Postal Banks: Wanted by Poor, He Felt … 100 Years Ago

The New York Times (NYT) online archives recently led us to one of these extraordinary re-discoveries of history. “Wanted by Poor, He Felt”: this was the sub-title of NYT’s article on the approval of the postal bank bill by U.S. Senate in June 1910. At that time, President Taft (Republican) “felt that it is to these poorer people in the United States that the Postal Banks will appeal and that it will encourage the saving of money by them”. Sounds familiar? This is today’s “financial inclusion” of course. Taft was absolutely right. As of 1947, $30 billion of today’s dollar had been deposited on postal savings accounts!

Many articles related to the creation of a postal bank were published in the NYT during the first half of the year 1910. But who were these poor people President Taft was targeting? They were “the people who had small means of voicing their desires for Federal legislation”, they were “the many foreigners, who do not even have votes, but who are saturated with suspicion of practically all institutions for the encouragement of money savings”. So poor immigrants in the U.S. did not trust American banks and were usually remitting the full amount of their savings abroad through international postal money orders. Indeed, these transfers were ending up in postal banks in their origin countries – the close link between remittances and postal savings accounts was a reality – and these foreign postal financial institutions were government-backed, too. Not surprisingly, trust is essential – possibly the first ingredient – for encouraging the poor segments of population to join a formal savings institution or scheme. In the U.S. postal bank bill, it was expressed that “the faith of the United States is solemnly pledged to the payment of the deposits made in postal savings depository offices”.

Not all bankers were necesseraly opposed to increased competition by the new created postal bank. A representative of small banks wrote to the NYT: “the savings banks are pleased to have had the Government inaugurate the postal savings banks throughout the country, for it will surely be the means of financial education to thousands of ignorant and folish foreigners, whose habits of hoarding and stowing away their savings on their person or in their homes, hiding it under mattresses and in drawers, is well known”. More strategically, the representative also wrote that after a while – once the upper limit of what they can deposit on their postal savings account ($500) is reached – “they will rush to the State savings banks and increase their volume of deposits and number of depositors”.  Like yesterday, financial literacy helps to grow the overall retail banking market and the depth of a country’s financial market by adding new customers previously excluded.

The first postal banks in the U.S. were first established in post offices of small towns populated by migrants, and only after in big cities (remind you the way Brazil deployed its Banco Postal?). In less than a month time, the first postal bank branches collected an average of more than today’s $ 150,000 each.  A certificate-of-deposit plan was found “admirably adapted to its purpose” since “it is found to be readily understood by depositors and easily handled by Postmasters”. At the time, it was already well understood that it was crucial to develop a simplified and specific offer adapted to poor depositors’ needs and postal clerks knowledges. “Only individuals can open accounts. There can be no joint accounts and no corporation or partnership accounts. All accounts are stricly private. No person connected with the Post Office is allowed to disclose the name or the amount of the deposit of any patron of the bank”. Interestingly too, ” a married woman’s account is held in her own name and free from any interference or control by her husband”. No doubt of the power of financial inclusion in gender issues: what’s new today?

And what were the impacts on local economic development? One of the big concerns during the preparation of the bill was the use of postal deposits and whether they could end up in large Wall Street’s banks in New York rather than remaining in and benefiting first to local communities. Therefore the act that was approved aimed at “keeping at least 65 per cent of the postal savings deposits in the communities where they originate”. Part of these deposits were deposited from day to day in State and National banks with branches in the communities in which the deposits are made or – if not possible – “nearest and most convenient to the postal depositories”  – the postal bank was becoming in a sense an agent of local banks (is branchless banking really new?). These local banks had to keep the postal accounts separated from the rest of  accounts. 5 per cent of the postal savings was held in the Treasury as a reserve and 30 per cent “may at time be invested in Government securities”.

And you, what do you learn from this historical experience for today’s financial inclusion policies?


One comment

  1. Hans Boon · · Reply

    The above appears a selective snapshot from a much broader and longer history of the U.S. postal savings. The reality is that it took 40 years of debate in the U.S. and 2 deep economic crises before the legislation was adopted to launch postal savings. Although there were many parallels in the concept, and objectives the U.S. postal savings system remained relatively very small in spite of the dense post office network, with not more than 5% market share and a 4 million savers before it was terminated as one of the first ones in 1966. Beyond the archives of the NYT there is extensive documentation about the U.S. postal savings, also in international comparisons. Therefore an analysis of that literature might provide deeper historical insight in the factors that contribute or create obstacles to inclusion and access to the poor. The documents available clearly indicate e.g. that in a free market and democracy as the U.S., a very limited and restricted model via public agencies is ineffective. That may therefore also explain the relative success of the Brazilian model based on a partnership between Correios with a full fledged bank operating under competitive conditions. From a development perspective, the lesson that can be shared between the U.S., Brazil and others is that the deposits of small savers should indeed be pooled and used for local (community) development and microfinance, rather than be expatriated to overseas markets.

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