In my last post, I discussed the experience of "postal savings" in America—its origins and how its flawed legislative design caused harm during the Great Depression. I showed that some features of the postal savings system adopted for political expediency, such as its fixed interest rates and the requirement to re-deposit the bulk of funds with local banks (but not savings and loan institutions), may have encouraged Depression-era bank runs and delayed the housing market's recovery.
Today I'll discuss the end of the old postal savings system half a century ago, and the idea's surprising recent rehabilitation, this time as an ostensible solution to America's unusually high rate of "unbanked" households. After critically assessing three widely held beliefs underlying the argument that postal banking can help the unbanked, I conclude that it is in fact unlikely to prove effective at achieving that goal.
The Decline of Postal Savings after WWII
The old postal savings system lasted until 1966, when Congress finally put an end to it. Yet its attractiveness to depositors had been dealt a fatal blow as early as 1934, when the advent of federal deposit insurance made ordinary (i.e., commercial bank) deposit accounts just as safe for balances up to $5000, which was more than the limit on postal savings accounts.[1] After a renewed period of growth during World War II, spurred by soldiers' need to bank by mail—a service commercial banks did not offer until after the war—the postal savings system went into terminal decline. In the two decades after 1945, the number of postal depositors fell by 80 percent, from more than four million to around 800,000.
Many postwar trends, from the spread of automobile ownership to the growth in the number of bank offices and the expansion of bank hours, also contributed to postal savings' decline. As early as 1952, the U.S. Comptroller General reported that "the main purpose and justification for the Postal Savings System are no longer applicable," and suggested that Congress consider whether there was still any need for it. Bills to abolish the system were introduced in every session of Congress between 1952 and 1966, when a broad majority finally passed the legislation, which President Johnson went on to sign.
The Rebirth of Postal Banking
By the time it ended, the postal savings system was already seen as a relic from the past. Yet half a century later, it is back on the policy agenda. No fewer than four of this year's Democratic presidential primary contenders, including Joe Biden, have called for its revival. Other prominent lawmakers, such as Rep. Alexandria Ocasio-Cortez (D-NY), and Sens. Bernie Sanders (I-VT) and Kirsten Gillibrand (D-NY), have in turn sponsored postal banking bills. These modern proponents of postal banking have also revived the argument first made in favor of postal savings over a century ago, namely, that commercial banks and other private financial institutions are not meeting the needs of low-income Americans.
Even if one accepts that argument, the proposed solution—a return to postal banking—seems anachronistic at best, coming just as the digitization of financial services seems poised to diminish the importance of brick-and-mortar bank offices. What, then, explains the allure of as aggressively "analog" an institution as postal banking? Cynics might say that its proponents are less concerned with helping the poor than with creating a new revenue source for the ailing U.S. Postal Service, as well as a new means for the distribution of subsidized credit. This agenda no doubt plays a role. But I believe that proponents of postal banking have also fallen victim to three popular yet mistaken beliefs concerning the capacity of postal banking to bank the unbanked.
The first of these mistaken beliefs is that the unbanked today resemble those who found postal savings accounts attractive 100 years ago. The second is that the absence of conveniently located brick-and-mortar bank offices is an important reason why many people lack a bank account. The third is that postal banking is a relatively efficient way to bring cheaper payments and credit to unbanked households.
The Demographics of Postal Banking
Immigrants were heavy users of the old postal savings system—so much so that one observer wrote in 1917 that that system was "to a large degree an immigrant's bank," noting that this circumstance was "peculiar to the United States." At the time, 60 percent of postal savings depositors, accounting for three-quarters of total deposits, were foreign-born. African Americans, on the other hand, accounted for just 1.6 percent of postal depositors, even though they made up 12 percent of the population. One reason for their low participation was that most African Americans lived in the South, where fewer post offices offered postal savings accounts. Elsewhere, and especially in the urban Northeast, African Americans were more likely to have postal savings accounts.
Because the unbanked today include disproportionate numbers of unnaturalized immigrants and minorities, many present-day proponents of postal banking regard the past record of postal banking as evidence that its revival would assist them: According to the FDIC, 16.2 percent of foreign-born non-citizen households lack a bank account, compared with 5.9 percent of U.S.-born and 4.8 percent of foreign-born citizen households.[2] African Americans and Hispanics have unbanked rates of 16.9 percent and 14 percent, respectively, against just 3 percent for white households. The language spoken at home is another strong predictor, with Spanish-only households four times as likely to lack an account as ones in which English or some other language is spoken.
But there are also significant differences between today's unbanked and users of the old postal savings system. For one thing, the immigrants who patronized postal savings in the 1910s and 1920s tended to hail from European countries, such as Greece, Russia, Italy, and Austria-Hungary, which had established postal banks. In contrast, postal banking has been much less important, if not altogether absent, in Mexico, China, and India, the three countries that supply most present-day immigrants to America. Post offices today also play a smaller role in the lives of immigrants than they did one-hundred years ago. With the drastic decline of letters as electronic communications became more accessible, immigrants visit post offices much less often than they once did. Even when they wish to send money orders, which were once a popular USPS offering, present-day immigrants rely mainly on private providers rather than the USPS, which now handles just 0.03 percent of international money transfer volume. Domestic money order volume, meanwhile, has dropped by 60 percent since 2000.
Do Physical Facilities Matter?
Proponents of postal banking often say that the USPS's 31,322 post offices could help it to reach households that lack ready access to bank offices. The USPS's "universal service obligation" requires it to maintain postal facilities and personnel to serve every ZIP code in the country. For that reason, even though there were 81,356 bank offices—headquarters plus branches—in the U.S. in 2019, post offices can be found in census tracts that have no bank branches within a 10-mile radius—so-called "banking deserts." Were distance from a banking facility an important reason why many are unbanked, the presence of post offices where there are no banks would itself be a compelling argument for postal banking.
But the unbanked generally aren't so because they lack nearby bank offices. The FDIC's unbanked survey shows only 9.2 percent cite "inconvenient locations" as a reason for their status, with just 2.1 percent calling it the main reason. By contrast, 52.7 percent cite lacking enough money to keep in an account, and 30.2 percent say they do not trust banks. According to a Federal Reserve survey, although households are more likely to open an account at a bank with a branch near them, their decision whether to open an account at all is not affected by whether they live near a bank branch.
Nor do many unbanked people live in banking deserts. Of the more than 20 million in unbanked households, only around four million live in banking deserts—half of them in urban deserts, and the other half in rural ones. The median rural resident lives farther away from a bank branch than the median urban resident, yet almost as high a percentage of rural as urban households are customers of at least one bank (95 percent vs. 96 percent). And households in the largest urban centers are often more likely to lack an account than those living in suburban and even rural areas. For example, New York City has a higher unbanked rate than the national average, despite lacking even a single banking desert.
Access to Financial Services
If postal savings proponents in 1910 wanted to encourage "thrift among the poorer classes," their 21st-century counterparts wish to bring inexpensive payments and credit to the unbanked. They see postal banking as an efficient—relatively fast and inexpensive—way to do this. But even if the USPS could develop the requisite infrastructure in short order, which is itself doubtful, postal banking would probably not be very cost-effective. On one hand, the USPS is more expensive to run than comparable private businesses. On the other, certain regulations are far more responsible for limiting the appeal of bank accounts, especially among the poor, than any lack of banking facilities. Eliminating such regulations would therefore be a speedier and less costly way to help the unbanked.
Far from benefiting from economies of scale and lower per-unit costs, the USPS has comparably high fixed and operating expenses. This is in part because many of its facilities get very little foot traffic—less than five visits per day for the bottom 15 percent of post offices. But employee compensation accounts for the bulk of the USPS's costs. My colleague Chris Edwards recently quoted figures from the Treasury Department showing that the average USPS employee earns between 10 and 30 percent more than his private-sector counterpart at UPS and FedEx. And there is no reason to assume the new staff hired to run postal banking services would earn any less, since USPS compensation is subject to collective bargaining.
Besides being costlier than many of its proponents assume, postal banking would not address the real reasons the unbanked offer for their plight. Consider, for example, the cost of keeping a bank account. Roughly one third of the unbanked say that not having enough money to keep in an account is their main reason for lacking one, while another 10 percent cite account fees. The reason they do is that around 70 percent of bank accounts offered today require account holders to either maintain a minimum average balance—usually somewhere between $1,000 and $2,000—or have a certain value of monthly direct deposits to avoid a monthly fee somewhere between $7 and $15.
Yet as recently as 2009, 80 percent of accounts had no such maintenance fees. While several developments since 2009 might have contributed to the change, an important recent study blames it on one particular post-crisis regulation: the Durbin Amendment capping debit-card interchange fees. That only larger banks subject to that regulation cut back on free checking and raised account fees is compelling evidence for that explanation. If the Durbin Amendment is indeed at fault, repealing it should promote renewed growth in free checking accounts, financed with interchange fees from accountholders in proportion to their spending, which usually correlates with disposable income.
What about the other reasons the unbanked cite for their situation? Distrust of banks may be a consequence of bad experiences with the banks of other countries, at least among immigrants. If so, their beliefs can only be changed by experience. In the meantime, policymakers could help by allowing firms that the unbanked patronize and trust to offer basic accounts to their customers. The list of well-known and trusted institutions in America is not short, and it includes the USPS but also tech firms—Amazon, Google, and PayPal—private couriers—UPS and FedEx—as well as Chick-Fil-A, Home Depot, and Walmart. And many of these firms have greater foot traffic than post offices, especially among the target unbanked population.
Conclusion: The Strange Persistence of Postal Banking
To paraphrase the USPS's unofficial motto, neither snow nor rain nor heat nor gloom of night—nor the evidence from unbanked surveys—have yet managed to dissuade contemporary proponents of postal banking. But there is no reason to believe that postal banking would significantly lower the number of Americans without bank accounts. That does not mean there are no suitable remedies, but these are more likely to come from innovative tech firms and retailers in the private sector, and from the removal of regulations that have raised the cost of keeping a bank account. Congress was right to end the postal savings system, and it should not reverse this decision more than 50 years later.
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[1] The limit was $2,500 at the time of the passage of deposit insurance legislation. It then rose to $5,000 in 1935, $10,000 in 1950, and $15,000 in 1966 when Congress discontinued the postal savings system. During that period, the maximum balance in a postal savings account was $2,500.
[2] That number does not include undocumented immigrant households, whose members, lacking a Social Security Number, could not open a bank account even if they wished to do so.