200 YEARS OF SAVINGS BANKS: A STRONG AND LASTING BUSINESS MODEL FOR RESPONSIBLE, REGIONAL RETAIL BANKING pot

TABLE OF CONTENTSForeword 7Chapter 1: Savings Banks: From an Idea to an Institution 9Henry Duncan and the Savings Bank Movement in the UK 11 Michael Moss, Professor of Archival Studies,

200 YEARS OF SAVINGS BANKS:

A STRONG AND LASTING BUSINESS MODEL FOR RESPONSIBLE,

REGIONAL RETAIL BANKING

63

September 2011

200 YEARS OF SAVINGS BANKS:

A STRONG AND LASTING BUSINESS MODEL FOR RESPONSIBLE,

REGIONAL RETAIL BANKING

The findings, interpretations and conclusions expressed in this paper donot necessarily reflect the views of WSBI (World Savings Banks Institute) orESBG (European Savings Banks Group) Neither WSBI nor ESBG guaranteethe accuracy of the data included in this work The material in thispublication is copyrighted.

TABLE OF CONTENTS

Foreword 7Chapter 1: Savings Banks: From an Idea to an Institution 9Henry Duncan and the Savings Bank Movement in the UK 11

Michael Moss, Professor of Archival Studies,

University of Glasgow

Savings and Economic Development: Sweden in the 19th Century 27

Enrique Rodriguez, Professor at the Center for Banking

and Finance and Senior Vice-President of Swedbank, and

Mats Andersson, Archivist, Swedbank

Savings Banks in Portugal: Origins and Attributes 49

Pedro Sameiro, Secretary General, Montepio

Chapter 2: Savings Banks: A Banking Model Worldwide 57Why Does the U.S Have a Weak Mutual Savings Bank Sector? 59

R Daniel Wadhwani, Assistant Professor, University of the Pacific

The First Savings Banks in Latin America: Cuba and Puerto Rico 87(1840-1898)

Angel Pascual Martinez Soto, Professor, University of Murcia

Savings Banks in the Asia-Pacific Region: A History 107

of Development

Pui-Tak Lee, Research Officer, Centre of Asian Studies,

University of Hong-Kong

Development and Diffusion of Savings and Savings Banks 125

in China: A Historical Perspective

Pui-Tak Lee, Research Officer, Centre of Asian Studies,

University of Hong-Kong

Do savings banks differ from traditional commercial banks? 141

This is a report on the “200 Years of Savings Banks: A Strong and LastingBusiness Model for Responsible, Regional Retail Banking” conferenceheld in Edinburgh on 10 June 2010 The conference focused on the past,present and future of savings banks

In 1810, Reverend Henry Duncan opened a savings bank in his smallparish in Ruthwell (Dumfries, Scotland) Two hundred years later, theEdinburgh conference celebrated the savings bank in Ruthwell as a modelfor modern savings banks and retail banking institutions that continue tocater to the needs of European citizens, small and medium-sizedbusinesses and local authorities, and have evolved into dynamic financialinstitutions that represent one-third of the current retail banking sector Chapter 1 of this report retraces the development of savings banks on theEuropean continent The article by Prof Michael Moss, author of a history

of savings banks in Scotland, focuses on Henry Duncan and the development

of the savings bank model in the United Kingdom Two case studies ofsavings banks follow: Prof Enrique Rodriguez and Archivist MatsAndersson focus on Sweden, and Montepio Secretary General PedroSameiro focuses on Portugal

Chapter 2 explores how savings bank ideals and principles have spread allover the world The institutions assumed different forms but share thenotion that banking is a tool for all and not a privilege for the few The report includes research by R Daniel Wadhwani, Assistant Professor

at the University of the Pacific (USA), on the development of savingsbanks in North America, followed by Martinez Soto, Professor at theUniversity of Murcia, who writes about the proliferation of savings banks

In conclusion, Prof Giovanni Manghetti reflects on savings banks in thecurrent financial crisis and elaborates on risks and future opportunities The report aims to stimulate and encourage research on the development

of savings and retail banks all over the world

I hope this publication will be a source of inspiration for further research

Chris De Noose

ESBG-WSBI Managing Director

CHAPTER 1: SAVINGS BANKS:

FROM AN IDEA TO AN INSTITUTION

Michael Moss, Professor Archival Studies, University of Glasgow

Michael Moss is a professor of archival studies in the School ofHumanities at the University of Glasgow He was responsible forsurveying and rescuing the records of the savings bank movement

in Scotland and England before flotation In collaboration withIain Russell, he was commissioned by Sir Nicholas Goodison,Chairman of the TSB, to write a history of the movement, whichwas published by Weidenfeld and Nicolson in 1994 as AnInvaluable Treasure: A History of the TSB In 2000 he published ahistory of Standard Life, the Edinburgh life assurance company,which had similar values to those of the savings bank movement

He is a member of the board of the National Archives of Scotlandand of the Advisory Council on Records and Archives

Reverend Henry Duncan was born at Lochrutton,Kirkcudbrightshire, on 8 October 1774, the thirdson of the minister Reverend George Duncan.Lochrutton is about six miles south-west ofDumfries in south-west Scotland In the late18th century it had a population of some

550 people, who were engaged mostly infarming Reverend George Duncan complainedthat the landowners showed no enthusiasm forimproving the agriculture of the parish, eventhough there was a flourishing export trade withthe west coast of England Henry Duncan was educated at DumfriesAcademy before attending St Andrews University for two sessions from

1788 to 1790 At the time it was common for children as young as 14 to

HENRY DUNCAN AND

THE SAVINGS BANK

MOVEMENT IN THE UK

Reverend Henry Duncan.

He left St Andrews in 1790 to take up a position as a junior clerk in theLiverpool banking house of Arthur Heywood Sons & Co The attraction ofLiverpool for Henry Duncan was that his two brothers were alreadyworking there However, unlike his brothers, he did not find the world ofcommerce to his liking His employers complained he devoted too muchtime to literary pursuits and theological study Deciding to follow hisfather into the church, he returned to Scotland to take classes atEdinburgh and Glasgow Universities where he was influenced by thejurist John Miller and the moral philosopher Dugald Stewart He wentback to Lochrutton in 1798 and the following year he was appointedminister of Ruthwell where he was to remain for the rest of his life

The weather in 1799 and 1800 in much of Scotland was cold and wetand the harvest poor Henry Duncan responded to the plight of hiscongregation by arranging with his brothers to send supplies of Indiancorn from Liverpool, which he sold to the needy at cost price In a spirit

of self-help, he encouraged women to take up spinning woollen yarn toThe church in Ruthwell, where Henry Duncan was minister.

Recognising that such measures offered only partial solutions to theproblems of poverty, he revived the local friendly society that had beenfounded in 1795 and had quickly become moribund He rewrote therules and regulations and improved its management So successful wasthis initiative that he formed another society specifically for women.Soon over a quarter of the parish, some 300 people, were members ofthe two societies Opposed to compulsory taxation, to provide relief tothe poor and destitute, he was a passionate supporter of “self-help”.Such attitudes begged the serious question as to whether the very poorhad sufficient marginal income to save, even in good times – a debatethat still continues between those who are committed to state-sponsoredsocial welfare and those who oppose it or at least wish to curtail the level

of spending After the resumption of the war with France in 1803, theprice of food climbed and hardship, particularly in rural areas, becamemore acute

From 1808 Henry Duncan tried to inculcate ideals of thrift in the local

community by publishing a series of tracts and articles in the Dumfries and Galloway Courier, which he had created with financial support from

his brothers These had a strong moral message – the provident and behaved could look forward to a secure independent future, while theimprovident and dissolute, especially the intemperate, could anticipateruin and destitution Such moralising has continued to this day

well-Despite the success of the friendly societies, Duncan was not convincedthat their rules and regulations, which required regular subscriptions,were appropriate, for they entailed collecting the uncertain savings ofthe poor This led him to propose that savings banks with verysimple regulations should be opened in every parish in Scotland.Although Scotland’s banking system, with interest bearing accounts, wasmore advanced than those of other countries, it did not provide services

to individuals with only small amounts to deposit, and who were thusoften obliged to keep their savings in cash or lend them in the localmoney market, which could be very risky In May 1810 Henry Duncanopened the Ruthwell Savings Bank in the Friendly Society’s rooms

Deposits were invested incommercial bank interest-bearingaccounts In a practice thatbecame familiar in Scotland, theKirk Session (the church elders)and the minister were trustees,while prominent locals wereextraordinary members of the court

of directors Ordinary membershad to make an initial deposit of GBP 1, while extraordinary membershad to pay GBP 2 and honorary members GBP 5 This was very prescient

of Henry Duncan, as the better-off depositors made only occasionaladditional deposits and almost no withdrawals, while ordinary memberscould be expected to make a large number of small deposits The subsidy

of small depositors by those with large balances persisted and waseventually a factor in the erosion of the savings bank ideal that ledinexorably to privatisation

In deciding to open the Ruthwell

Savings Bank, Henry Duncan drew

on the experience of other savings

schemes and friendly societies

In 1797 the utilitarian philosopher

Jeremy Bentham proposed the

establishment of what he called

“Frugality Banks” or savings banks

that would pay interest on

deposits and that would be built

and managed by a proposed

National Charity Company

The following year Mrs Priscilla

Wakefield established a Female

Benefits Club incorporating a Children’s Bank in the parish of Tottenham

to the north of London

Anybody could open an account for a child by making regular monthlycontributions of a penny or more At the turn of the century sheconverted her Female Benefit Club into a Benefit Bank, recognised at the

Deposit box of the Ruthwell Parish Bank.

The Wakefield family, with Mrs Priscilla Wakefield who created the ‘first distinct Bank for Savings publicly set on foot for the benefit of the lower classes’.

The political economist Thomas Malthus, in the second edition of his

celebrated 1803 Essay on the Principles of Population, writes, “To facilitate

the saving of small sums of money for this purpose [he is referring to thepurchase of a cow] and to encourage young labourers to economise theirearnings with a view to a provision for marriage, it might be extremelyuseful to have County Banks, where the smallest sums would be receivedand a fair interest granted for them” He elaborated on these ideas in the

1817 fifth edition, going so far as to suggest that by postponing marriageuntil sufficient capital had been accumulated there would be less needfor the state to support needy families, as there would be fewer of them.Although he admitted that such a transition could not be effectedquickly, his concept of “saving a portion of present earnings for futurecontingencies” has remained the bedrock of much of the rhetoric ofthrift and providence ever since Nevertheless, he later recognised that

“the principle of saving taken to excess would destroy the motive toproduction” While he extolled saving “as a most sacred private duty”,

he had doubts about its public application, which a century latereconomist J M Keynes crystallised into his well known paradox of thrift:

“a private virtue and a public vice”

In 1804 George Rose, a member of Parliament for Christchurch and president of the board of trade, called for imaginative ideas to help solvethe intractable problem of poverty He was later to play a crucial role inpromoting the savings bank ideal Within a year John Bone responded tothis challenge by advocating the abolition of poor relief and, along withwhat amounted to sheltered accommodation for old people, suggestedthat “a Bank should be opened to receive the small savings of the youth

vice-of both sexes, who have no dependence but their labour and economy,and to return them on the day of their marriage with the interest andpremiums proportional to the amount” With wartime inflation runninghigh, Patrick Colquhoun, a stipendiary magistrate in London, expanded

on these ideas by outlining a scheme for a National Deposit Bank forParochial Savings managed and guaranteed by the government The bankwould be a powerful force for social change and “unquestionably give anew and more provident character to menial servants and thereby rescuefemales from the walks of prostitution” Samuel Whitbread, the reformingmember of Parliament for Bedford, attempted to introduce legislation toestablish a national savings bank based on post offices There were otherlocal initiatives, such as the West Calder Friendly Bank outside Edinburgh

Such concepts and developments were critical in shaping Henry Duncan’sideas for the parish bank in Ruthwell What set him apart from the otherswho could lay claim to be the founder of the savings bank movement,such as Priscilla Wakefield, was his unstinting effort to publicise hisachievement and promote the formation of savings banks in every parish

in Scotland Because the concept of thrift and self-help had been soheavily promoted and followed, additional banks were formedspontaneously both in Scotland and England John Henry Forbes, the son

of the Edinburgh banker Sir William Forbes, promoted a savings bank as

a branch of the City’s Society for the Suppression of Beggars, in 1813.When GBP 10 had been deposited it was to be transferred to Sir WilliamForbes & Co Within less than two years the bank had almost 750subscribers In England the Liverpool Mechanics, Servants & LabourersFund was founded in 1812 and the Bristol Savings Bank the followingyear By the time these banks were beginning to make an impact, the warwith France was over

The sudden cessation of government wartime expenditure after thevictory at the Battle of the Nations in 1814 triggered a catastrophiceconomic recession that was compounded by appalling weather due toexceptional volcanic activity Confronted by unprecedented demand forpoor relief, parishes throughout the United Kingdom looked for ways toreduce the burden, especially by encouraging saving During 1815 severalsavings banks were formed in Scotland and England, which weremodelled on the ideas of Henry Duncan and other commentators

In England, where there was no tradition of commercial bank bearing accounts, deposits were invested in government stock, whichbecame common practice As the savings movement in England gatheredpace during the remainder of the decade, its principal advocate wasGeorge Rose, who was still a member of Parliament for Christchurch and

interest-an effective publicist with strong links to the national press Unlike Duncinterest-an,Rose was a Tory who believed savings banks “would gradually do away

with the evils of the system of poor laws” His Observations on Banks for Savings, published in 1816, relied heavily on the example of Forbes’s

Edinburgh bank and ignored Henry Duncan’s Ruthwell venture

Rose was vehemently attacked by William Cobbett, the social reformerand political thinker, who again warned that the poor lacked themarginal propensity to save Nevertheless, in 1817 Rose successfullyintroduced legislation “to encourage the Establishment of Banks forSavings in England” All deposits in England and Wales were to be placed

on account with the Commissioners of the National Debt which wouldpay interest at the rate of just over 4.5% per annum

The purpose of this substantial premium on the prevailing rate ongovernment stock was to attract savers The principals of this legislationwere to remain in force until privatisation, and in some senses GeorgeRose can lay claim to being the founder of the savings bank movement.Although Henry Duncan came to London to advise Rose, the legislationdid not apply to Scotland, as Duncan and his fellow Scots wished toretain the ability to place deposits with commercial banks

Government protection stimulated a wave of publications supporting thesavings ideal By the close of 1817, 101 savings banks had opened inEngland and Wales with more than GBP 250,000 in deposits, with an

additional 125 banks established in the following year In his 1818 Annals

of Banks for Savings the political reformer and radical Sir Francis Burdett

saluted Henry Duncan as having founded the first successful savings bankand fully supported his vision of a future Utopia, with savings banks atthe centre ensuring an absence of poverty The experience of the banksdid not support the naivety of this rhetoric The majority of saverswere drawn from the ranks of shopkeepers, skilled craftsmen, domesticservants, school teachers, farmers, and their wives and children,confirming that there was a genuine gap in the financial market for thesurplus income of wage earners However, this initial experiencecorroborated the opinion of commentators, such as William Cobbett,that savings banks would do nothing to reduce expenditure on poorrelief, which indeed proved to be the case Ironically, the governmentcould be encouraged in a period of heightened political tension, as it wasargued that depositors were unlikely to be radicalised or to rebel if theirsavings were invested in guaranteed public funds, as many savers wereartisans, who were most prominent in the radical causes supported bySir Francis Burdett

As the concept of saving amongst those who had benefitted from therapid industrialisation of the late 18th century took hold, so the rhetoricshifted towards self-improvement and self-help for the “respectableclasses” Inextricably linked to “self help” was the emerging temperancemovement Temperance literature contrasted the ruin that accompaniedoverindulgence in drink and riotous living with the prosperity thataccompanied saving and temperate behaviour.

Much of this literature was directed at women and children, who wereportrayed as the victims of male dissolution Henry Duncan shared suchconcepts and they came increasingly to colour his later writings, in whichthe dissolute drunkard could anticipate the direst consequences, evenpublic execution Scotland was also home to the first Sunday school inthe United Kingdom, in Glasgow, in 1815-16, and the first temperancesociety, in Greenock, in 1829 Just like the savings banks, Sunday schoolsand temperance societies were quickly established throughout the UnitedKingdom, attracting large numbers of supporters As enthusiasm for thetwin gospels of “self-help” and temperance grew, so did concern thatthe government was subsidising the savings movement by paying interest

at an above-market rate, particularly as the anticipated decrease in poorrelief had not materialised In 1829 interest rates were cut and the ceiling

on annual and total deposits reduced, leading to a decline in savings.This was followed in 1834 by a root and branch reform of the Poor Law

in England and Wales, largely designed to save money The ability todeposit funds with the Commissioners of the National Debt wasextended to Scotland the following year in an effort to revitalise amovement that was in danger of becoming moribund

Although the new Poor Law paid lip service to the savings movements,the connection between poor relief and savings was now broken andwhen in 1844 interest rates were cut again there was almost no mention

of the social benefits of the savings banks There was suspicion ingovernment circles that those better off were taking advantage of thegenerous rates paid on deposits in savings banks This was a contradictionimplicit in the savings banks from the outset To finance their servicesthey needed major depositors who exercised few transactions

Henry Duncan died in 1846 at age of 72 A true son of the ScottishEnlightenment, his interests were wide ranging, encompassingantiquarian pursuits, drawing, modelling, sculpture, gardening andarchitecture In his later years, he could take satisfaction that he had been

in some sense the progenitor of a movement that now covered the whole

of the United Kingdom, even though its customer base and purpose wasfundamentally different from his original concept, with the one exceptionthat “saving for a rainy day” was to remain a core value until the coming

of the welfare state in the early 20th century

After his death the savings movement and friendly societies were hit by

a succession of frauds that damaged their standing and restrictedprogress By 1861 there were 645 individual banks with total deposits ofGBP 41 million Two years earlier, the concepts of thrift and improvementhad received a ringing endorsement in Samuel Smiles’s best-selling book

Self Help, which has never been out of print

since To a modern reader the text may seemoverburdened with Victorian platitudes from theopening sentence (“Heaven helps those whohelp themselves”) Like Henry Duncan, SamuelSmiles was a Scot who chose medicine ratherthan the church as a career, but abandoned hiscalling in favour of the insurance industry

In his view the struggle to live prudently was anachievement because man’s natural state wasprodigality Saving was for him a matter ofinvestment that provided the opportunity towork, which for all its tedium was honourable.The notion that there was a moral duty to savewas novel: “A penny is a very small matter, yet the comfort of thousandsdepend upon the proper spending and saving of pennies” Smiles hasbeen criticised by left-wing historians, who condemn him as a champion

of an unbridled selfish capitalism Such attacks overlook his efforts toillustrate the rhetoric of “self-help” with well chosen examples from allwalks of life that tempered hedonistic self-interest with a mutual respectfor others

Samuel Smiles, author

of the best-selling book

Self Help.

Smiles had much in common with Henry Duncan, believing that the role

of government was to be a benevolent spectator of its hard-working,industrious and thrifty citizens His rhetoric struck a chord with many butwas not entirely shared by the Liberal government of William Gladstone,which in 1861 established the Post Office Savings Bank to complementthe savings banks and achieve nationwide coverage through the network

of sub-post offices Many in the savings bank movement distrusted thegovernment’s motives, perceiving the Post Office Savings Bank as acompetitor, which indeed proved to be the case By the close of 1862 thePost Office Savings Banks had attracted over 178,000 customers andtotal deposits of almost GBP 1.7 million at the expense of savings banks,which experienced a sharp decline in the number of depositorsthroughout the country There was an urgent need for the movement tospeak with a common voice A national extension committee was formed

in London in 1862 and led in 1886 to the formation of the TrusteeSavings Banks Association Savings banks were facing competition notonly for small deposits from the Post Office, but also for their greater,customary role from commercial banks that were seeking additional retaildeposits through evolving branch networks to shore up their balancesheets Savings banks were unable to offer competitive rates of interest

on their current accounts

With competition from commercial banks and an increasing volume oftransactions, savings banks had to find ways of offering higher interestrates to their major depositors, on whom they depended to meet theiroverheads A legislative provision enabled them to do this by openingspecial investment accounts that were invested in local governmentstocks, which paid higher returns than the National Debt Commissioner.During the 1870s the savings banks and thrift movement in generalgained ground in the north of Britain, particularly Scotland, while it lostground to the Post Office Savings Bank in the south This was to haveimportant consequences in Scotland and northern counties, which weresynonymous with provident institutions Several savings banks closed.One victim was the bank at Ruthwell which in 1875, faced with adwindling number of depositors, amalgamated with the Annan SavingsBank that eventually was acquired by the Royal Bank of Scotland

By the mid-1880s attitudes were beginning to change, with socialcommentators and philosophers, such as T H Green, arguing that personalfreedom could only be achieved through a degree of state direction andcontrol and by finally laying to rest the notion that the poor had amarginal propensity to save This was very different from Samuel Smiles’sconviction that hardship and struggle allowed an individual to escapefrom a natural state of prodigality into one of self-determination.Such ideas were confirmed by the first systematic social surveysconducted in the 1890s, and led in turn to the beginnings of the welfarestate by the Liberal government just before the outbreak of the FirstWorld War and to the emergence of the Labour Party With the rhetoric

of thrift off the political agenda, the government could afford to allowthe Post Office Savings Bank, aimed directly at the poorest in society, andthe savings banks, whose customer base was better-off, to coexist In thesouthern half of Britain the result was that more savings banks closed andhanded over their funds to the Post Office, while in the north theyprospered, helped by rising real wages and increases in both the annuallimit on deposits and the ceiling on total deposits Once again, craftsmenand artisans fuelled an increase in business, particularly in the economy’sservice and tertiary sectors Saving by and for children also grew By 1899the savings banks had achieved a 7% market penetration Much of thisgrowth seems to have been driven more by saving for a short-termpurpose – for example, holidays and entertainment – than for the longterm In the century’s prosperous final decade a rise in savings occurredthroughout the thrift movement, accompanied by a huge increase in themembership of friendly societies and a sharp rise in the sale of lifeinsurance products In the face of criticism of their rhetoric by socialcommentators, the movement questioned its purpose but wasencouraged to persist when analysis showed that the majority ofcustomers held small deposits of about GDP 10

The long recession that began at the turn of the century and lasted foralmost a decade confirmed Keynes’s observation that the propensity tosave correlates with disposable income By 1905 total withdrawals ofsavings exceeded deposits but turnover did not decline, suggesting thatsavings accounts were being used effectively as a form of currentaccount There were those who rejected a Keynesian explanation for adecline in savings ratios during periods of austerity and preferred toblame Edwardian Britain’s extravagant spending on luxuries and

Many in the savings bank movement clung to the old rhetoric that formost families thrift was an essential virtue that safeguarded health andhappiness Such ideas were finally debunked by evidence presented in

1906 to the Royal Commission on the Poor Laws and Relief of Distress byCharles Booth, who from his detailed investigations of householdincomes showed that a large part of the population “ha[s] not theambition or the ability to establish out of their wages a fund to whichthey may turn in times of stress” In keeping with these findings manysavings banks ceased to promote thrift as a way out of poverty, butinstead attacked extravagance, amusements, gambling and particularlyoverindulgence in alcohol The National Insurance Act of 1911 provided,for the first time, health insurance and unemployment benefits to thoseengaged in certain cyclical industries, and paved the way for theintroduction of old age pensions Although the state might haveappeared to be taking over the original role of the savings movement,the Liberal government went out of its way to emphasise that thrift was

no less the handmaid of the new welfare state, as “a new and verygeneral desire will arise among men to augment the State allowances,which is theirs in certain emergencies, by some effort of their own, forthey will have the State’s assurance that sickness and unemployment,the grim spectres which have hitherto confronted working men, will notrob them of a penny of their savings”

The progress of welfare reform, including the introduction of old agepensions, was interrupted by the First World War Extensive campaignsorganised by the National War Savings Committee reached a crescendo

in 1918 and were designed in part to cool the economy by deferringspending until the war was over

With the coming of peace Thomas Henderson of the Savings Bank ofGlasgow articulated a widely accepted view when he wrote: “To manythoughtful minds in the savings bank movement it has been apparent forsome time that, if savings banks are to maintain their hold upon thecommunity, then they must adapt their methods to the changing needs

of the day, they realise that the old conceptions of their functions whichwas limited very largely to making provision for a rainy day, must giveplace to a wider conception and meet, more adequately, present dayrequirements” The managers of the Coventry Savings Bank were struck

As enthusiasm for house ownership swept Britain, particularly the south

of England, savings banks could not match the growth of buildingsocieties in attracting depositors, usually with much higher rates ofinterest They were not, however, eclipsed and the number of depositorsand total deposits continued to grow, while those of the Post OfficeSavings Bank fell During the economic slump of the early 1930s savingsbanks went to great lengths to counter Keynes’s claim that depositorswere saving when they should have been spending They could beforgiven, as advice from economists was conflicting and thrift remainedvery much part of the government agenda, through the National SavingsCampaign However, a debate emerged over what might be theappropriate level of savings at various points of the economic cycle.Before this argument was resolved, Hitler had come to power and Britainonce more found itself at war and desperate for savings to support thewar effort The saving campaign continued after the war, during the longperiod of austerity that lasted into the early 1950s and witnessed a fall insaving ratios from 10% in 1945 to less than 3% in 1950 Under the post-war Labour government the welfare state was extended with the creation

in 1948 of the National Health Service and a costly programme ofnationalisation of essential services and industries Against thisbackground the whole savings movement had no alternative but toreturn to the interwar rhetoric of saving for future consumption – for apurpose, particularly the purchase of household goods and for holidaysand recreation The Oxford Savings Bank was typical in telling depositors:

In many cases saving through the Bank is for short periods only, but the Committee believes that the type of savings, for example, to meet commitments for household expenditure, or for holidays or Christmas, is a form of Thrift no less valuable than the old established conception of saving as being the accumulation of small sums over a longer period of years, often with no particular end in view Experience has shown that the short-term saver, having learnt the values of his short-term saving, becomes a long-term saver.

This did not mean that the old rhetoric was completely abandoned, as itcould be applied to both long- and short-term savers Advertisements stillcontrasted the contented provident saver with the dismal improvident.The predominance of short-term saving aligned savings banks muchmore closely with commercial retail banks that by now had greatlyextended their branch network and were competing directly for deposits,particularly those of larger better-off customers, which made it difficultfor savings banks to service smaller accounts.

The 20 years from 1950 to 1970 can best be characterised as an unequalstruggle between the whole of the thrift movement in the UnitedKingdom and commercial banks that were rapidly extending theirservices to retail customers who were themselves coming to expect arange of financial services that savings institutions lacked the power toprovide Savings banks responded by amalgamations that werestimulated by the need to automate processes to reduce the cost ofmanaging thousands of small accounts and the need to introducemovement-wide services, such as cheque payment, which often requiredeither legislation or government approval

As is well known, this led inexorably to the amalgamation of nearly all thebanks into regional groupings and finally into a single, broader UKorganisation – the TSB, which was floated on the stock exchange in

1986 Although the decision to float rather than leave the TSB as amutual organisation was taken by the Conservative government, whichwas opposed to any involvement by the state in the market for financialservices, with hindsight it would probably have happened in any event.The problem for the TSB and its managers was that they lacked anyexperience of commercial banking and most of the capital raised atflotation, which was much in excess of capital requirements, was lost invery risky ventures into merchant banking and insurance After a period

of reorganisation and restructuring around its core business of retailfinancial services, Lloyds Bank, an established UK commercial bank,acquired TSB in 1995 and traded under the name Lloyds TSB until 2009,when it was renamed Lloyds Banking Group This transition from anetwork of savings banks of various sizes with deep local roots into a fullyfledged commercial bank was painful and not without its critics A recentreport from the Lloyds Banking Group suggests that far from being dead

n Ahiakpor, J C W (1995), “A Paradox of Thrift or Keynes’sMisrepresentation of Saving in the Classical Theory of Growth?”,

Southern Economic Journal, 62 (1) 16-33.

n Bone, J (1806), The Principles and Regulations of Tranquillity; an institution commenced in the metropolis for encouraging and enabling industrious and prudent individuals in the various classes of the community to provide for themselves, etc., London, J Asperne (1807), The Friend of the People: or, Considerations addressed principally to persons of small incomes recommending them to adopt some more effectual measures for securing their own independence than those proposed to parliament by Mr Whitbread, are calculated to promote, London, M Jones.

(1807), The Wants of the People, and the Means of the Government;

or, Objections to the interference of the legislature in the affairs of the poor, as recommended by Mr Whitbread in the House of Commons, etc., London, Jordan & Maxwell.

n Colquhoun, P (1796), A Treatise on the Police of the Metropolis, explaining the various crimes which are felt as a pressure upon the Community, and suggesting remedies for their prevention,

London, Dilly

(1806), A Treatise on Indigence, London, J Hatchard.

n Duncan, H (1815), An essay on the nature and advantages of Parish Banks: together with a corrected copy of the rules and regulations of the Parent Institution in Ruthwell: and directions for conducting the details of business, etc., Edinburgh.

n Finlayson, G (1994), Citizen, State, and social welfare in Britain

1830-1990, Oxford, Clarendon Press.

n Gosden, P H (1961), The Friendly Societies in England 1815-1875.

Manchester, Manchester University Press

n Halifax 50 Years of Savings report (2010), available online athttp://www.lloydsbankinggroup.com/media/pdfs/halifax/2010/190610Halifax_50_years_of_savings_report.pdf?WT.ac=018

n Hobsbawn, E, J (1962), Age of Revolution 1789-1848, London,

Weidenfeld and Nicolson

n Horne, O (1947), A History of Savings Banks, Oxford, Oxford

University Press

n Keynes, J M (1936), The General Theory of Employment Interest and

n Lloyd-Jones, R., and Lewis, M J., (1991), Small Savers in the Late Victorian Period: Business Data Base of the Sheffield Savings Bank, 1861-1901, Leicester, Perpetuity Press.

n Malthus, T (1798), An Essay on the Principle of Population, London (1803), An Essay on the Principle of Population, London, quarto edition (1817), An Essay on the Principle of Population, London, John Murray,

fifth ed., available online at http://books.google.co.uk/books (accessedAugust 2008)

(1836), Principles of political economy considered with a view to their practical application, London, William Pickering, available online

http://books.google.co.uk/books (accessed August 2008)

n Maseres, F (1772), A Proposal for Establishing Life-Annuities in Parishes for the Benefit of the Industrious Poor, London, Benjamin White.

n Morris, R J (1981), “Samuel Smiles and the Genesis of Self-Help”,

Historical Journal, 24, pp 89-109.

n Moss, M S., and Russell, I F (1994), An Invaluable Treasure: A History

of the TSB, London, Weidenfeld and Nicolson.

n Ogborn, M E (1962), Equitable Assurances: The story of life assurance in the experience of the Equitable Life Assurance Society, 1762-1962, London, George Allen & Unwin.

n Pratt, John Tidd (1830), The History of Savings Banks in England, Wales, and Ireland, etc., London, C.J.G & F Rivington.

n Price, R (1771), Observations on Reversionary Payments; on schemes for providing annuities for widows and on the National Debt.

To which are added four essays on different subjects in the doctrine of Life Annuities Also, an appendix, containing tables, shewing the probabilities of life in London, Norwich and Northampton, etc.,

http://www.fullbooks.com/Self-Help.html (accessed July 2008)

n Smiles, S (1875), Thrift, London, John Murray.

n “Tracts on Savings banks” (1816), Quarterly Review, October.

Mats Andersson, Archivist, Swedbank

Mats Andersson has been archivist at Swedbank since 1998 and isauthor of numerous articles on savings banks history

Enrique Rodríguez, Senior Vice-President, Swedbank

Enrique Rodriguez is professor at the Royal Institute of Technology,Stockholm, Sweden, and has been senior vice-president of Swedbanksince 1985 He is the author of books, research publications andscientific articles on, i.a., public finance, savings and developmentand savings banks history

1 Introduction

A fact that is scarcely known in northern Europe is that the general idea

of savings banks had already been hatched, in France, in the early 17thcentury In 1611, Hughes Délestre published a booklet on theestablishment of “pawn shops”, which already included the idea ofpromoting saving Délestre gave voice to the need to offer workers thepossibility of depositing small amounts at a modest interest rate, so as tomitigate periods of hardship In a 1697 booklet, Daniel Defoe introduced

a similar idea Both, however, remained mere ideas until well into the18th century, when philanthropic and social-liberal ideas envisagedsavings banks as a means to fight and prevent poverty

In Hamburg a savings bank was founded in 1778, “for people of lessermeans”, and a few years later the Oldenburg and Kiel savings banks were

SAVINGS BANKS AND

ECONOMIC DEVELOPMENT:

SWEDEN IN THE 19TH

CENTURY

Independent of the German process, similar institutions were established

in Great Britain In 1798, an institution was founded in Tottenham, whichresembled savings banks, and the following year another one inWendower But the first savings bank with modern characteristics, whichserved as a standard for the British and Nordic systems, was founded in

1810, in Ruthwell, in southern Scotland From then on, the ideas thatformed the foundation of the European savings banks movement were asubject of serious consideration

The ideas were imported into Sweden, where savings groups were already

in existence, with characteristics that resembled those of savings banks

In 1805, Berndt Harder Santesson founded a savings group for theworkers of one of his own glassworks and a few years later another onewith similar characteristics Bearing in mind the close connectionbetween German and Swedish incipient capitalism, Santesson veryprobably received inspiration from Germany In any case, the main goal

of the creation of these groups was to help poor classes forestall times ofhardship and thus fight against poverty

During most of the 18th century, economic ideas did not attributeimportance to saving It was even said that saving reduced spending,and therefore lowered both production and employment levels.Classical economics, however, very soon managed to prove that savingwas one of the bases for improving production and consequently forstrengthening other macroeconomic variables Saving became thefoundation of capital formation and was thus crucial to the well-being ofnations Religious authorities, such as those in Nordic countries,reinforced the increasingly favourable perception of saving by preaching

it as a virtue, which also explains part of the process

Nevertheless, the savings bank movement had to convince people of theadvantages of saving and launched nationwide promotional campaigns.The following phrase expresses great pragmatism in a poetic tone, but italso clearly exposes the commercialism that has often lurked behindphilanthropy: “Saving does not develop on the basis of commands andsermons, but on the basis of banking institutions, as the earth receivesseed No sensible man squanders seed so as to benefit more The urge

Savings banks are the oldest banking group in Sweden, and in manyrespects they have led the march towards the modern banking system.Since 1928, the savings banks’ symbol has been the old oak; its evocation

of strength and security has helped make it one of the most famousmarket icons

After the creation of savings banks in Gothenburg, in 1820, and inStockholm, in 1821, the movement expanded with such speed that 500savings banks existed by the time the old oak became the movement’ssymbol Very soon, savings banks distinguished themselves by their closebonds to local and regional authorities, who sometimes took the initiativewhen founding savings banks Among the promoters were also farmersand local businessmen As a result of this process, Sweden’s savingsbanks played a key role in the capital formation that was required for theindustrialisation process, which in this country did not come about untilthe second half of the 19th century The savings generated during theinitial stage not only managed to support local investments but alsofuelled the consumption of the first manufactured products

For many years, savings banks acted unaware of their importance incapital formation and economic development One could say with someexaggeration that savings banks in Sweden ignored that they acted asbanking institutions until 40 years ago But, indeed, savings banks werecrucial to the rationalisation and mechanisation of agriculture at the end

of the 19th century, the massive migration of the rural populationtowards cities, the development of the first industries, cultural andeducational evolution, etc

2 Central figures

Four individuals played particularly important roles in the introduction ofsavings banks to Sweden: Johan Westin, who launched the idea, Carl DavidSkogman, who outlined it officially, Berndt Harder Santesson, who put itinto practice, and Eduard Ludendorff, who headed the first savings bank.Johan Westin (1751-1828) was a prominent politician and a member ofthe board of directors of the National Bank Having studied the savingsbanks legislation passed by Parliament in Great Britain in 1817, the following

However, his idea that the National Debt Office should take charge ofsavings banks met with no success; a Parliamentary committee decidedthe government should not be in charge of such activity Instead, thecommittee proposed to the government that “some talented person”should write a paper on the so-called savings banks, in order to offer thepublic a clear notion of the definition of such banks

Carl David Skogman (1786-1856), who played the most crucial role ofthe four, was the “talented person” whom the government entrustedwith introducing the idea of savings banks His paper on the subject waspublished in 1819, and 1,000 copies were printed At the time, Swedenwas experiencing serious financial problems: the monetary system wasanarchic, public finances were inadequate and the economy wasunderdeveloped The country needed fresh ideas from abroad,particularly from England, which was considered the cradle of the newworld economy

Skogman wrote several papers during an official journey to the U.S andBritain Back in Sweden, in 1815, he held several offices and, among otheractivities, concerned himself with the banking system The forerunning

“discount” banks that had been established after 1770 were sufferingbecause of the economic crisis and liquidity and management problems.The government named Skogman head of one of the most importantbanks, and in 1817 he was appointed secretary of the committeecharged with resolving the banking crisis, among other tasks He soonwas named minister of finance and trade, and towards 1830 he wasundoubtedly the government’s key figure

His 1819 paper compared experiences in Scotland and England of dealingwith the poor He claimed that English laws on social welfare encouragedvagrancy and harmed the working class interests In Scotland, however,the first savings banks showed the positive effects of organised saving.The paper concluded that there were better ways to prevent poverty thansocial welfare programmes: society’s upper classes should not only helpfinancially but also do good deeds and promote work and saving as ameans to economic independence Thus savings banks were the bestsolution transform “help to self-help”, and for the well-to-do classes toavoid tax increases to fund social welfare For savings banks to be

Berndt Harder Santesson (1776-1862) was a practical man whoorganised saving among workers His main field, however, was industry.

He headed several companies and was the owner of two glassworks

In Swedish history he is especially known as the builder of the GreatCanal that spans the country and as a member of Parliament Santessonwas born in Gothenburg, where he spent most of his life

As early as 1805 he established his first “savings bank” in one of hisglassworks, and reached an agreement with the workers to save 10% oftheir wages in order to meet future needs The deposited savings, whichearned 5% interest, were invested in the same glassworks The generalidea was to generate funds for employees to use in old age, but fundscould also be withdrawn in the event of transfer Santesson continued tocreate savings banks in his successive positions, and some of them enduredfor many years In many senses, Santesson was a man of the future.Eduard Ludendorff (1790-1824) was a businessman of German origin whofounded Sweden’s first savings bank (1820), and in addition to devotingtime to religious and liberal ideas, he was engaged in developing tradeand markets After studying in Berlin, he worked in his family’s tradinghouse, and later became involved with Swedish trade With great effort,Ludendorff managed to acquire the funds required to create the firstsavings bank, and in his own home created the administrative andcommercial foundation for its development in Gothenburg

3 The first savings banks

In addition to causing great damage to agriculture, the crisis afterthe Napoleonic Wars wreaked havoc on Gothenburg’s commercial life.Real estate prices fell and bankruptcies were numerous The city’s own

“discount bank” closed its doors to the general public Thus it was thefirst savings bank that became the bank of local businessmen

The first savings bank’s statutes were based on Skogman’s 1819 paper,but they differed in that they required half the members of the board ofdirectors to be elected from among the persons who contributed to thebank’s founding and maintenance, and that the rest be appointed byroyal decree The Parliament’s view was that savings banks would need

When the second savings bank was founded in Stockholm, in 1821, noroyal appointment was required either On the other hand, when newsavings banks were established, the county governor or another publicofficial would often automatically become a member of the board ofdirectors

The fact that Skogman’s idea to appoint half of the board members byroyal decree was unsuccessful actually resulted in a positive outcome.Savings banks develop without government control and in adecentralised way, which at the same time creates closer bonds to localactivities and strengthens the general public’s trust in these institutions

We have already mentioned that savings banks, as far as their goals areconcerned, were in line with the bourgeois ideology of the day, but theirsuccess was rather fuelled by meeting genuine economic needs The use

of money was spreading, and as a result so too was the need for financialinstitutions In 1822, three new savings banks were created During theremainder of the 1820s two to three savings banks were foundedannually, so that by 1830 24 savings banks, most of which were located

in the county capitals, existed

The savings bank movement’s explicit mission was to promote saving.Providing loans was also important, although theoretically as a secondarymission The most common interest rate for deposits was 5%, andtherefore loans were usually granted at 6% In 1828, savings banks wereauthorised to open accounts in the National Bank, but since the latterpaid interest at 3% or less, savings banks did not use it to a great extent

As a rule, deposited money was invested in businesses more or lessheaded directly by savings bank board members In Gothenburg, as wehave already mentioned, loans to industry and trade predominatedduring the first years According to the auditors, most of the loans weresecured by easily sold commodities Of the total sum of loans in 1821,23,000 Swedish crowns were guaranteed by iron and steel securities,9,400 by gold and silver securities and 7,300 by miscellaneous shares(Hessling, 1989) Loans against personal securities were also verycommon; this way many workers and farmers were able to gradually freethemselves of local usurers

Traditional villages were changing, farmers were deserting their land andnew land was being farmed In 1839, the statutes of a new savings bank

in southern Sweden declared that loans should be offered to small-scalefarmers, making it the first to establish loan-granting as a savings bankservice This generated a wave of new savings banks

During this period, we also find a particularly interesting reason for theincrease in the number of savings banks In the counties of southernSweden, towards the mid-19th century, grain exports, revenues, and,consequently, savings increased In many cases, savings banks in citiesrefused to accept new deposits, for obvious reasons: more money meansmore work, and most work in savings banks was performed on avoluntary basis Thus parish savings banks met this increased demand andproliferated (Hessling, 1989)

Agrarian crises during the second half of the 19th century also fuelled theproliferation of savings banks In general, farmers’ trust in local savingsbanks grows stronger in times of crisis, as savings banks offer better loanconditions than mortgage institutions or commercial banks do The 1862local administration reform attracted additional interest in creatingsavings banks, because the latter was a necessary complement tothe reform

For a long time, loans with personal securities were the predominant typefrom savings banks – with the exception of the largest banks, wheremortgage loans and loans with other non-personal securities have alwaysbeen of great importance Because of the saving bank’s philanthropic andpatriarchal nature, and because its loans were small, borrowers andguarantors were trusted more than real securities In small communities,where bank employees knew the residents, loans with personal securitieswere quite suitable Thus this type of loan continued to serve its purposeuntil well into the 20th century

Initially, mortgage loans were usually redeemed in order to make way fornew borrowers, but when pay-off rules were introduced it could beavoided and capital formation could be fostered simultaneously, whichsoon became one of savings banks’ main goals Industrialisationincreased demand for this type of loan, thus savings banks increasinglyspecialised in larger loans, at cheaper administrative cost, which in time

The 1892 Savings Banks Act, as we shall see, caused certain difficulties.Some savings banks were forced to cut down on their loans to industry,trade and local agriculture Therefore, real estate loans, with theexception of industrial real estate, became predominant Loans to localauthorities also continued to grow as a result of the needs of newpopulation centres

The Savings Banks Act was a turning point By the mid-19th century,commercial banks had attained an important position The first one hadbeen founded in 1831, in Ystad, southern Sweden The important role ofcommercial banks in the industrialisation process is undisputable In away, the Savings Banks Act echoed the power achieved by commercialbanks, which experienced their most expansive period during the threedecades following its passage

Incredibly, savings banks were not represented on the committee in charge

of preparing the Savings Banks Act Commercial banks, however, werewell represented The committee chairman was a well-known commercialbank shareholder and 17 bank representatives participated This had aprofound impact on the bill Loans to business, according to the Act,were the purview of commercial banks, while savings banks should belimited to savings administration Thus a division of functions was establishedthat would mark the savings bank industry until the mid-20th century

4 Savings banks and local communities

By encouraging individual savings, savings banks have contributed tostabilising the value of money and hence to curbing inflation, particularly

to finance major public projects and mobilise funds for potential crises.However, savings banks have been local institutions with a definedsphere of activities and specific rules adapted to local circumstances.The savings collected in one region, as a rule, are used in that very region.This has enabled savings banks to enter new sectors, in accordancewith local needs, to develop local industries, thus helping to improveregional balance

From the start, Swedish savings banks operated as independent banks

Each savings bank had its own policy In Gothenburg, the savings bankwas engaged in export and import commodity mortgages, while inStockholm it focused on real estate mortgages The interesting point isthat each savings bank’s lending reflected local trade and industry, andeach bank tried to adapt its credit policy to changes in economicdevelopment Moreover, savings banks adjusted to general credit needs.Municipalities borrowed money to invest in infrastructure programmes,while savings banks consistently supported financing for housingconstruction and government borrowing To a great extent, savingsbanks have acted as though they were government banks, given that thepublic sector has never needed to own institutions that meet local andgeneral credit demands so well

Initially, certain savings banks had difficulties, since they totally lackedeconomic support from government authorities Savings banks were noteven allowed to invest part of their assets in the Swedish Central Bankagainst a fair interest rate Apparently, the government felt that savingsbanks should manage on their own, and that the Central Bank should not

be burdened with any possible expenses But beginning in 1830, savingsbanks were entitled to invest some of their capital in the Central Bank,which in some cases proved vital The fact that savings banks were forcedfrom the very beginning to approach the market without governmentsupport may explain why many savings banks developed rapidly frompublic utility undertakings into common money-holding institutions

It took a rather long time before it was officially recognised that savingsbanks could be of great value to business: they made it possible toestablish small-scale enterprises, carry out soil and real estateimprovements, etc They could also help the poor strive to improve theirlot And of course such local support enhanced the general public’swell-being Savings bank loans remained within the local communityand empowered it to develop

Eduard Ludendorff, the founder of the Gothenburg savings bank, wascommitted to poor relief, which may have contributed to the bank’sgranting several loans to poor widows As security for their loans they leftpersonal property such as jewellery, silver cutlery, etc The bank’s firstannual report stated that its assistance included not only managing smalldeposits, but also granting loans to people in temporary need Thus poor

In other words, the bank helped people help themselves If it did not,the report stated, small borrowers would otherwise fall prey to usurers or

be forced to sell their property at a loss

However, the Gothenburg savings bank was not the only one to acceptpersonal property as security for loans Many other savings banksaccepted “good and working pocket watches”, gold rings, etc., assecurity Auditors of several savings banks pointed out that their businesswas beginning to look like a pawnshop

The Gothenburg savings bank had other ways to illustrate its responsibilitytowards the community For example, when an embezzlement scandalrocked its major competitor, Gothenburg savings bank took it over, thussecuring depositors’ money Meanwhile, savings banks in general earned

a reputation for cash donations During the 19th century, they donatedgenerously to education and granted subsidies to organisations engaged

in poor relief As a rule, savings banks leaders and board members werepeople who took an interest in economics and social development.Many pursued commercial, agricultural, industrial and other social activities.The government’s hands-off approach to savings banks – from the verybeginning, it had no interest in either centralising or steering themtowards the purchase of securities or government bonds – determinedthe path they took For most, their only chance to grow was in trying

to make deposits productive by loaning money on local markets.Other savings banks took it upon themselves to finance local and countyinfrastructure Moreover, through their social work, comprised mainly

of donations and financial support, savings banks contributed tothe country’s economic and social development and thus shaped thefoundation of economic growth

5 Savings bank lending

The first savings banks main goal was to administer the savings of people

of lesser means By and by, new savings banks were created to serve abroader purpose Many founders were philanthropists and businessmensimultaneously The Färs Savings Bank was founded, in 1839, with the

In many cases, loans were granted to the members of savings bankboards of directors, but also against personal guarantee and againstcollateral In ports, loans were usually granted against securities inexport/import goods In the Stockholm City Savings Bank it was common

to borrow money against bonds, and as the Stock Exchange developed,loans against securities in shares became crucial to savings banks ingeneral (Nygren, 1981) The most common loans, however, were againstreal estate mortgages and valuables As the demand for loans grew,

in the 1850s, the statutes of many savings bank stated explicitly that theirpurpose was granting loans in addition to administering savings Local authorities obtained savings bank loans to finance infrastructure,schools and hospitals It might be argued that local needs determined thedevelopment of lending They drove Swedish savings banks to develop asindependent credit institutions and become, in the second half of the19th century, more important than commercial banks Thus the Swedishsavings banks movement turned out to be rather unique in Europe.Savings banks would never have survived without increasing theirlending Unfortunately, it took time for the savings bank movement tounderstand this and for the top savings banks to take the lead andincrease lending (Sommarin, 1940) Borrowers were offered possibilities

to expand their businesses, using loans for agriculture, buildings, toolpurchases and materials Some savings banks even borrowed capital fromprivate banks to grant loans

For the Gothenburg savings bank, lending against commodity collateralwas the dominant form of credit during its first 20 years There was also

a great number of small loans against silver and gold collateral.Several other savings banks lent against valuables and became full-servicepawnborkers This form of lending was replaced gradually by moremodern forms Moreover, the Gothenburg savings bank made it possible

to establish Gothenburg Private Bank, since almost one-third of the

paid-up share capital was mortgaged at the savings bank Thus cooperation inand the differentiation of Gothenburg’s banking sector was established The Norrköping savings bank was founded in 1824 by two manufacturerswho lent against mortgages, valuables such as silver and gold, and evensecurities in shares in steamships sailing the Norrköping-Stockholm route

In northern Sweden, the Piteå savings bank suffered a small loss duringits first year, 1852, but the total amount in loans granted almost equalledthat in deposits Regional agricultural societies were the main playersbehind efforts to improve the state of agriculture and infrastructure,which led to the creation of several savings banks.

At the Söderhamn savings bank the first mortgage loan against security

in land was granted on the first banking day During the 1850s and1860s, lending was based on real estate mortgages, but loans againstshares gradually increased, and at the turn of the century this form oflending had risen to approximately half the amount of deposits The expressed intention of various early savings banks was to preventpoverty However, when savings banks opened in rural areas, lendingbecame the key purpose, as from the beginning their focus was onthe credit market (Perlinge, 2005) Around 1840, many new savingsbanks were defined as credit-oriented, targeting agriculture andagricultural communities

Promissory notes an debt obligations, which were means of paymentaccepted by the local community, i.e as local bills, comprised much thelocal credit market Thus institutional loans were not very important atthe beginning of the 19th century, but they expanded as local savingsbanks were created and partly took over traditional instruments, in thesense that savings banks mainly granted loans as promissory notesagainst security or mortgage

During the Industrial Revolution, the British strategy to help the poor byecouraging deposits in savings banks, which in turn invested money inthe English government, did not work in Sweden And investing savingsbanks’ money in government bonds could not be materialised, largelybecause of the lack of a developed bond market Instead, savings bankshad to play the part of independent banks

Savings banks did not share a lot in common when it came to theirlending practices Each savings bank had its own pattern, adapted to theneeds of the local credit market In Gothenburg, as we know, money wasraised on merchants’ export/import commodities, and in Vänersborg

One significant idea amongst savings banks was that savings generated

in local communities should be used for local credit needs This was ofgreat importance to the savings banks’ own development since theincreasing lending activity created greater needs to procure deposits.Little by little, the work done by savings banks through promotion ofsavings, savings clubs, school savings, etc became a complement to theirbusiness All this undoubtedly provided very strong impulses thatfurthered Sweden’s economic growth

Various reports in the 1960s and 1970s (Nygren) analysed the role savingsbanks played in the development of local credit markets and the incipientindustry For instance, overall Swedish savings bank lending againstshares as security doubled between 1876 and 1893, and equalled 25%

of commercial bank share lending during the latter years of that period.Lending to businesses was a strong component of savings bank lending

At the same time, board members could be engaged in other creditinstitutions and local commercial banks Thus savings banks played aneven more important role in financing local business by transferringmeans between institutions and through common strategic ideas Table 1: Institutional lending 1835-1875 Millions of SEK

* Note that the size of savings bank loans were generally much smaller

Central Debt Commercial Savings MortgageBank Office Banks Banks* Institutions

Table 2: Savings Banks and Commercial Banks: current loans

* Loans to Local Authorities excluded

** Including other lending (Letters of Credit, Bills of Exchange, etc.)

Source: Nygren 1981, Pettersson 2001.

Section “Savings Banks’ Lending” based on Nygren’s work.

Already in the 1830s and 1840s, several savings banks developed a type

of lending that in practice turned them into a kind of commercial bankfor the urban bourgeoisie Savings banks increased institutional lending,and as time went on they managed to break down the private promissorynote lending system

The banking innovations achieved by savings banks consisted mainly inthat they developed the local credit market, differentiated lendingaccording to the varying conditions of the sphere of action, and increaseddeposits as a source of financing lending

After 1820, new savings banks opened with great frequency In 1859,there were already 125, with an overall lending of 27 million SEK By 1875,the number of savings banks had grown to 325, and lending totalledapproximately 150 million SEK, including loans to local authorities

The first savings banks were established in cities and trade areas.Railway creation fuelled savings bank creation In most cases, this build-

up was supported by philanthropy and savings ideas, but in practice thebanks were limited to the local credit market In rural areas, however,savings banks were established with a view to gaining access to greater

Current loans, million SEK, Total lending

Savings Commercial Commercial Year Banks* Banks Banks**