Fertility Declines
Substitution Effects

The issue of how and why people make financial plans for their future has received much more attention from economists than from historians. Histories of savings institutions abound, and studies of aggregate savings have been produced for a number of countries, but the analysis of the microeconomic foundations of savings behaviour has largely been the preserve of applied economists.

In modern industrial societies most people provide for their old age by saving and accumulating financial assets during their working life. This idea of life-cycle savings is an important part of economists' explanations of household consumption and savings. In pre-industrial times, however, the absence of appropriate financial institutions prevented the planned accumulation of financial assets, so elderly people typically had to rely for support on younger family members.

Over the last few years economic historians in the United States have begun to study how patterns of financial planning and personal saving have changed over time, in an attempt to develop a microeconomic explanation of change and growth in the nineteenth century American economy. Some of the impetus for these new lines of inquiry has come from the field of development economics, where the extent to which individuals use market mechanisms rather than family ties for intergenerational transfers has been seen as an important influence on the pace of economic modernization.

This new research has identified a striking transition in mid- nineteenth century America from the "traditional" pattern of relying on family support in old age to the "modern" pattern of life-cycle savings. This transition in household behaviour has been used to explain the substantial fall in fertility and increase in the rate of capital formation observed in the United States around 1850: Americans substituted bank accounts for babies in their planning for old age and retirement. This interpretation views children as economic assets and identifies a fall in the implicit rate of return on children and a rise in the return on physical assets as the cause of the "massive portfolio reallocation" away from children and towards physical assets around 1850. Why did the implicit rate of return on children fall? In nineteenth century America, increasing urbanization and migration led to children becoming less and less reliable as assets. Where alternative employment possibilities outside the family farm were good, children exercised their bargaining power and reduced their parents' expectations of support. This meant a fall in the return to children and resulted in a decline in fertility

This paper examines UK evidence to see whether a similar transition to life-cycle behaviour occurred in nineteenth century Britain. Britain also experienced a sharp fall in fertility in the late Victorian period and a high rate of capital formation, and there is evidence of widespread saving in new financial institutions. A closer examination of saving behaviour shows, however, that very few British workers adopted life-cycle saving patterns; their saving was for short-run goals, and was part of a broader pattern of financial management that also involved recourse to borrowing and credit purchase, in order to cope with the financial fluctuations of working-class life.

This difference in the observed savings behaviour of British and American workers is surprising, and may in part be the consequence of a misreading of some of the American evidence. Researchers may have drawn inappropriate conclusions because of a failure to study saving motives adequately: the evidence of a "life-cycle transition" is based more on a headcount of the number of savers than on any assessment of the motivation or periodicity of the observed saving behaviour. The British experience suggests that saving habits, even though widespread, need not imply the existence of life-cycle motivation; it may simply be a response to the increased short-run financial insecurity of urban working-class life. In addition, the extent of coherent life-cycle saving claimed for late nineteenth century America seems implausible in the light of modern tests of the life-cycle saving hypothesis, which have shown that fully 40% of the sampled populations in America and Canada today do not conform to the predictions of the life-cycle theory. As the life-cycle theory seems to be inapplicable to the poorest two- fifths of workers even today, it is plausible to suggest that in the nineteenth century, when incomes were much lower, an even larger proportion of the working population may have failed to accumulate life-cycle savings. Life-cycle savings may therefore have been no more prevalent in the United States than in Britain during the nineteenth century.

To the extent that there were genuine differences in savings behaviour between the two countries, these may be ascribed to a more generous welfare system (in the shape of the Poor Law) in Britain. This provided for elderly people who could not look after themselves and reflected the difference between an ethos of "welfarism" in Britain and self-reliance in America. But the most persuasive explanation is that, despite the similarity of estimates of per capita GNP in Britain and America in this period, the real income of British workers was too low and erratic to permit them to adopt the same pattern of asset accumulation as their American counterparts. In consequence, the rapid fall in fertility in Britain after 1870 seems to have little or nothing to do with the adoption of long-term financial planning, or the substitution of bank accounts for babies: this financial strategy was beyond the means of the great majority of the British working class.