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The Institutional Foundations of Personal Finance: Innovation in U.S. Savings Banks, 1880s–1920s

  • R. Daniel Wadhwani

Abstract

The system of personal finance that developed in the United States was more fragmented than comparative arrangements in most industrializing countries, where savings banks had become large, diversified financial institutions. The federalist political structure of the U.S., combined with lobbying by existing intermediaries, inhibited the establishment of a centralized public provider of financial services for households such as emerged elsewhere. Moreover, the United States did not develop strong, diversified savings institutions at the local level, due in part to regulations that stifled innovation by savings banks and in part to the risk-averse organizational culture of the banks themselves. These factors enabled the proliferation of specialized intermediaries that aggressively marketed new financial services to households and facilitated the growth of new patterns of financial behavior among ordinary Americans.

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2 Krooss, Herman and Blyn, Martin, A History of Financial Intermediaries (New York, 1971), 91175; Goldsmith, Raymond, Study of Saving in the United States, vol. 1 (Princeton, 1956), Table T-8, 359–61; Olney, Martha, Buy Now, Pay Later: Advertising, Credit, and Consumer Durables in the 1920s (Chapel Hill, 1991), 656.

3 Calder, Lendol, Financing the American Dream: A Cultural History of Consumer Credit (Princeton, 1999); Tucker, David, The Decline of Thrift in America: Our Cultural Shift from Saving to Spending (New York, 1990); Ott, Julia, “‘The Free and Open People's Market’: Political Ideology and Retail Brokerage at the New York Stock Exchange, 1913–1933,” Journal of American History 96 (2009): 4471; Hochfelder, David, “‘Where the Common People Could Speculate’: The Ticker, Bucket Shops, and the Origins of Popular Participation in Financial Markets, 1880–1920,” Journal of American History 93 (Sept. 2006): 335–58.

4 Maddison, Angus, “A Long-run Perspective on Saving,” Scandinavian Journal of Economics 94 (June 1992): 181–96.

5 Sass, Steven, The Promise of Private Pensions (Cambridge, U.K., 1997); Olney, Buy Now, Pay Later; Klein, Jennifer, For All These Rights: Business, Labor and the Shaping of America's Public-Private Welfare State (Princeton, 2003); Easterly, Michael, “Your Job is Your Credit: Creating a Market for Loans to Salaried Employees in New York City,” Enterprise and Society 10 (2009): 651–60.

6 While the structure and competitive dynamics of personal finance have received little attention, scholars have devoted considerable attention to the structure of commercial banking and enterprise finance. For instance, see White, Eugene, Regulation and Reform of the American Banking System, 1900–1929 (Princeton, 1983); Calomiris, Charles, United States Bank Deregulation in Historical Perspective (New York, 2000).

7 Horne, Oliver, A History of Savings Banks (London, 1947); Mura, Jürgen, ed., History of European Savings Banks, trans. Jelbert, Margaret (Stuttgart, 1996); Moss, Michael and Russell, Iain, An Invaluable Treasure: A History of the TSB (London, 1994); Ross, Duncan, “‘Penny Banks’ in Glasgow, 1850–1914,” Financial History Review 9 (2002): 2139; Olmstead, Alan, New York Savings Banks in the Antebellum Years, 1819–1861 (Chapel Hill, N.C., 1976); Davis, Lance and Payne, Peter, The Savings Bank of Baltimore, 1818–1866 (Baltimore, 1956).

8 Wright, Robert, Wealth of Nations Rediscovered (New York, 2002); Sylla, Richard, “Financial Systems and Economic Modernization,” Journal of Economic History 62 (2002): 277–92.

9 Rothenberg, Winifred, “The Emergence of a Capital Market in Rural Massachusetts, 1730–1838,” Journal of Economic History 46 (Dec. 1985): 781808; Wright, Robert, “Bank Ownership and Lending Patterns in New York and Pennsylvania, 1781–1831,” Business History Review 73 (Spring 1999): 4248.

10 See, for instance, Naomi Lamoreaux's description of commercial-bank capabilities in antebellum New England. Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England (New York, 1994).

11 Rothenberg, “The Emergence of a Capital Market,” 787–91; Ball, Duane, “Dynamics of Population and Wealth in Eighteenth-Century Chester County, Pennsylvania,” Journal of Interdisciplinary History 6 (1976): 621–44.

12 Horne, A History of Savings Banks, 28–32; Wysocki, Josef, “Introduction,” in History of European Savings Banks, ed. Mura, Jürgen (Stuttgart, 1996), 913; Vogler, Bernard, ed., L'Histoire des caisses d'epargne européennes, vol. 1: Les Origines (Paris, 1991).

13 Moss and Russell, An Invaluable Treasure, 8–33; Wysocki, “Introduction,” 9–13.

14 Sowell, David, “La Caja de Ahorros de Bogota, 1846–1865: Artisans, Credit, Development, and Savings in Early National Columbia,” Hispanic American Historical Review 73 (1993): 615–38; Gráda, Cormac Ó, “Savings Banks as an Institutional Import: The Case of Nineteenth-Century Ireland,” Financial History Review 10 (2003): 3155; Wyscoki, “Introduction,” 13–14; Comin, Francisco, Martinez-Soto, Angel Pasqual, and Roldan, Ines, Las Cajas de Ahorros en Cuba y Puerto Rico (Madrid, 2011).

15 Keyes, Emerson, A History of Savings Banks in the United States, vol. 1 (New York, 1876); Wadhwani, R. Daniel, “Citizen Savers: Family Economy, Financial Institutions, and Public Policy in the United States from the Market Revolution to the Great Depression,” PhD diss., University of Pennsylvania, 2002.

16 Davis and Payne, Savings Bank, 26–41, 114–37; Olmstead, New York Savings Banks in the Antebellum Years, 74–116.

17 U.S. Comptroller of the Currency, Annual Report, vol. 1 (Washington, D.C., 1898), 614.

18 Johnson, Paul, Saving and Spending: The Working-Class Economy in Britain, 1870–1939 (New York, 1985), 87125; Wadhwani, “Citizen Savers,” ch. 3.

19 Alter, George, Goldin, Claudia, and Rotella, Elyce, ’The Savings of Ordinary Americans: The Philadelphia Saving Fund Society in the Mid-Nineteenth Century,” Journal of Economic History 54, no. 4 (Dec. 1994): 735–67; Wadhwani, R. Daniel, “Banking from the Bottom Up: The Case of Migrant Savers at the Philadelphia Saving Fund Society During the late Nineteenth Century,” Financial History Review 9 (2002): 4163.

20 Murphy, Sharon Ann, Investing in Life: Insurance in Antebellum America (Baltimore, 2010); Mason, David, From Building and Loans to Bailouts: A History of the American Savings and Loan Industry (New York, 2004); Cleary, E. J., The Building Society Movement (London, 1965); Johnson, Saving and Spending.

21 Carter, Susan B., et al. , Historical Statistics of the United States: Millennial Edition (New York, 2006), Table Cj741–747; U.S. Comptroller of the Currency, Annual Report (Washington, D.C., 1898), 614. Similar developments were seen in Britain. See Johnson, Saving and Spending.

22 Krooss and Blyn, A History of Financial Intermediaries, 125; Lintner, John, Mutual Savings Banks in the Savings and Mortgage Markets (Andover, Mass., 1948), 107, 129.

23 Hertner, Peter, “Italy,” in History of European Savings Banks, ed. Mura, Jürgen (Stuttgart, 1996), 223–24, 231; Edwards, Jeremy and Ogilvie, Sheilah, “Universal Banking and German Industrialization: A Reappraisal,” Economic History Review 49 (1996): 431; Eugene White, “Were Banks Special Intermediaries in Late Nineteenth Century America?” Federal Reserve Bank of St. Louis Review (May/June 1998): 14.

24 Wysocki, “Introduction,” 15–16; Mura, Jürgen, “Germany,” in History of European Savings Banks, ed. Mura, Jürgen (Stuttgart, 1996), 107; R. Daniel Wadhwani, “Organizational Form and Industry Emergence: Mutual and Nonprofit Firms in the Development of the American Personal Finance Industry,” Business History (forthcoming).

25 Wysocki, “Introduction,” 17–20; Beveridge, Andrew, “Local Lending Practice: Borrowers in a Small Northeastern Industrial City, 1832–1915,” Journal of Economic History 45 (1985): 393403; Sowell, “La Caja de Ahorros de Bogota,” 622–29.

26 Lintner, Mutual Savings Banks, 67–102; Moster, Antoine and Vogler, Bernard, “France,” in History of European Savings Banks, ed. Mura, Jürgen (Stuttgart, 1996), 77; and Hertner, “Italy,” 194–96.

27 De Tocqueville, Alexis, Democracy in America: Part the Second, The Social Influence of Democracy (New York, 1840), 306–7.

28 Gosden, Peter, “Great Britain,” in History of European Savings Banks, ed. Mura, Jürgen (Stuttgart, 1996), 136–38; Moss and Russell, An Invaluable Treasure, 33–37.

29 Moster and Vogler, “France,” 76–77.

30 Moss and Russell, An Invaluable Treasure, 51–77; Gosden, “Great Britain,” 139–41.

31 Postal savings systems varied in how their funds were invested. See Wolff, Henry, “Savings Banks at Home and Abroad,” Journal of the Royal Statistical Society 60 (1897): 278359.

32 Wolff, “Savings Banks at Home and Abroad,” 278–359; National Monetary Commission (NMC), Notes on the Postal Savings-Bank Systems of the Leading Countries (Washington, D.C., 1910); Westney, Eleanor, Imitation and Innovation: The Transfer of Western Organizational Patterns to Meiji Japan (Cambridge, Mass., 1987), 100145.

33 Heyn, Edward, “Postal Savings Banks,” Annals of the American Academy of Political and Social Science 8 (1896), and NMC, Notes on the Postal Savings-Bank Systems, 10–11; Rosenbluth, Frances McCall, Financial Politics in Contemporary Japan (Ithaca, N.Y., 1989), 171.

34 Gosden, “Great Britain,” 158.

35 Hamilton, James, Savings and Savings Institutions (London, 1902), 300422.

36 NMC, Notes on the Postal Savings-Bank Systems, 8.

37 Rosenbluth, Financial Politics in Contemporary Japan, 168–72; Goldsmith, Raymond, The Financial Development of Japan (New Haven, 1983), 8587; Anderson, Stephen, “The Political Economy of Japanese Saving: How Postal Savings and Public Pensions Support High Rates of Household Saving in Japan,” Journal of Japanese Studies 16 (1990): 6870.

38 Wayland, H. L., ’The State and the Savings of the People,” American Social Science A ssociation Journal 22 (June 1887): 158–59; Heyn, “Postal Savings Banks,” 487; Edwin Walter Kemmerer, Postal Savings: An Historical and Critical Study of the Postal Savings Bank System of the United States (Princeton, 1917), 1719.

39 Schewe, Donald Bru, “A History of the Postal Savings System in America, 1910–1970,” PhD diss., Ohio State University, 1971, 2354.

40 Postal Savings Bank Hearings before the Committee on Post-Office and Post-Roads (Washington, D.C., 1910), 20.

41 Kemmerer, Postal Savings, 13–15, fn 23; Schewe, “A History of the Postal Savings System,” 23–54.

42 Kemmerer, Postal Savings, 13. Congressional Record, 20 June 1908, 8811–8812.

43 Statement of Mr. E. R. Gurney, Postal Savings Bank Hearings, 33.

44 Kemmerer, Postal Savings, 89. The amount was estimated to be “not less than $30,000,000.”

45 O'Hara, Maureen and Easley, David, “The Postal Savings System in the Depression,” Journal of Economic History 39 (Sept. 1979): 744; Kemmerer, Postal Savings, 33n16.

46 Kemmerer, Postal Savings, 64. The original nineteenth-century proposals had recommended 4 percent. Report of the Postmaster General (Washington, D.C., 1873), xxxv; Report of the Postmaster General (Washington, D.C., 1871), xxxvi.

47 Kemmerer, Postal Savings, 108–16.

48 Ibid., 56–65.

49 Statement of Honorable Alexander M. Dockery … Relative to the Proposal to Invest Postal Savings Deposits in Federal Farm-Loan Bonds (Washington, D.C., 1916), 2122.

50 Schewe, “A History of the Postal Savings System,” 171.

51 Anderson, “Japanese Saving,” 69–70; Sheldon Garon, “Fashioning a Culture of Diligence and Thrift: Savings and Frugality Campaigns in Japan, 1900–1931,“ in Japan's Competing Modernities: Issues in Culture and Democracy, ed. Minichielo, Sharon (Honolulu, 1998).

52 Moss and Russell, An Invaluable Treasure, 145–65.

53 Schoenfeld, Margaret, “Trend in Wage Earners' Savings in Philadelphia,” Annals of the American Academy of Political and Social Science 121, suppl. (Sept. 1925): 341–42.

54 White, Eugene, “The Political Economy of Bank Regulation, 1864–1933,” Journal of Economic History 42 (1982): 3340.

55 Mason, From Building and Loans to Bailouts, 32–29; Ewalt, Josephine, A Business Reborn: The Savings and Loan Story (Chicago, 1962), 381–85.

56 Ashworth, Herbert, Building Society Story (London, 1980); Peter Scott and Lucy Newton, “Advertising, Promotion, and the Rise of a National Building Society Movement in Interwar Britain,” Henley School of Management, discussion paper 081 (2009).

57 Jeffrey Fear and R. Daniel Wadhwani, “Populism and Political Entrepreneurship: The Universalization of German Savings Banks and the Decline of American Savings Banks, 1908–1934,” in Doing Business in the Age of Extremes, ed. Kocka, Jürgen, Ziegler, Dieter, and Berghoff, Hartmut (New York, forthcoming). On savings banks in Germany, see Schultz, Günther, “The German Savings Banks between State and Market,” in Savings Banks between State and Market, ed. DeNoose, Chris (Brussels, 2001), 4865; Günther Schultz, “Savings Banks since 1800: The German Case,” paper given at Congreso Internacional De Historia de Las Cajas de Ahorros, Murcia, Spain, 16–18 Oct. 2008; Mura, “Germany”; Guinnane, Timothy, “Delegated Monitors, Germany's Banking System, 1800–1914,” Journal of Economic Literature 40 (Mar. 2002): 73124.

58 U.S. savings banks' share of all savings held by major intermediaries declined from 45 percent to 21 percent, while their share of institutional lending on real estate declined from 44 percent to 26 percent between 1900 and 1930. Lintner, Mutual Savings Banks, 463; Grebler, Leo, Blank, David, and Winnick, Louis, Capital Formation in Residential Real Estate (Princeton, 1956), 468–80. “Savings,” for these statistics, include savings and time deposits in savings banks and commercial banks, the unpledged shares of savings and loan associations, and net equity in life insurance.

59 By the turn of the century, savings banks existed throughout Germany, whereas in the United States mutual savings banks were concentrated in the Northeast and Mid-Atlantic. Though stock savings banks were formed in parts of the Midwest and South, these tended to be very small. Also, in Germany, most of the savings banks were linked to local governments, giving them an implicit public guarantee.

60 Hun v. Cary 82 N.Y. (1880), 65, 71, 78; Sedgwick, Arthur, “Trustees as Tort-Feasors,” American Law Review 10 (1880); Wadhwani, R. Daniel, “Protecting Small Savers: The Political Economy of Economic Security,” Journal of Policy History 18 (2006): 136–39.

61 Manning, James, Century of American Savings Banks (New York, 1917), 234.

62 Wadhwani, “Protecting Small Savers,” 126–45.

63 Bennett, Frank, The Story of Mutual Savings Banks (Boston, 1924), 104–5. There were variations in these trends by region as some midwestern states relaxed rules on stock savings banks. Preston, Howard H., History of Banking in Iowa (Des Moines, 1922), 155. On state and regional variation, see Wadhwani, “Organizational Form.”

64 Kniffin, William, The Savings Bank and Its Practical Work (New York, 1912), 24.

65 Stevens, Frederic Bliss, History of the Savings Banks Association of the State of New York (Garden City, N.Y., 1915), 78; Manning, Century of American Savings Banks, 21.

66 Mura, “Germany,” 121–22; Fear and Wadhwani, “Populism and Political Entrepreneurship.”

67 U.S. Comptroller of the Currency, Annual Report (1945), 49.

68 Brandeis, Louis, “Why Not Savings-Bank Life Insurance for Wage Earners?American Monthly Review of Reviews 35 (1907): 339; Welfling, Weldon, Mutual Savings Banks (Cleveland, 1968), 188; Mason, Alpheus Thomas, The Brandeis Way (Princeton, 1938); Johnson, Donald, Savings Bank Life Insurance (Homewood, Ill., 1963).

69 Mason, Brandeis Way, 187.

71 Johnson, Savings Bank Life Insurance, 24–26.

72 Bátiz-Lazo, Bernardo, “Strategic Alliances and Competitive Edge: Insights from Spanish and U.K. Banking Histories,” Business History 46, no. 1 (2004): 2356. See also Hans Pfisterer and Bernard Vogler, “Introduction,” 13–14; Christian Dirnger, “Austria,” 17–62; Antti Kuusterä, “Finland,” 131–36; and Ingvar Körberg, “Sweden,” 325–44, all in History of European Savings Banks, vol. 2, ed. Jürgen Mura (Stuttgart, 2000); Manuel Titos Martinez, “Spain,” 288, and Hertner, “Italy,” 202, 207–8, in History of European Savings Banks, ed. Mura, Jürgen (Stuttgart, 1996).

73 Stevens, History of the Savings Banks Association of the State of New York, 3–29; Mutual Savings Banks Association Records, Burns Library, Boston, Massachusetts.

74 See the discussion in Stevens, History of the Savings Banks Association of the State of New York, 21–22.

75 The Savings Bank Association of New York did briefly establish institutions to provide members with liquidity, a guaranty fund, and joint investment opportunities and advice in reaction to the crisis of the Great Depression, but members subsequently opted out of participating in this system. Steiner, W. H., “The New York Mutual Savings Banks Fund,” Journal of Political Economy 52 (1944): 7479.

76 Manning, Century of American Savings Banks, 234.

77 Feldenkirchen, Wilfried, “When It Comes Down to Money: History and Corporate Culture of the Savings Banks in Germany,” in Savings Banks: A Dynamic Strategy Based on a Strong Identity (Stuttgart, 2004), 1931; Fear and Wadhwani, “Populism and Political Entrepreneurship;” Cohen, Lizabeth, Making a New Deal: Industrial Workers in Chicago, 1919–1939 (New York, 1990), 7583; “Flurry of October 1931,” 1, Banking Crises of the 1930s Record Group, Philadelphia Saving Fund Society Collection, Hagley Museum and Library, Wilmington, Del.; Immigrant Banks, vol. 37 of The Reports of the Immigration Commission (Washington, D.C., 1911).

78 Carter, Historical Statistics, Table Cj362–374.

79 Schultz, “German Savings Banks,” 53; Feldman, Gerald, The Great Disorder: Politics, Economic, and Society in the German Inflation, 1914–1924 (New York, 1993), 846.

80 Carter, Historical Statistics, Tables Cj 265–272 and Cj 251–264; Krooss and Blyn, A History of Financial Intermediaries, 152–56.

81 Mason, From Building and Loans to Bailouts, 40–68. Building societies were also successful in the United Kingdom by the 1920s and 1930s. Johnson, Saving and Spending, 116–25; Scott, Peter, “Marketing Mass Home Ownership and the Creation of the Modern Working-Class Consumer in Interwar Britain,” Business History 50 (2008): 425.

82 Ott, “The Free and Open People's Market,” 45; Krooss and Blyn, A History of Financial Intermediaries, 167; Means, Gardiner, “Diffusion of Stock Ownership in the United States,” Quarterly Journal of Economics 44 (1930): 561600.

83 Schoenfeld, “Trend in Wage Earners' Savings in Philadelphia,” 18–25, shows that five of the nineteen industrial concerns she surveyed offered stock purchase plans; Sass, The Promise of Private Pensions.

84 In these countries, commercial banks often did not actively develop services for middle-and working-class households until the post–World War II era. Alan Booth and Mark Billings, “Contested and Contestable Markets in British Retail Banking, 1945–1970,” paper presented at the Economic and Business Historical Society Conference, Columbus, Oh., 15 Apr. 2011; Moster and Vogler, “France,” 84–85; Goldsmith, Financial Development, 85–87. To some extent Great Britain, where insurance companies and building associations expanded rapidly, was an exception.

85 Response to Change: A Century of Commercial Bank Activity in the Savings Field (New York, 1965), 37. Schoenfeld, “Trend in Wage Earners' Savings in Philadelphia,” 57–58.

86 Loucks, William, The Philadelphia Plan of Home Financing (Chicago, 1929), 124; Reep, Samuel, Second Mortgages and Land Contracts in Real Estate Financing (New York, 1928), 90108.

87 Calder, Financing the American Dream, 111–55; Krooss and Blyn, A History of Financial Intermediaries, 154; Easterly, “Your Job is Your Credit,” 206–44.

88 See, for instance, Mason, From Building and Loans, 46–47; Cohen, Making a New Deal, 79; Blodgett, Harvey Alvaro, Double Your Savings (St. Paul, 1921). On the United Kingdom, see Lucy Newton, “Branding, Marketing, and Product Innovation: The Attempts of British Banks to Reach Consumers in the Interwar Period,” Henley School of Management Discussion Paper 2008-55 (2008).

89 Wadhwani, “Citizen Savers,” 265–83; Olney, Buy Now, 57–85; Goldsmith, Study of Saving in the United States, 359–61; Schoenfeld, “Trend in Wage Earners' Savings in Philadelphia,” 57–59.

90 Schoenfeld, “Trend in Wage Earners' Savings in Philadelphia.” On persistent international differences in the allocation of financial assets by households later in the twentieth century, see Goldsmith, Raymond, Comparative National Balance Sheets (Chicago, 1985), 179–85. The United Kingdom, like the United States, did experience the popularization of insurance, annuities, and mortgage loans. Johnson, Saving and Spending; Scott, “Marketing.”

91 “Flurry of October 1931,” 1, Banking Crises of the 1930s Record Group, Philadelphia Saving Fund Society Collection, Hagley Museum and Library, Wilmington, Del.

92 Calomiris, United States Bank Deregulation in Historical Perspective, 93–163, 212–79.

93 Benston, George, “Savings Banking and the Public Interest,” Journal of Money, Credit, and Banking 4 (1972): 144–45; Welfling, Mutual Savings Banks, 84.

94 Deposit insurance and the Pension Benefits Guarantee Corporation, for instance, can both be seen as attempts to deal with such risks. On the shifting risk burden in the last few decades, see Andrea Ryan, Gunnar Trumbull, and Peter Tufano, “A Brief Postwar History of U.S. Consumer Finance,” in this issue.

95 See, for instance, Flam, Helena, “Democracy in Debt: Credit and Politics in Patterson, N.J., 1890–1930,” Journal of Social History 18 (Spring 1985): 439–62; Cohen, Making a New Deal, 75–83.

The Institutional Foundations of Personal Finance: Innovation in U.S. Savings Banks, 1880s–1920s

  • R. Daniel Wadhwani

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