Post Office Banking: Banking Profiles
Executive Summary
- Post office banking is in the US’s history and is also commonly found in other countries.
- Private banking interests strongly opposed any government involvement of competition in banking.
Introduction
What is little discussed is that the banking entities in the US with the highest ratings by their customers are not private banks but credit unions. Credit unions are community banks and unlike a standard private bank, credit unions are set up legally as non-profits. This means they pay back any profits they do accrue to their members. Credit unions are normally set up to serve a targeted customer base, like teachers in a region or the employees of a state. Under a situation where private banking was to be eliminated, credit unions are a likely outcome. However, once again, credit unions receive their money creation capability entirely from the government. And they charge interest rates. As has been explained in other entries, interest rates are only necessary when there is a private central bank and private banks. Credit union employees would be prime candidates to be rolled into a US government banking system.
The importance of the US Post Office is covered in the following quotation.
In an 1832 encyclopedia article about the American post office, political theorist Francis Lieber ranked it with the printing press and the mariner’s compass as “one of the most effective instruments of civilization.”1 Most nineteenth-century Americans agreed: the postal system was “one of the most notable features of American public life.” It erased community borders and connected the spacious country—leveling the information playing field by disseminating information and public discourse. One contemporary observed that it enabled a better democracy than that enjoyed by the Greeks, Romans, or any other celebrated civilization because it provided a medium for communication to spread to each corner of the land, “penetrating its darkened regions, and equalizing, elevating, and harmonizing … the social position and geographical distribution of the people.” And, said one historian, it was the “agent of change” that set in motion a democratic revolution that “transformed American public life.” The U.S. Post Office Department was “quite literally without precedent in the history of the world.”
Source: How the Other Half Banks
https://www.amazon.com/How-Other-Half-Banks-Exploitation/dp/0674286065
Deposits in postal banks remained stable in the 1920s, but in the 1930s, the postal banks swelled with an influx of depositors running away from banks. In 1930 alone, almost fifty thousand new depositors fled to postal banks with almost $22 million in additional deposits, totaling $191 million in deposits. Those deposits continued to double every year for the next three years. Postal banks’ regional focus also shifted dramatically during the Great Depression, from immigrant hubs in the Northeast and West to the Midwest and the South, where bank failures were more prevalent. By 1929, only 39 percent of depositors were foreigners. Not only were fewer immigrants coming to America, but those who had started with postal banking accounts graduated to regular bank accounts. By 1934, postal banks had $1.2 billion in deposits—about 10 percent of the entire commercial banking system. The Times reported Postmaster Walter Brown’s explanation: “The postal savings system is a logical refuge for the timid, and functions best in areas of financial stress.” A historian analyzing the postal banks in 1936 said that this rise in deposits meant that the post office would significantly influence the banking system. This was confirmed by a 2013 economic analysis showing that postal banking actually reduced bank runs during the Great Depression by infusing liquidity into local banks and by providing a safe haven for deposits. In 1933, Congress finally approved the collection of postal bank deposits by the Treasury in order to help pay for mounting government debts. President Roosevelt started selling postal savings bonds and eventually, Treasury bonds, through 1935. But Roosevelt chose to deemphasize the postal banks as a method of banking reform. He had his eyes set on much broader reforms, including creating a federal deposit insurance fund to quell the instability in banks. Once Federal Deposit Insurance Corporation (FDIC) insurance was created, banks became safe enough for even the most timid depositors. Funds flowed out of postal banks and back into mainstream banks almost immediately. In 1941, the post office began courting patriotic citizens with “Defense Savings Stamps,” which were treasury bonds used to fund the war. The post office heavily advertised these bonds in schools, magazines, newspapers, and radio ads. In fact, the majority of these bonds were sold to schoolchildren using a robust advertising campaign and the slogan “Buy war bonds.” There was no age minimum for buying the bonds, and the young and the small savers poured in money so that they too could help Uncle Sam. During their first year, the bonds brought in over $100 million. The postmaster general report reveals that war bonds became the post office’s most popular service until the end of World War II. Deposits actually jumped in 1947 to their historic peak of $3.4 billion in deposits and 4 million users. One reason for the boost is that in the 1940s, the USPSS introduced the world to banking by mail. Many servicemen abroad deposited their earnings into postal banks.123 By the end of World War II, the government had raised about $8 billion in additional war funding through war bonds and Treasury bonds sold through the post office. The post office banks did not lend consumer or mortgage credit, but in wartime, they were successfully retooled to solicit investments in U.S. savings bonds and war stamps. By the 1950s, deposit insurance had become a resounding success, practically halting the tide of bank failures and boosting confidence in the system. With no war to fund, deposits rapidly flowed out of the post office and back into banks at a rate of about a 10 percent loss per year for three years starting in 1950. Although postal banks had enjoyed locational advantages during the previous era, there were now more roads and cars, allowing rural dwellers to reach banks—not to mention the creation of banking by mail, which most banks had by then adopted. By 1950, 68 percent of the nation’s towns and cities had both postal savings depositories and banks. And because banks could pay higher interest than the post office and had become just as safe, the USPSS no longer presented an attractive option for depositors. Poverty and immigration were also at a historic low. This was the heyday of banking. During the postwar economic boom, thrifts, credit unions, and commercial banks proliferated into many neighborhoods, and most people could open a bank account if they wanted one. Decades later, however, this would no longer be the case. Banks abandoned poor areas. Post offices remained, but without any banking functions.By 1952, after two government studies found that the USPSS was no longer justified and that the program’s original goals likely no longer applied, bills began being introduced to end the USPSS. The first was proposed in 1952 by first-term senator Wallace F. Bennett (R-UT), the father of Bob Bennett (R-UT) and a member of the Senate banking committee. Eisenhower’s postmaster general, Arthur Summerfield, attempted to raise the deposit limit in 1957 to save the system, but both of President Lyndon Johnson’s postmaster generals supported legislation to end it.In 1966, the USPSS was officially abolished as part of Johnson’s streamlining of the federal government. There were fewer than one million account holders at the time.
Source: How the Other Half Banks
Tocqueville remarked that in America, unlike in European countries, an uneducated “backwoodsman” in far-flung Michigan knows just as much about the affairs of the government as those living in the capital: “There is an astonishing circulation of letters and newspapers among these savage woods.… I do not think that in the most enlightened rural districts of France there is intellectual movement either so rapid or on such a scale as in this wilderness.”
Source: How the Other Half Banks
The highly coveted, distinctive position of postmaster in each town was given to its most prominent and trusted citizen. The fact that women and blacks were explicitly excluded from being postmasters was a fighting cause for both groups for nearly a century. The exclusion instilled institutional racism and sexism that prohibited their full participation in public and political life. Frederick Douglass complained that the fact that blacks were “not trusted even to carry a mail bag twenty yards across the street” stigmatized the race and inculcated a sense of their inferiority. The postal policies of racial and gender exclusion proved to be significant barriers for these groups precisely because the post office came to represent democratic equality.The Post Office Act of 1792, supported by George Washington, James Madison, and Alexander Hamilton, has been called “one of the most important single pieces of legislation to have been enacted by Congress in the early republic.” The act made several crucial decisions that would shape our first-rate democracy and economy. First, it was decided that the federal government would financially support the post office without requiring it to produce a surplus like its counterparts in Europe.11 It was to be self-sustaining but not profitable and when needed, supplemented by the Treasury. This made the post office department the largest government agency by far during this time. Second, the post office would serve every community without regard to profit. In other words, profitable routes (along the Eastern Seaboard) would subsidize the east-to-west routes. Other shippers could compete with the post office along these routes, but the post office could not discontinue any route without congressional approval. Third, Congress would subsidize the dissemination of newspapers through the post office. The subsidy, financed by merchants who paid handsomely to mail letters, reduced the price of newspapers by 700 percent. In other words, wealthy northeasterners were paying for information to be carried to the rural farmers of the South and West. Information was critical to participating in the economy and in the political process, so the federal government enabled the flow of information to all regions without worrying about costs.
Source: How the Other Half Banks
The federal government was, in the modern words of Grover Norquist, “so small you could drown it in a bathtub” when it decided to financially support the post office. In effect, the postal service was one of the only services the federal government provided. Even fiscal conservatives like Alexander Hamilton endorsed its foundational principle: communities over profits.20 (The federal government rejected this principle in 1970 when it decided that the post office should be cut off from the government and left to fend for itself.)Many have forgotten that the post office made much of the budding American economy possible. Upon explaining successful retailer Montgomery Ward’s ability to use free market competition to revolutionize sales in America, even Thomas Sowell, an unabashed proponent of laissez-faire free markets operating without government intervention, observed: “Montgomery Ward cut delivery costs by operating as a mail-order house, selling directly to consumers all over the country from its huge warehouse in Chicago, using the government’s already existing mail delivery system to deliver its products to customers at lower cost.” The beauty of this organization is that because it focused on access to communities over profits, it was able to adapt and offer different services to accommodate the needs of the country. Its central mission being equality of access, it was not long after its creation before that encompassed financial inclusion. Postal banking started in Great Britain in 1861. From the beginning, the goal of postal banking abroad was financial inclusion. Postal banks were such a success in England that one contemporary called them “the greatest boon ever conferred on the working classes of this country.” In England, postal banks were geared toward “the humbler classes” and offered a low interest rate of 2 percent on deposits, below those of existing banks. Once the British system started, word spread internationally through the fastest means available at the time: the post office. The idea quickly spread across the British Empire to New Zealand in 1876, to Canada in 1868, and to New South Wales in 1871. After two decades, almost every Western country—plus Japan—had adopted nationwide postal banking. Germany was the only country that chose not to implement postal banking because it already had an extensive network of savings banks and credit unions. Germany’s savings banks formed a national union to fight the creation of a postal-banking system, and it wasn’t until 1939 that Hitler’s Third Reich overcame this opposition and established postal banking. In 1871, President Ulysses S. Grant’s postmaster general, John Creswell, proposed postal savings banks in the United States modeled after those in Great Britain.
Source: How the Other Half Banks
The post office, with its rich history and public mission, proved the obvious choice for providing this service. With branches in communities where no bank and certainly, no savings bank, would go, the post office could potentially do with savings what it had with information—democratize banking.
Source: How the Other Half Banks
Almost every postmaster general, from the time of Creswell’s initial proposal until it passed, supported postal banking.45 The only gap occurred during the two terms of Grover Cleveland (1885–1889, 1893–1897), the only Democrat to hold office during the forty years of debate.
Source: How the Other Half Banks
The public and the press failed to note the centrality of postal banking in one of the most crucial periods of banking reform in our country. Postal banking almost proved to be the alternative to FDIC 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 serving as a central bank before the Federal Reserve was up to the task. The deposits that flowed into the postal banks from the poor were centralized in the Treasury, as well as in localities, and then infused back into banks during times of need. Postal banking helped fund World War II and reduced government deficits after the Great Depression.Most crucially, postal banking was the most successful experiment in financial inclusion in the United States. More effective than any other philanthropic or mutual effort to bank the poor, postal banking brought millions of new immigrants and rural dwellers into the U.S. banking system all at once. One of the central aims of the postal banks was also the most difficult to measure: teaching habits of thrift and saving to the poor. In 1970, as the market-based philosophy swept the banking world, the post office was also transformed. For one, it was spun off the federal government and required to fund itself. It would no longer receive government help to support unprofitable routes. Further, it would have to balance its own budget, even if that meant cutting services. In the last decade, as Internet technology has fundamentally changed the way in which we communicate, the very purpose and necessity of the post office has been called into question. The institution has struggled financially due to technological change as well as competition from private companies like the United Parcel Service and FedEx. But its fiscal woes also have political roots. In 2006, Congress forced the post office to prefund its employee pension plans (something not required of any other government agency)—a political maneuver some claim was designed to hasten the institution’s decline. The legislation immediately caused a $5.5 billion shortfall per year, from which the postal service has yet to recover.128The structure of the postal system today is a mix of public and private, but the bottom line is that it is a federal agency that is not funded by the public fisc. After the passage of the Postal Reorganization Act in 1970, which relegated the United States Postal Service (USPS) from a cabinet department into an independent agency, the USPS began operating somewhat like a business. Unlike government-owned corporations such as Amtrak, the USPS is still a federal agency and is governed by an eleven-member board of governors, nine of whom are presidential appointees who serve staggered terms.129 The Postal Reorganization Act cut the purse strings to the USPS, and it shifted from relying on taxpayer money to cover the cost of operations to generating revenue from postage.130 The post office has a revolving fund with the Treasury, into which it must deposit all revenues and profits from its products. In other words, the USPS has no shareholders or investors who make money if it becomes profitable. The problem, however, is that the postal service has not been making a profit but has been operating under a deficit since 2006. The Treasury has loaned the postal service a total of $15 billion since the 2006 legislative change, and it reached its debt limit in 2012. And so, amid financial woes and a decreased demand for physical mail, the U.S. Postal Service has begun to cut costs and services. Without a new revenue source, it will be forced to cut routes and in time, potentially shut down an establishment that helped shape America as an egalitarian democracy. It is within this context that calls for reviving the postal-banking system can be heard.
Source: How the Other Half Banks
Current estimates show that the unbanked spend $89 billion each year on financial fees and services.2 All of this money goes to alternative financial service providers—payday lenders, check-cashers, and other nonbanks that charge high fees to store and move people’s money. Providing these services at much lower costs has a triple advantage of reviving the beleaguered but too-important-to-fail postal service, putting the money back in the pockets of the poor, and providing an alternative to a harmful industry that has proved nearly impossible to regulate away. Postal banking may seem radical to many in the United States who remain convinced that banking should be a “private market” free from “government intervention,” but it is a mundane part of life for the rest of the world. Postal banking abroad is the norm, not an aberration. Postal banking has operated in many Western countries since the 1800s, and currently, fifty-one countries use postal banking as their primary method of financial inclusion—only 6 percent of postal carriers worldwide do not offer banking services. (It is estimated that postal banking has banked over one billion people worldwide.) A variety of models exist worldwide—some focus on the poor and others offer postal banking services to the entire population. In fact, the United States is one of the only developed countries in the world without a postal banking network. However, we do not need to look abroad for a justification or even a model for postal banking when we can refer to our own rich history.
Source: How the Other Half Banks
A 2015 survey shows that over half the population has savings that they do not deposit in banks and many admit they store their cash in sock drawers, cookie jars, under mattresses, or in their freezers. It is possible that just as in the 1900s, hoarded money from across the country would pour into the postal banks from under mattresses, from prepaid cards, or from funds otherwise wired abroad. Historically, only federal government involvement in credit markets has increased lending and lowered the costs of credit. By insuring deposits, providing liquidity through the central bank, creating secondary markets enabled by government-sponsored enterprises (GSEs), and constructing a structure of government support, private banks have been able to lend at unprecedented levels. Postal banks could connect to this existing apparatus and route credit directly to borrowers without having to circulate the money through the bloated banking system.
Source: How the Other Half Banks
The post office is an independent agency connected to the federal government, which means that all excess profits are forfeited to the Treasury. Because the post office has no shareholders demanding a return on investment, it is unlikely to be motivated to take advantage of its customers for private gain. All gains will be public, as will losses. A board of directors, presumably public representatives chosen by a democratically elected president, would be tasked to oversee its activities.In addition, the post office can naturally reduce the high costs of lending to the poor because of its already large network of existing branches. Compared to payday lenders, the post office can use its present infrastructure and staff, thus saving money otherwise spent on advertising, marketing, personnel, and stores. It can add revenue on day one without the expense of starting from scratch.
This is critical because of how profit incentives have turned private banking into a highly unethical industry.
Source: How the Other Half Banks
Finally, because the post office never left the regions forsaken by the banks and other businesses, it has developed an ongoing relationship of trust with these communities. Many unbanked individuals already buy money orders at their local post office. This means that the post office has access to a customer base that is not comfortable in banks. Surveys of the unbanked show that minority groups are significantly more likely to be unbanked than other groups. This is especially true in certain regions of the country, such as the South for blacks, regardless of income or financial status. Certain groups simply do not patronize banks because they do not trust them. But the cultural and class barriers that keep many people away from mainstream banks do not exist at the local post office.In many inner-city and rural communities, the post office is the crowded and bustling place where the neighborhood gathers to do its business, helped by clerks who are members of that same community. Even those who never go to their local post office branch are familiar with the mail carrier who visits their home daily. And following history’s cue, the postal network can offer information in more languages than do banks and appeal to the large population of immigrants, or even the undocumented, who have money to save, but no access to banks. Many of these workers currently send their money abroad—money that can be induced to stay within America’s borders. As it was in the 1900s, this can be a surprising source of revenue for the postal banks.Trust, especially in banking, consists of more than just a “nice feeling.” It is a way to lower costs and reduce barriers of entry. This was the point of government deposit insurance. Banks cannot survive if their customers do not trust them to hold and lend their money. It is hard to predict whether the public will warm to postal banking, but in light of historical and international experience and the significant modern distrust of fringe banks, the public may view the post office as a safer and more trustworthy place to store funds. If this is the case, the post office may even decide to forego the added costs and regulatory burdens of FDIC deposit insurance because the post office’s position as a federal agency and its access to the Treasury’s deep pockets can fulfill essentially the same function as FDIC insurance. If the goal of federally funded deposit insurance has been to stop bank runs, it would be redundant for a deposit account linked to the federal government to also be insured by it.
Source: How the Other Half Banks
In fact, in the 1900s postal banking was considered a safer and more complete substitute to quell banking panic than federal deposit insurance.The public already trusts the U.S. Postal Service and this trust is not undeserved. The post office enjoys a history of service to the American people unrivaled by any other institution or government entity.
Source: How the Other Half Banks
In a way, the post office serves as a perfect foil for the banking industry. The latter receives hefty federal government support and rejects any public-serving function and the former is currently receiving limited federal government support and yet views public service as its primary mission. Even today, the stated mission of the U.S. Postal Service is “to provide postal services to bind the Nation together through the personal, educational, literary, and business correspondence of the people. It shall provide prompt, reliable, and efficient services to patrons in all areas and shall render postal services to all communities.”
Source: How the Other Half Banks
The ideological opposition, much like in the 1800s, will likely revolve around the idea of too much state intervention in markets, a slide toward Socialism, and an overbearing or paternalistic state. If the reader has made it this far in the book, hopefully, that line of reasoning can be dismissed outright. Pitting a public option against a private banking market is a handy rhetorical tool, but it’s just smoke and mirrors. The banking system exists on a foundation of heavy state intervention.Opposition will also come from banks, which for two centuries have reliably and consistently opposed any potential threat to their market share—even before they are certain it will be a threat. When the post office inspector general’s office released its White Paper report with the banking proposal, many in the banking industry quickly responded that not only were they already meeting market needs but that it also was a terrible idea—“the worst idea since the Ford Edsel.” The credit union lobbyists have also opposed the idea, reasserting that they are meeting these needs. These claims were made a hundred years ago about postal banking, and they were as wrong then as they are now. Banks are no longer interested in small accounts or small loans. Policymakers beholden to payday lenders will also likely oppose the bill by saying that payday lenders do their best to meet the needs of a hard-to-bank public. Although any market share the post office takes would come directly from the payday lending industry, that industry’s destruction due to cheaper credit cannot be lamented too greatly. The large and profitable payday industry serves very little public purpose besides meeting the credit demands of the desperate with interest rates only the desperate would pay.Others will point to the practical difficulties of an inefficient government agency’s ability to manage the complexity of offering financial services to a large sector of the population. It is worth noting at this point that the post office manages to deliver mail to every mailbox in the country daily, even to remote U.S. territories that other shippers will not service. Some claim that postal employees, who are trained to sort mail and sell stamps, will not be able to operate financial instruments. However, these critics underestimate postal employees. Unlike many similarly situated companies, the post office still offers its staff a route to the middle class. As such, they are able to recruit many talented and loyal employees.Not only are postal employees capable individuals, but providing simple financial products does not require years of skilled training. Consider the numerous bank tellers or Wal-Mart and Cash America employees who manage this very thing while earning smaller hourly wages and fewer benefits than postal employees. Can the post office handle the challenges of becoming a quasibanking institution? There is no indication it cannot, especially with the help of specialized banking and industry experts who would almost certainly be enlisted to help with the transition. The post office can even partner with banks or credit unions for their servicing and automated teller machine functions.Others have pointed to the epic demise of the GSEs Fannie Mae and Freddie Mac during the financial crisis as a reason to avoid government intrusion into credit markets. However, this clearly misunderstands the causes of Fannie Mae’s and Freddie Mac’s failures. The GSEs, particularly Fannie Mae, successfully brought mortgage lending to the American people. By creating a secondary market for mortgage loans and acting as the central intermediaries for all mortgage lending, they made mortgages accessible to all from the time they were created until they were privatized. The problem with their privatization was that they retained the implicit support of the federal government—the markets treated the GSEs as though they had the federal government’s backing when they did not. The private shareholders who controlled these institutions were incentivized to profit in the short term by taking on too much risk, which made them inherently unstable. The government did not share in the corporation’s profits during the housing bubble, but when Fannie Mae failed because it had taken on too much mortgage risk, the federal government had to take on its losses and bail it out as the market had assumed it would.The problem of public losses and privatized gains is inherent to any government-supported bank, but it was magnified with the GSEs due to their size and their ambiguous nature as quasigovernment entities. The same circumstances doomed Freedman’s Savings Bank: the façade of government support over a privately run, profit-motivated institution. An institution that operates for the benefit of private shareholders yet advertises that it is a public institution is a dangerous lie.