Matthew Yglesias has a post today, riffing off of Kevin Drum’s muted anger, calling for reviving the now defunct (in the United States) “postal savings system“. This system, which began in 1911, was designed to get money out from under mattresses, and encourage banking by immigrants (where postal banking was a common practice). The bank payed a flat 2% interest rate on deposits, which it then re-deposited in local banks at a rate of 2.5%. Upon deposit, customers were given certificates of deposit in $1, $2, $5, $10, $20, $50, and $100 increments. Minimum deposit was one dollar, and deposits were limited (by the end of the system) to $2,500. The system was slow on the pick-up, but really ballooned after 1929 (spiking to $1.2bn in the 30’s), for obvious reasons. However, during the 30’s, with local banking systems in shambles, the practical effect of postal banking was nearly the same as privately hoarding gold.
The draw of the postal banking system, of course, was the “full faith and credit of the United States government”, a guarantee that didn’t exist for private sector banks. Coincidentally, with the passage of FDIC, and after WWII (when it payed an astronomical interest rate relative to the “market” rate), interest in postal banking severely waned, and by 1967, the system was absolved by an Act of Congress. Mildly interestingly, at the time of its dissolution, there was around $50 million unclaimed on deposit, which individuals could claim up until 1985, when payment of any claims were stopped by law. Long before then, however, the system stopped paying interest on deposits.
Now, I’m on the record somewhere (though I can’t find it at the moment?) claiming that the FDIC nearly single-handedly killed financial architecture. By that I mean, banks are ugly now, and the FDIC made them so. Apparently the FDIC also had a hand in killing off the postal banking system. But I still have a lingering question about why it was so unpopular in the US to begin with, and no convincing answers really come to mind at the moment. Many countries (including Germany and Japan) still operate a public postal bank, although many are in the midst of being privatized (along with postal delivery in many countries!).
I think postal banks in the current era would be a magnet for small and very short-term demand deposits, and not much more. Those types of deposits are, of course, the type that people have trouble with (as far as ‘vanilla banking’ goes). Thus, the bank would likely be relatively costly, as I’m assuming that “we” would be subsidizing smaller explicit fees. This would undoubtedly help people who don’t manage their accounts very well (or don’t even have an account, as many poorer people don’t), but doesn’t do much by way of preventing that from happening. Pair it with a savings lottery, and you have a nice idea to help poor people build intergenerational wealth (a bigger problem). And of course the “payday lending” industry is ever-unpopular, so it’s an easy political solution.
Finally, you have a question of what is done with the deposits. Direct loans (of course to ‘small business’)? T-bills? Muni’s? Redeposit in other lending institutions? I would, of course, warn that a public savings bank given a broad enough mandate would be a nearly irresistible vehicle for highly subsidized (and politically directed) lending. I don’t think that we’re headed this way; but the history is not exciting, nor are the possibilities — so it is a natural subject for me to think about.