to credit shortages(ÓGráda, 2003). If this was also the case in Saxony, an increase in housing construction might stunt economicdevelopment by reducing investment in industry.



Savings banks increased aggregate savings by increasing financial inclusion. However, they probably did not generatelife-cycle savings. For overall economic development, this meant that the aggregate savings rate stayed relatively low,as people frequently depleted their savings. For further research, it would be interesting to see how the developmentand further spread of old age and life insurance affected savings behaviour. To arrive at firmer conclusions, it isnecessary to look at individual account movements to see how banks were used by different individuals. While this isa daunting task for a whole state to undertake, Alter et al. (1994) have shown that looking at only one institutionover time can already deliver meaningful insights. Furthermore, a more detailed measure of economic activity on thelocal level can provide more information in what ways savings banks affected the economy.

7. CONCLUSION

Savings banks were intended as institutions to foster thrift among the poor. While concerns were frequently raisedthat they were used by wealthier individuals, this study shows that this was not the case. Thus, savings banks weresuccessful in increasing financial inclusion. In this capacity, they had the power to increase the aggregate savings rateand thereby contribute to economic growth. Their success in doing so was somewhat limited by the fact that mostsavers only saved for the short term to smooth consumption over the business cycle, rather than to accumulate assetsin the long run. Nevertheless, the data show a positive effect of savings on economic activity as measured by housing.

Savings banks were founded as non-profit organizations to alleviate poverty and help people insure themselves.Owing to their status as charities, it was important to their owners, the municipalities, as well as the state governmentthat participated in the banks' oversight, that savings banks mainly benefited low-income groups. Controlling for GDPper capita growth, and assuming that this reflects income growth across the population, average deposits did notincrease over time. Moreover, the ratio of workers' wages to average deposits actually increased. Thus, it can beconcluded that savings banks were effective in serving their target group. As the focus of the founders was heavilydirected on alleviating poverty, it would be interesting to examine the consumption patterns of the users of thesavings banks to measure any notable improvements. In contemporary studies, microfinance institutions with a similarset-up to the savings banks frequently find a positive effect.

While savings banks were intended to support individuals, they also had important macroeconomic implications.The scholarship on the role of finance during the Industrial Revolution usually focuses on the provision of capital forbusiness. However, much capital lay dormant as it was not accessible for financial markets. Savings banks changedthis situation by mobilizing the funds of a large, previously un-banked social group. However, with their focus onmortgages and sovereign bonds, savings banks also provide a possible source of distortion in capital markets. Furtheranalysis of the interest rates on mortgages extended by savings banks as well as the cost of capital to businesses couldreveal whether and to what extend the restrictive asset allocation practices of the savings banks distorted markets.

The present research makes a contribution to two strands in the literature. On the one hand, it contributes to thescholarship on the role of banking and finance for industrialization in Europe. The focus there is often solely on largeuniversal banks and asset markets, emphasizing the distribution of capital, but not its mobilization. For Germany,there already exists considerable research on credit cooperatives, but savings banks have been neglected. This studysuggests that they played an important role as well by mobilizing savings and making financial products accessible tolarger parts of the population. On the other hand, the example of the savings banks provides a case study of an earlyform of a microfinance institution. The fact that they were enthusiastically embraced by a sizeable proportion ofsociety suggests that a market failure existed. Establishing a branch network of banks entails high fixed costs that maynot be recovered if the margins to be earned by the bank on each individual account are small. Today, many bankingrequirements can be handled on mobile phones rather than in a local branch, making it profitable again to offerfinancial products even to those with modest funds. During the nineteenth century possibilities to solve this dilemmawere limited, but the savings banks nevertheless found ways to extend basic yet important services to their customers.

8. REFERENCES

8.1 Primary sources

• The journals of the Statistical Office (Königliches Sächsisches Statistisches Bureau) are available online from SächsischeLandesbibliothek - Staats- und Universitätsbibliothek Dresden (SLUB) at http://digital.slub-dresden.de/werkansicht/dlf/56643/1/.

• Engel, E. (1857). Beiträge zur Gewerbegeographie und Gewerbestatisktik des Königreichs Sachsen II-III. Zeitschriftdes Statistischen Bureaus des Könglichen Sächsischen Ministeriums des Innern, vol. 3, no. 2-3, pp. 25-68.

• Statistisches Bureau des Königlichen Sächsischen Ministeriums des Inneren (1861). Statistik der Armenhäuser imKönigreich Sachsen. Zeitschrift des Statistischen Bureaus des Könglichen Sächsischen Ministeriums des Innern,vol. 7, no. 6-7, pp. 65-88.

• Volksdichte-Schichtenkarte des Königreiches Sachsen nach der Zählung vom 1. Dezember 1900. Published by:Paul Hermann, Dresden. Retrieved from http://blogs.bodleian.ox.ac.uk/maps/2015/05/28/poulation-maps/.

8.2 Savings banks data (in chronological order)

• Statistisches Bureau des Königlichen Sächsischen Ministeriums des Inneren (1860). Die Sparcassen des KönigreichsSachsen von 1854 bis 1858. Zeitschrift des Statistischen Bureaus des Könglichen Sächsischen Ministeriums desInnern, vol. 6, no. 1-3, pp. 1-32.

• Statistisches Bureau des Königlichen Sächsischen Ministeriums des Inneren (1861). Die Sparcassen des KönigreichsSachsen im Jahre 1859. Zeitschrift des Statistischen Bureaus des Könglichen Sächsischen Ministeriums des Innern,vol. 7, no. 3, pp. 17-32.

• Statistisches Bureau des Königlichen Sächsischen Ministeriums des Inneren (1864). Die Sparkassen des KönigreichsSachsen 1860, 1861 und 1862. Zeitschrift des Statistischen Bureaus des Könglichen Sächsischen Ministeriums desInnern, vol. 10, no. 1-3, pp. 1-40.

• K. Sächsisches Statistisches Bureau (1869). Die Sparkassen des Königreichs Sachsen in den Jahren 1863-1867, I & II.Zeitschrift des K. Sächsischen Statistischen Bureau's, vol. 15, no. 4-7, pp. 37-62 & 69-107.

• K. Sächsisches Statistisches Bureau (1874). Die Sparkassen des Königreichs Sachsen in den Jahren 1868-71, I & II.Zeitschrift des K. Sächsischen Statistischen Bureau's, vol. 20, no. 4-6, pp. 33-104.

• Böhmert, V. (1878). Die Sparkassen des Königreichs Sachsen in den letzten 30 Jahren. Zeitschrift des K.Sächsischen Statistischen Bureau's, vol. 24, no. 3-4, pp. 95-164.

• Böhmert, V. (1883). Das sächsische Sparkassenwesen von 1821-1881. Zeitschrift des K. Sächsischen StatistischenBureau's, vol. 29, no. 1-2, pp. 205-210.

• Wächter, G. (1896). Die Sparkassen des Königreichs Sachsen von 1894-1898. Zeitschrift des K. SächsischenStatistischen Bureau's, vol. 42, no. 3-4, pp. 123-130.

8.3 Census data (in chronological order)

• Statistisches Bureau des Königlichen Sächsischen Ministeriums des Inneren (1859). Die Hauptresultate derVolkszählung im Königreich Sachsen. Zeitschrift des Statistischen Bureaus des Könglichen SächsischenMinisteriums des Innern, vol. 5, no. 4-8, pp. 33-112.

• Statistisches Bureau des Königlichen Sächsischen Ministeriums des Inneren (1862). Die Hauptresultate derVolkszählung im Königreiche Sachsen. Zeitschrift des Statistischen Bureaus des Könglichen SächsischenMinisteriums des Innern, vol. 8, no. 1-2, pp. 1-24.

• Statistisches Bureau des Königlichen Sächsischen Ministeriums des Inneren (1865). Die Hauptresultate derVolkszählung im Kömigreich Sachsen am 3. December 1864. Zeitschrift des Statistischen Bureaus des KönglichenSächsischen Ministeriums des Innern, vol. 11, no. 1-4, pp. 1-64.

• K. Sächsisches Statistisches Bureau (1868). Volkszählung vom 3. December 1867, Zeitschrift des K. SächsischenStatistischen Bureau's, vol. 14, no. 5, pp. 65-86.

• K. Sächsisches Statistisches Bureau (1872). Bericht über die Volkszählung im Königreiche Sachsen am 1. December1871. Zeitschrift des K. Sächsischen Statistischen Bureau's, vol. 18, no. 5-8, pp. 33-100.

• Böhmert, V. (1876). Bericht über die Volkszählung im Königreiche Sachsen am 1. December 1875. Zeitschrift desK. Sächsischen Statistischen Bureau's, vol. 22, no. 1-2, pp. 44-197.

• Böhmert, V. (1881). Die sächsische Volkszählung vom 1. December 1880. Zeitschrift des K. Sächsischen StatistischenBureau's, vol. 27, no. 1-2, pp. 1-182.





• Lommatzsch, G. (1896). Die sächsische Volkszählung vom 2. December 1895. Zeitschrift des K. SächsischenStatistischen Bureau's, vol. 42, no. 3-4, pp. 123-130.

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• Allen, R. C. (2001). The great divergence in European wages and prices from the Middle Ages to the First WorldWar. Explorations in Economic History, vol. 38, no. 4, pp. 411-447.

• Alter, G., Goldin, C., & Rotella, E. (1994). The savings of ordinary Americans: The Philadelphia Saving Fund Societyin the mid-nineteenth century. The Journal of Economic History, vol. 54, no. 4, pp. 735-767.

• Anderson, T. W., & Hsiao, C. (1981). Estimation of dynamic models with error components. Journal of theAmerican Statistical Association, vol. 76, pp. 598-606.

• Andrews, D. W. K., & Lu, B. (2001). Consistent model and moment selection procedures for GMM estimation withapplication to dynamic panel data models. Journal of Econometrics, vol. 101, pp. 123-164.

• Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and anapplication to employment equations. Review of Economic Studies, vol. 58, pp. 277-297.

• Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-componentsmodels. Journal of Econometrics, vol. 68, pp. 29-51.

• Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models.Journal of Econometrics, vol. 87, pp. 115-143.

• Braedt, F. (1912). Das Sparkassenwesen im Königreich Sachsen. Tübingen, Germany: Verlag der Laupp'schenBuchhandlung.

• Bruhn, M., & Love, I. (2009). The economic impact of banking the unbanked: Evidence from Mexico. World BankPolicy Research Working Paper, no. 4981.

• Burgess, R., & Pande, R. (2005). Do rural banks matter? Evidence from the Indian social banking experiment.The American Economic Review, vol. 95, no. 3, pp. 780-795.

• Bolt, J., & van Zanden, J. L. (2014). The Maddison Project: Collaborative research on historical national accounts.The Economic History Review, vol. 67, no.3, pp. 627-651.

• Cameron, A. C., & Trivedi, P. K. (1998). Regression Analysis of Count Data. Cambridge, UK: Cambridge University Press. • Cardow, A., & Wilson, W. R. (2015). The establishment of New Zealand savings banks in colonial times. Mimeo,

available at SSRN 2562618. • Cummins, N. J. (2015). Lecture 11: The Great Depression (1/2). Unpublished lecture notes in EH483 - The Development

and Integration of the World Economy in the 19th and 20th Centuries, London School of Economics. • Deaton, A. (1991). Saving and liquidity constraints. Econometrica, vol. 59, no. 5. • Decker, R. (2012). A note on the Helmert transformation. Retrieved from http://econweb.umd.edu/~decker/

code.html. • Dupas, P., & Robinson, J. (2012). Savings constraints and microenterprise development: Evidence from a field

experiment in Kenya. NBER Working Paper, no. 14693. • Fishlow, A. (1961). The Trustee Savings Banks, 1817-1861. The Journal of Economic History, vol. 21, no. 1, pp.26-40. • Fohlin, C. (1999). Capital mobilisation and utilisation in latecomer economies: Germany and Italy compared.

European Review of Economic History, no. 2, pp. 139-174. • Forberger, R. (1982). Die industrielle Revolution in Sachsen 1800-1861 - Band 1: Die Revolution der

Produktivkräfte in Sachsen 1800-1831. Berlin, German Democratic Republic: Akademie-Verlag. • Garon, S. (2011). Beyond our Means: Why America Spends While the World Saves. Princton, NJ: Princeton

University Press. • Gerschenkron, A. (1962). Economic backwardness in historical perspective. Cambridge, MA: Harvard University

Press. • Guinanne, T. W. (2001). Cooperatives as information machines: German rural credit cooperatives, 1883-1914.

The Journal of Economic History, vol. 61, no. 2, pp. 366-389. • Guinnane, T. W. (2002). Delegated monitors, large and small: Germany's banking system, 1800-1914. Journal of

Economic Literature, vol. 40, no. 1, pp. 73-124. • Hennock, E. P. (2007). The Origin of the Welfare State in England and Germany, 1850-1914. Cambridge, UK:

Cambridge University Press.

• Holtfrerich, C.-L. (1989). The monetary unification process in 19th-century Germany: Relevance and lessons forEurope today. In De Cecco, M., & Giovannini, A. (Eds.), A European Central Bank? Perspectives on MonetaryUnification After Ten Years of the EMS. Cambridge, UK: Cambridge University Press.

• Hubbard, R. G., Skinner, J., & Zeldes, S. P. (1995). Precautionary saving and social insurance. The Journal of PoliticalEconomy, vol. 103, no. 2, pp. 360-399.

• Huberman, M. (2004). Working hours of the world unite? New international evidence of worktime, 1870-1913.The Journal of Economic History, vol. 64, no. 4, pp. 964-1001.

• King, M. A. (1983). The economics of saving (No. w1247). National Bureau of Economic Research. • Levine, R. (1997). Financial development and economic growth: Views and agenda. Journal of Economic

Literature, vol. 35, no. 2, pp. 688-726. • Love, I., & Zicchino, L. (2006). Financial development and dynamic investment behaviour: Evidence from panel VAR.

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APPENDIX

A1. Tables

Table 1: Interest earned and administrative costs

Note: Interest earned and administrative costs in relation to 100 Mark deposits outstanding. Source: Adapted from Braedt (1912), Table 14, p. 116ff.

INTEREST ADMINISTRATIVE INTEREST ADMINISTRATIVEYEAR EARNED COSTS YEAR EARNED COSTS

1849 3.541 0.403 1879

1850 3.667 0.385 1880

1851 3.755 0.35 1881

1852 3.735 0.353 1882

1853 3.703 0.333 1883 0.198

1854 3.773 0.316 1884 0.183

1855 3.882 0.359 1885 0.181

1856 3.787 0.305 1886

1857 3.809 0.309 1887 4.047 0.187

1858 3.932 0.306 1888 4.025 0.181

1859 4.127 0.33 1889 0.17

1860 3.99 0.31 1890 0.168

1861 3.771 0.295 1891 0.167

1862 3.898 0.289 1892 0.168

1863 3.927 0.281 1893 3.952 0.167

1864 3.922 0.258 1894 3.955 0.169

1865 4.143 0.272 1895 3.871 0.166

1866 4.162 0.275 1896

1867 4.293 0.295 1897

1868 4.199 0.266 1898 3.806 0.12

1869 4.277 0.255 1899 3.852 0.159

1870 4.204 0.263 1900 4.033 0.167

1871 4.229 0.239 1901

1872 4.266 0.243 1902 0.168

1873 4.349 0.224 1903 0.162

1874 4.432 0.203 1904 0.162

1875 4.549 0.206 1905 0.161

1876 0.197 1906 0.165

1877 0.21 1907 0.167

1878 1908 0.174

Table 2: Summary statistics

Note: Bank data cover the years 1857 to 1893 with a gap from 1878 to 1888. Census data span 1855 to 1895. In the all years column, the numbers

of towns with and without banks do not sum up to the total because some towns appear in either category during different years. Proportion of urban

communities gives the fraction of towns included in the (sub-)dataset which are listed under urban communities (Stadtgemeinde) as opposed to rural

community (plattes Land). All monetary values are stated in Thaler, the currency of Saxony before 1871. Thaler were broken down into Groschen (1

Thaler=30 Groschen) and Pfennige (1 Groschen=10 Pfennig). Numbers are rounded to the nearest Thaler. For years after 1871, the statistics were

reported in Mark, the new currency. The numbers are converted back into Thaler at the official exchange rate of 1 Thaler = 3 Mark. The nominal values

are converted into real values with the help of a price index constructed for Leipzig by Allen (2001). As an important assumption for statistical inference,

variables have been tested for stationarity. Reassuringly, all series are stationary.

23

VARIABLE ALL YEARS 1857 1893

ALL TOWNS

Number of towns 240.30 240.00 250.00

Number of banks 101.05 100.00 235.00

Average population 7238.85 3978.54 18678.26

Average number of urban communities 0.59 0.59 0.60

Average total savers' deposits 196170.90 78665.01 273452.00

Average value of deposits made 14.99 14.00 9.56

Average value of withdrawals 21.71 23.29 14.75

TOWNS WITH SAVINGS BANK

Number of towns 243.81 240.00 250.00

Number of banks 168.74 100.00 235.00



Average total savers' deposits 196170.90 78665.01 273452.00

Average value of deposits made 14.99 14.00 9.56

Average value of withdrawals 21.71 23.29 14.75

TOWNS WITHOUT SAVINGS BANK

Number of towns 239.61 240.00 250.00

Number of banks 96.51 100.00 235.00



Average total savers' deposits

Average value of deposits made

Average value of withdrawals



Table 3: Average deposits made over time

Note: All models are estimated with random effects. Average deposits made are total amounts deposited divided by number of deposits made during

a given year and at a given savings bank. Bautzen, Dresden and Leipzig are dummy variables, equalling 1 for towns in the respective counties. Zwickau

has been omitted due to multicollinearity. No. deposits refers to the number of deposits made during any given year, independent of the size of the

deposits. The Empire dummy is equal to 1 after 1870. Robust standard errors in parentheses. Significance levels: * p < 0.05, ** p < 0.01, *** p < 0.001.

DEPENDENT VARIABLE: AVERAGE DEPOSITS MADE

(1) (2) (3) (4) (5)

Year -0.12*** -0.39*** -0.34*** -0.39*** -0.03 (0.02) (0.04) (0.05) (0.05) (0.06)

GDP per capita 0.01*** 0.01*** 0.01*** 0.01*** (0.00) (0.00) (0.00) (0.00)

Urban 3.50*** 3.12*** 3.58*** 3.03*** (0.64) (0.63) (0.64) (0.63)

Year*Bautzen -0.08 (0.05)

Year*Dresden -0.03 (0.04)

Year*Leipzig -0.11* (0.05)

Bautzen 140.96 (103.05)

Dresden 55.46 (74.92)

Leipzig 210.45* (97.48)

No. deposits -0.00 -0.00 (0.00) (0.00)

Empire 1008.94*** (120.89)

Empire*year -0.54*** (0.06)

Constant 248.62*** 723.79*** 635.87*** 717.51*** 56.96 (33.77) (81.60) (91.29) (82.02) (114.01)

N 3845.000 3738.000 3738.000 3738.000 3738.000

Table 4: Effect of the business cycle on deposits outstanding

Note: gGDP indicates the growth rate of GDP per capita in Germany. This variable is interacted with the different counties, urban, population, and

recession, indicated by *. Recession is a dummy variable for years with negative GDP growth. (t-1) indicates the one-year lag of a variable. All models

are estimated with random effects. Significance levels: * p<0.05, ** p<0.01, *** p<0.001. Robust standard errors in parentheses.

25

DEPENDENT VARIABLE: CHANGE IN TOTAL DEPOSITS OUTSTANDING

(1) (2) (3) (4) (5)

gGDP 141990.14*** 141124.59*** 67250.09 23686740.93*** 276403.94*** (24119.96) (24290.64) (65138.51) (5777356.67) (70451.26)

Year -444.98*** -425.72*** -436.18*** -204.29*** -380.84*** (58.18) (56.07) (61.47) (54.01) (51.35)

gGDP (t-1) 256357.99*** 262552.65*** 274064.08*** 257447.97*** (38399.76) (39541.19) (42364.64) (38896.33)

gGDP*Bautzen 167452.21 (125687.91)

gGDP*Dresden 58360.86 (55471.47)

gGDP*Leipzig -65967.79 (50262.37)

gGDP*urban 93209.45 (51192.03)

gGDP*population -1.43 (6.97)

Bautzen 545.94 (1888.62)

Dresden -209.36 (1168.04)

Leipzig 3167.09* (1542.50)

Population 0.33*** (0.06)

Urban 347.85 (942.82)

gGDP*year -12581.53*** (3086.77)

gGDP*recession -146470.46 (107690.52)

Recession 6983.86* (3182.57)

Constant 841176.15*** 801203.73*** 817277.03*** 386784.65*** 710963.88*** (109525.33) (105138.73) (115035.06) (101185.47) (96243.98)

N 3449 3449 3352 3449 3449



Table 5: Estimation of number of houses, total sample

Note: Dependent variable is the number of residentially-used houses in each town and year. Deposits outstanding is entered in 1000 Thaler. Columns

1 and 2 are estimated with random effects (RE) and columns 3-6 with two-step system GMM (sysGMM). For the system GMM models, reported

standard errors are Windmeijer-robust (Windmeijer 2005) and deposits outstanding is treated as endogenous. Bank is a dummy variable set to 1 for

towns that had a savings bank during any given year. L. and L2. indicate first and second lags, respectively. abond (1) and (2) give the P-value of the

Arellano-Bond-test for zero autocorrelation in first and second differences, respectively. For a discussions of the technique of GMM estimation, see

Arellano & Bond (1991), Arellano & Bover (1995), Blundell & Bond (1998), and (Roodman, 2009). Significance levels: * p<0.05, ** p<0.01, ***

p<0.001. Robust standard errors in parentheses.

DEPENDENT VARIABLE: NUMBER OF HOUSES

(1) (2) (3) (4) (5) (6)

ESTIMATOR RE RE SYSGMM SYSGMM SYSGMM SYSGMM

Bank 17.522** 18.036* -10.145*** 9.404*** (6.067) (8.901) (1.792) (1.339)

Population 0.027*** 0.027*** 0.005*** 0.006*** 0.005*** 0.006**

(0.001) (0.001) (0.000) (0.000) (0.001) (0.002)

Urban 70.575** 70.730**

(24.511) (24.134)

Depos. Outstanding -0.004 0.015*** 0.003*** 0.009* 0.008

(0.033) (0.001) (0.001) (0.004) (0.004)

Houses (t-1) 0.881*** 1.503*** 0.875*** 1.498***

(0.004) (0.001) (0.022) (0.050)

Houses (t-2) -0.696*** -0.694***

(0.002) (0.030)

Year 0.009** 0.114* -0.728 -0.092

(0.003) (0.053) (0.731) (1.313)

Constant 187.571*** 187.326*** 0.000 -175.317 1385.832 215.842

(18.487) (18.123) (.) (99.175) (1366.341) (2468.184)

N 7040 7040 6805 6570 6805 6570

No. of instruments 927 925 570 568

abond (1) 0.041 0.265 0.041

abond (2) 0.054 0.56 0.057

Table 6: Estimation of number of houses, towns with banks

Note: Dependent variable is the number of residentially-used houses in each town and year. Deposits outstanding is entered in 1000 Thaler. L. and L2.

indicate the first and second lag, respectively. In columns 1 to 2, estimation is with random effects. Columns 3 to 6 are estimated with two-step system

GMM and reported standard errors are Windmeijer-robust. In columns 3 to 5, deposits outstanding is treated as endogenous (end), whereas it is treated

as predetermined (pre) in column 6. abond (1) and (2) give the P-value of the Arellano-Bond-test for zero autocorrelation in first and second differences,

respectively. Significance levels: * p<0.05, ** p<0.01, *** p<0.001. Robust standard errors in parentheses.

Table 7: ZINB regression with Vuong-test

Note: Zero-inflated negative binomial regression for count data. Population and urban are set as the inflating variables, i.e. the variables that determine

whether the dependent variables, deposits outstanding is equal to zero. The Vuong test statistic signals whether the model is better estimated in a

ZINB (high positive values) or a negative binomial model (high negative values). The z-statistic follows a standard normal distribution and the reported

value corresponds with a P-value of 0.0. Significance levels: * p<0.05, ** p<0.01, *** p<0.001. Robust standard errors in parentheses.

27

DEPENDENT VARIABLE: DEPOSITS OUTSTANDING

Houses 0.001*** Constant 1.173*** (0.000) (0.056)

Population -0.000*** ln(alpha) 0.326 (0.000) (0.027)

Urban 1.067*** alpha 1.385 (0.044) (0.037)

Constant 3.662*** Constant 0.326*** (0.042) (0.027)

inflate Vuong 18.915

Population -0.000*** N 7040 (0.000)

Urban -1.081*** (0.056)

DEPENDENT VARIABLE: NUMBER OF HOUSES

(1) (2) (3) (4) (5)

ESTIMATOR RE SYSGMM SYSGMM SYSGMM SYSGMM

END END END PRE

Depos. Outstanding 0.022 0.015 0.063 0.089* 0.056** (0.139) (0.011) (0.040) (0.040) (0.020)

Population 0.026*** 0.006*** 0.005*** 0.005*** 0.005*** (0.003) (0.001) (0.002) (0.001) (0.001)

Year 1.028 -1.040** -1.513 -2.150 -1.280 (1.095) (0.376) (1.817) (1.378) (0.676)

Houses (t-1) 0.843*** 1.463*** 1.458*** 1.466*** (0.040) (0.057) (0.051) (0.039)

Houses (t-2) -0.685*** -0.687*** -0.685*** (0.039) (0.007) (0.012)

Urban -77.781 (70.083)

Constant -1668.893 1984.845** 2892.128 4143.683 2455.577 (2051.034) (709.301) (3413.707) (2630.793) (1270.591)

N 3737 3736 3735 3735 3735

No. of instruments 489 488 488 514

abond (1) 0.401 0.067 0.066 0.067

abond (2) 0.633 0.113 0.109 0.112



A2. Figures

Figure 1: Population density, Saxony, 1900

Note: The map shows the population density of Saxony obtained from the census in 1900. Red areas have the highest, green the lowest densities, as

indicated on the scale in the lower-right corner. The dotted borders indicate the four counties. The inlets on the middle-left and bottom-right show

details of the areas around Leipzig and Dresden, respectively. Courtesy of Bodleian Map Room, Bodleian Library, University of Oxford.

Figure 2: Number of savings banks in Saxony

Note: The savings banks in the large towns of Annaberg, Dresden, Leipzig and Pirna are summarized as one. In 1893, Annaberg, Dresden and Pirna

had two, Leipzig seven independent savings banks.

250

200

150

100

50

0

1855

1857

1859

1861

1863

1865

1867

1869

1871

1873

1875

1877

1879

1881

1883

1885

1887

1889

1891

1893

1895

Num

ber

of b

anks

Year

Figure 3: Average deposits outstanding per capita

Note: These figures are affected by the currency reform in 1873. From 1873, reporting was in Mark, which is converted into Thaler at an exchange

rate of 3 Mark/Thaler. They are adjusted for changes in the consumer price index.

Figure 4: Total deposits and withdrawals

Note: Deposits and withdrawals refer to the sum of money deposited at or withdrawn from each bank, summed up across all banks for each year.

Adjust for changes in consumer price index and currency reform in 1873.

29

140

120

100

80

60

40

20

0

1855

1857

1859

1861

1863

1865

1867

1869

1871

1873

1875

1877

1879

1881

1883

1885

1887

1889

1891

1893

1895

Thal

er

Year

n Bautzen n Dresden n Leipzig n Zwickau

50

40

30

20

10

0

1855

1857

1859

1861

1863

1865

1867

1869

1871

1873

1875

1877

1879

1881

1883

1885

1887

1889

1891

1893

1895

Mill

ion

Thal

er

Year

n Deposits n Withdrawals



Figure 5: Total population vs. sample

Figure 6: Yearly wages of workers in Leipzig and average deposits made

Note: Wages reported by Allen (2001) in grams of silver per day and convert into Thaler at a price of 16.67 Thaler per gram of silver in 1857

(Holtfrerich).Yearly wages are calculated as daily wage*300, corresponding to average days worked per year in Germany in 1870 (Huberman, 2004).

Average deposits made are total amount of deposits divided by number of deposits made, averaged across banks by county.

4,0

3,5

3,0

2,5

2,0

1,5

1,0

0,5

0,0

1855

1857

1859

1861

1863

1865

1867

1869

1871

1873

1875

1877

1879

1881

1883

1885

1887

1889

1891

1893

1895

Popu

latio

n in

mill

ions

Year

n Total population of Saxony n In dataset

300

250

200

150

100

50

0

1855

1857

1859

1861

1863

1865

1867

1869

1871

1873

1875

1877

1879

1881

1883

1885

1887

1889

1891

1893

1895

Thal

er

Year

n Yearly wage n Bautzen n Dresden n Leipzig n Zwickau

Figure 7: Size of average deposits and withdrawals made across all savings banks

Note: Sum of amounts deposited and withdrawn in a given year, divided by the number of deposits and withdrawals made, respectively. Values in Mark

are converted into Thaler at an exchange rate of 3:1 after 1873. Adjusted for inflation with consumer price index for Leipzig (Allen, 2001).

Figure 8: Impulse response functions from panel VAR model, whole sample

Note: Each panel shows the reaction to a one standard deviation shock in the first variable in the caption by the second variable. Estimated with fourlags and population as exogenous variable.

31

30

25

20

15

10

5

0

1855

1857

1859

1861

1863

1865

1867

1869

1871

1873

1875

1877

1879

1881

1883

1885

1887

1889

1891

1893

1895

Thal

er

Year

n Average deposits n Average withdrawals

20.000

10.000

0

-10.000

-20.000

Step Step

n 95% CI n Orthogonalized IRF Impulse : response

Withdrawals: Withdrawals Withdrawals: Deposits

0 5 10 0 5 10

30.000

20.000

10.000

0

-10.000

-20.000

Deposits: Withdrawals Deposits: Deposits

0 5 10 0 5 10



Figure 9: Impulse response functions from panel VAR model, pre 1878 sample

Note: Each panel shows the reaction to a one standard deviation shock in the first variable in the caption by the second variable. Estimated with one

lag and population as exogenous variable.

40.000

20.000

0

-20.000

-40.000

Step Step



0 5 10 0 5 10

60.000

40.000

20.000

0

-20.000

-40.000


0 5 10 0 5 10

Figure 10: Impulse response functions from panel VAR model, post 1887 sample

Note: Each panel shows the reaction to a one standard deviation shock in the first variable in the caption by the second variable. Estimated with two

lags and population as exogenous variable.

33

10.000

5.000

0

-5.000

-10.000

Step Step



0 5 10 0 5 10

20.000

10.000

5.000

0

-5.000

-10.000


0 5 10 0 5 10



Figure 11: Total deposits outstanding across all savings banks

Note: Sum of deposits outstanding of all savings banks in sample. Values in Mark are converted into Thaler at an exchange rate of 3:1 after 1873.

Adjusted for inflation with consumer price index for Leipzig (Allen, 2001).

80

70

60

50

40

30

20

10

0

1855

1857

1859

1861

1863

1865

1867

1869

1871

1873

1875

1877

1879

1881

1883

1885

1887

1889

1891

1893

1895

Mill

ion

Thal

er

Year

WSBI - ESBGRue Marie-Thérèse, 11 n B-1000 Brussels n Tel: +32 2 211 11 11 n Fax: +32 2 211 11 [email protected] n www.wsbi-esbg.org

Published by WSBI/ESBG. © November 2016

poverty relief and financial inclusion: savings banks … · 2016-12-09 · chris de noose wsbi and...

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