Written by: Mehrsa Baradaran
As the debate over reinstituting postal banking heats up, we should know we had it. And it worked.
Last week John Oliver offered up an exposé on payday loans, describing them as “the circle of debt” that “screws us all.” And at the conclusion of Oliver’s takedown on payday lending Sarah Silverman offered low-income borrowers better alternatives—including donating blood and jumping in front of rich folks’ cars. But there is a burgeoning alternative to usurious payday lending: postal banking, which allows low-income Americans to do their banking—from bill payment to small loans—at the same post office where they buy stamps. As states try to regulate away the payday-lending sector, their desperate customers may be pushed either into the black market or bankruptcy. Postal banking is a much better solution. It is time to consider a “public option” for small loans.
Every other developed country in the world has postal banking, and we actually did too. It is important to remember this forgotten history as we begin to talk seriously about reviving postal banking because the system worked and it worked well. Postal banking, which existed in the United States from 1911 to 1966, was in fact so central to our banking system that it was almost the alternative to federal deposit insurance, and served as such from 1911 until 1933. The system prevented many bank runs during a turbulent time in the nation’s banking history—essentially performing central banking functions before the Federal Reserve was up to the task. Postal banking helped fund two world wars and reduced a massive government deficit after the Great Depression.
Postal banks started in Great Britain in 1861 and, from the outset, the primary goal was financial inclusion. But in the U.S., postal banking had other uses as well: In 1871, President Ulysses S. Grant’s postmaster general, John Creswell, proposed post office savings banks to pay for a new telegraph system. President Grant himself endorsed the postal banks as a way to free up hoarded money in far-flung regions of the country. But the nation’s bankers opposed it. They objected to the notion that all the deposits would go directly to the Treasury. Everyone feared centralized bank power, and localism in banking was as sacred as the Constitution at the time. The American Bankers Association objected to the competition with the federal government. Ideological opponents called it communist, socialist, and paternalistic. While they claimed that the private markets and savings banks were sufficient, in fact 98 percent of all savings banks were in the five northeastern states, leaving the South and the West virtually unbanked.
Once the idea was first proposed, nine postmasters and almost every president, except Grover Cleveland pushed the issue for 40 years. Almost 100 bills died in Congress before anything happened.
After the panic of 1907 (A panic that started on Wall Street and led to bank runs across the country) momentum finally shifted. In the 1908 presidential election, banking reform became a major issue with William Taft actually campaigning on postal banking as a way to stabilize the banking sector and help credit-starved regions like the South and the West. Taft won and his administration initiated postal banking.
Taft’s clear support of postal banking and his electoral mandate still weren’t enough to overcome bank and Democratic opposition. The Postal Savings Bank Bill, as passed, finally acquiesced to both localism and private bankers by mandating that almost all of the postal deposits stay in the community of origin. The debate at the time over whether postal banks were needed is illuminating today. Opponents claimed that anyone with money to save was already saving it. The Boston Globe opined, “It is easy enough for anybody to find a savings bank; the trouble is to find the savings to put in it.” Others urged that the reason rural dwellers were not saving in banks was because of the “ignorance of the common people,” or because “the inhabitants of remote rural districts are not so well posted in the world’s wicked ways as those who have the opportunity of perusing the daily papers.” In other words, some people are just too dumb and too poor to bank. Today we hear similar claims that the problem with the poor and unbanked is that they “lack financial literacy” or that they just don’t have enough money to open a bank account. The truth is that they are plenty literate, but they either don’t trust banks or the banks left their neighborhood years ago, leaving only payday lenders.
The bill eventually passed in 1910 and created what was called the United States Postal Savings System.* The interest on accounts was set by statute to a low 2.5 percent to avoid luring customers away from banks. The postmasters and supporting congressmen also called the postal banks “the poor man’s banks” to set bankers at ease. Accounts were capped at $100 deposits allowed per month and a total savings cap of $500—the limit was raised to $2,500 dollars in 1918.
By 1913 (just two years later) the banks had received $32 million—most of which came from “stocking banks,” as reported by the New York Times in 1913. The Times reported with frustration that many larger deposits were turned away and that the current deposits likely represented a fraction of those available. Princeton University historian Sheldon Garon claims that it was these caps and concessions that ultimately doomed the postal banking system in the United States. And ultimately, it was not southerners and westerners that most needed the banks as had been expected (although they eventually came around). It was the raft of recent immigrants in urban areas who immediately took to these banks. The reason (from congressional testimony in 1913): “Hundreds of thousands of our newly made citizens distrust banks and will not patronize them. They have absolute confidence in the Government and know what postal savings banks are.” The post office offered information to customers in 24 languages and would pass out leaflets right outside the ports of entry into the U.S. Consequently, the busiest postal banks were those right near the ports. By 1915, immigrants owned more than 70 percent of the postal bank’s deposits even though they were less than 15 percent of the population. There were accounts of deposits coming in stockings and cans with the paper money rotting and the coins rusted.
By 1934, postal banks had $1.2 billion in assets—about 10 percent of the entire commercial banking system—as small savers fled failing banks to the safety of a government-backed institution. And this trend might have continued if President Franklin Delano Roosevelt didn’t have broader banking reform in mind. But Roosevelt chose the FDIC over postal banking as a way of stabilizing things. Paradoxically, the same Roosevelt who forged an unprecedented expansion of the federal government during the New Deal would choose a bank-funded insurance scheme as opposed to a public banking system.
But even this was not the end for postal banking. FDR used the postal banks to sell Treasury bonds in 1935 to pay off the budget deficit after the Great Depression. In 1941, the postal banks started selling “Defense Savings Stamps” to help fund the war. The campaign was a phenomenal success. By the end of World War II, the government had raised $8 billion in war funding from the post office alone.
Deposits also reached their peak in 1947 with almost $3.4 billion and 4 million users banking at their post offices. In part this was because in 1940, the post office introduced the world to banking by mail, which appealed to soldiers stationed abroad.
But it was the beginning of the end. In 1946, 68 percent of the nation’s towns and cities had both postal savings depositories and banks. And because banks could charge higher interest than the post office and were just as safe, the USPSS was no longer an attractive option for deposits. This is no longer true today as banks have been squeezed on all sides by money markets, capital markets, and foreign banks. Banks began to abandon poor areas and post offices remained, but without banking services. And once banks deserted low-income neighborhoods starting in the 1970s, the high-cost payday lenders and check-cashers flooded in.
In 1965 the postmaster generals started to endorse ending postal banking. In 1966 it was officially abolished as part of Lyndon Johnson’s streamlining of the federal government. The postal banking system died a quiet death without public discussion. The public and press failed to note the centrality of postal banking in one of the most turbulent periods of banking in our country. Postal banking was America’s most successful experiment in financial inclusion—a problem we face again today. As we contemplate whether it has a place in our future we must recall the vital role it played in our past.
Mehrsa Baradaran is an associate professor at the University of Georgia School of Law specializing in banking law and is author of a forthcoming book on the subject.
For a discussion on banking opportunities watch this interview featuring Mehrsa Baradaran: