Poverty Relief and Financial Inclusion: Savings Banks in Nineteenth Century Germany

Abstract

This paper examines the effects of savings banks on poverty relief and financial inclusion in the German state of Saxony 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 known about how this can be achieved. During the nineteenth century, savings banks were introduced as a means to foster thrift among the poor. This paper finds that they were successful in catering to low-income households, and were used 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 for their target group. Therefore, their emergence allows for the study of the effect of savings in isolation from other financial services. Next to the benefits for individuals, savings banks also increased capital mobilization and served local communities through the provision of mortgages. This study finds a positive effect of savings bank deposits on housing construction. Thus, the savings banks in Saxony constitute an example of an early microfinance institution.