America, the Plannable: How Banks Affect Family Size

Some evidence points to the idea that a financial institution might assure parents-to-be that they won't need as many children to care for them in old age.

As of last year, nearly half of America’s middle-aged adults found themselves members, willing or not, of what’s been called “the sandwich generation,” so named because these people have a child below them and an aging parent above them. A smaller slice of this group—one in every seven middle-aged Americans—is currently providing financial support to both of these generations. Given the pecuniary strain involved, it's surprising that, about 150 years ago, parents might have gone out of their way to set up a situation like this.

There are all sorts of theories about why families choose to bear as many (or as few) children as they do, but one suggestion is that parents tend to have more children so that there will be more people for them to rely on financially in their old age. This idea—first laid out in 1971 and known as the “old-age security hypothesis”—isn’t a unified theory, but it does seek to explain part of the procreative calculus. Under this framework, children aren’t sources of joy and fulfillment, but rather “assets,” “instruments,” and goods to be “substituted out of.”

In order to test this hypothesis, economists have over the years examined eras in which societies’ financial safety nets grew tauter—the idea being that if people were made to feel more financially secure, they’d feel less of a need to produce a bunch of children to rely on. The data in these scenarios don’t point to any one conclusion. For every trio of demographers arguing that the rise of financial institutions could explain a decline in fertility in Prussia between 1875 and 1910, there’s another researcher observing that even though England’s financial networks began to ossify in the 16th century, the expected drop in fertility didn’t arrive until centuries later.

“Fertility and Financial Development: Evidence From U.S. Counties in the 19th Century,” an NBER working paper put out earlier this month, participates in this unresolved academic conversation. But for weighing the validity of the old-age security hypothesis, the paper’s setting—1850s America—is quite useful. Social Security wasn’t around yet, so if people didn’t have a local bank, chances are they’d worry about their monetary well-being as they aged. And because banks had to receive charters from states, researchers had access to surprisingly specific data about the financial institutions of 19th-century America.

The researchers studied fertility rates and the number of banks in 196 counties throughout the northeastern United States, and found a statistically significant correlation: The presence of a local bank in 1850 reduced the child-to-woman ratio in a town by about three percent—roughly a quarter of one standard deviation on the national level.

To double-check the firmness of this correlation, they controlled for things like the fact that the fertility rate is usually higher in rural areas, where people tended to be less receptive to contraception. They also ran their banking figures against another data set—one that counted not births, but children aged five to 14—in order to focus only on surviving children (a child’s survival is crucial to the old-age security hypothesis), which produced similar results.

The researchers are clear: “We do not argue that the old-age security motive is the main—nor even the most important—factor shaping fertility,” they write. (A family’s income, for instance, is considered to be a more powerful determining factor.) Instead, they only mean to demonstrate that promoting financial development can incentivize parents to have fewer children.

The implications of their finding, of course, aren’t constrained to 1850s America. Fertility rates across the globe vary widely: The average number of children for a woman in Zambia or Uganda is nearly six, while that figure for the U.S., the U.K., and Saudia Arabia hovers around two. And as of 2012, three-quarters of the world’s poor lack bank accounts. This isn’t just because they’re poor; it’s also because the few banks that do exist are too far away. So, as the developing world continues developing, stronger financial institutions might be one mechanism by which fertility rates decline.