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Postal Banking Didn't Work in 1910 — and It Won't Now

Democratic presidential candidate Bernie Sanders and Sen. Elizabeth Warren, D-Mass., have endorsed the creation of a U.S. postal banking system much like the limited banking services offered by postal systems around the world. But one need only look at our own national history to see why their plan would not work.

Sanders and Warren have touted the idea as if the U.S. never offered banking services through the postal service. But in 1910, Congress conceived of the U.S. Postal Savings System, run by the predecessor to the U.S. Postal Service. The program died on July 1, 1967. Illustrating yet again the cyclicality of democracy, while some Democrats want this now, Republicans wanted this a century ago.

As Cornell professors Maureen O'Hara and David Easley observed in a 1979 postmortem of that system, the postal savings idea came about earlier in the century after the Panic of 1907 led the public to lose confidence in the banking system. The proposal for a postal savings idea was introduced at the 1908 Republican National Convention. It included "full faith and credit" backing – up to a limit – for savings deposited through the postal system. Democrats, meanwhile, preferred government insurance of private bank deposits, as some states had already been doing. (The Federal Deposit Insurance Corp., of course, would be created later in the 1930s.)

Following the convention, President Taft was elected to his first term, and he called on Congress to propose a program for low-income savers. The final bill targeted low-income savers, kept deposits local and sought to limit direct competition with banks.

To target low-income savers, government backing for postal savings was capped, first at $500 per depositor, and then at $2,500 in 1918. That is equivalent to $7,875 and $39,377, respectively, in 2015 U.S. dollars. To keep deposits local, 95% of postal savings deposits were placed in national banks located close to the depositor, rather than in U.S. Treasury securities, since unlike now, public debt was viewed as temporary.

To limit direct competition with banks, the postal savings system could not lend to individuals. Banks that held postal savings deposits paid 2.25% interest on them – with 2% going to the depositor and the rest going to the postal system for administrative costs – which was lower than the industry norm. In 1910, banks paid on average 3.5% on ordinary deposits. Only an act of Congress could change the parameters of the postal savings system.

But the rigidity of a government-backed and government-managed system worked against integrating the postal savings program into the financial system. During the Great Depression, deflation pushed the real return on non-insured deposits below insured postal savings deposits, leading to outflows of the former especially at uninsured savings and loans, which contributed to housing market instability. When the postal savings system finally ended in 1967, deposits still paid the same fixed 2%.

Like their Republican predecessors, Warren and Sanders propose targeting low-income savers, and this time borrowers too. Sanders' proposal sounds like a European postal bank: a postal savings system offering a limited amount of banking services. Warren describes what amounts to quasi-nationalization of payday lending, perhaps through a public-private partnership with community banks and credit unions. Some, however, argue that financial institutions participating in such a program would wind up having to charge the same rates as the payday lenders.

Warren and Sanders have mentioned the fact that banks are closing branches as justification for postal banking. But they ignore the fact that the USPS also faces pressure to close post offices. They also fail to mention that for many people, being unbanked reflects a choice as my colleague, Thomas Miller of Mississippi State University, argues.

Neither proposal makes clear how to offer low-cost banking with subsidized borrowing while also improving the USPS finances. Yes, new services will bring in more revenue, but the costs may be even higher, meaning the USPS could end up worse off financially.

Another troubling aspect of these proposals is that they reflect renewed interest in populist ideas about banking. In "Fragile by Design," Columbia University's Charles Calomiris and Stanford's Stephen Haber point out that the U.S. has experienced frequent banking crises, including the Panic of 1907. The source of instability arose from the collusion between rural populist politicians and small banking interests to pass state laws that prevented out-of-state bank competition and even branch banking. State laws made our state-centric banks too small to weather regional shocks, resulting in thousands of bank failures over the last two centuries. Even the recent crisis reflects the effects of populist banking politics.

A postal savings system won't likely deliver better banking services. A better approach is to let customers choose what financial services in the marketplace work best for them.

Stephen Matteo Miller is a senior research fellow and member of the Financial Markets Working Group in the Mercatus Center at George Mason University.


(6) Comments



Comments (6)
@ iradember, on your point 1), on instability I was stressing the problems with S&Ls (which were often 2 person operations run part-time) and housing market stability, rather than banks. Banks were unstable because state-level prohibitions on interstate banking and even branching made them too small. As Calomiris and Haber and others point out, it was the populist politician-small bank political collusion that made that happen. On your point 3), I think you're rephrasing the point I made toward the top: "Only an act of Congress could change the parameters of the postal savings system," and right after that "But the rigidity of a government-backed and government-managed system worked against integrating the postal savings program into the financial system." On your point 4) read the Tom Miller piece linked in as he shows why payday lending for some might be a cheaper option than going to a bank; "nowhere else to turn" could be reinterpreted as "we're undercutting banks". On your point 5) it seems there's a tradeoff between offering affordable loans AND shoring up the USPS's finances. If you have references on how offering "affordable loans," which I read as loans priced below marginal cost, will close the gap for the USPS's existing revenue shortfall, please share. Maybe marginal cost pricing is the solution to all of this.

@ Kenover, please read Tom Miller's piece linked above. He shows the basic calculation for whether to bank or go to a payday lender. Also, on postal banks not dealing in the financial products that went bust, you have to understand that financial regulations can themselves explain why we have some of the financial practices and products we see. For instance, originate-to-distribute mortgage financing and mortgage backed securities (MBS) can partly be explained by lower regulatory capital requirements. Also, banks were prevented by state banking regulations from operating out of state for the first 190 years or so in the U.S. Some financial historians argue MBS made it possible to evade state regulations to help banks diversify their investment risks nationally.

@ mehrsa, of course banks opposed the competition, probably arising from the populist-small bank political collusion as per Calomiris and Haber. Prior to the 1980s rural populists didn't want out of state banks operating in their jurisdiction. The old system and the current proposals are different, so a coherent argument for why the old system didn't work, isn't relevant here. But, the O'Hara and Easley article says it was the rigid design that brought the original system to an end. What is relevant here is pricing; if you're already operating at a loss, as the USPS seems to be, and then you offer a new service (like affordable loans) priced below marginal cost, then that suggests the USPS finances will get worse, not better.
Posted by Stephen Miller | Wednesday, March 23 2016 at 6:09AM ET
A few corrections and clarifications among many that could be offered:

1. A fine-grained 1937 analysis by the St. Louis Fed determined the Postal Savings System to be a success for depositors and banks alike.

For example, the report said, "During the years 1930 to 1933 when the banks were experiencing large cash withdrawals by the public for hoarding and other purposes, postal savings was a means whereby some of the funds which might otherwise have been hoarded were turned back to the banks as redeposits", thus bolstering systemic stability.

2. The Postal Savings System continued to grow until after WWII. At the height of its popularity, about one in ten American households had a postal savings account.

3. Congress strangled the Postal Savings System by refusing to let the savings rate keep pace with banks. By the mid-1950s, banks were offering 4% while Congress forced the system to continue offering 2%.

4. The author urges, "let customers choose:" Cash America, a leading payday predator, boasted in its 2012 annual report, "...often, our customers have nowhere else to turn."

5. In 2014, the Postal Service's own inspector general proposed that the USPS help drive out predatory payday lenders by offering affordable small loans on manageable terms.

6. The nonpartisan US Conference of Mayors adopted a resolution in support of postal banking, "thereby enabling the only consistent nationwide alternative to payday predators" siphoning funds from lower-income communities.
Posted by iradember | Monday, March 21 2016 at 10:41PM ET
I deposited and withdrew money in the U.S. Post Office for my grandmother from about 1944 until 1949 when she died. She could neither read nor write.
However, she was an entrepreneur and these deposits/withdrawals enabled her to manage her money safely and effectively.
Posted by eejrich | Monday, March 21 2016 at 1:47PM ET
"...for many people, being unbanked reflects a choice as my colleague, Thomas Miller of Mississippi State University, argues."

I suppose you also believe that being homeless reflects peoples' "choice" to sleep on the street. In addition to affordable housing, low-income people need access to convenient, basic banking services. Now they "choose" to pay obscene usurious interest and fees at pay-day lenders and check cashing stores, which should both be illegal. The post office already has brick-and-mortar branches everywhere and, as noted above, it does a booming business in postal money orders. It's also worth noting that none of the European postal banks were affected by the financial crisis because, unlike retail banks, they did not make liar loans, speculate in markets or invest in bogus securities.
Posted by Kenover | Friday, March 18 2016 at 5:05PM ET
Your local U.S. Post Office is probably the biggest seller of money orders around, and a good choice for financially under-served persons and communities needing a safe and secure alternative. As a landlord, I get many rent payments in the form of USPO money orders.
Posted by Surf'nTurf | Friday, March 18 2016 at 11:45AM ET
You sort of skipped the period from 1918 until 1960 when the postal banks were quite successful and also you forgot to mention that they were only allowed to pay 2% because of heavy bank opposition. Even with those gaps, I'm not really seeing a coherent argument for why the system didn't work--except beware populists.
Posted by mehrsa | Thursday, March 17 2016 at 2:33PM ET
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