Wednesday, April 28, 2010

Postal Savings Accounts: An Idea Whose Time Has Come (Again)

In the rush to reform the financial system, there has been a lot of talk about making sure that all sorts of financial firms like credit card companies and banks offer plain "vanilla" products that are easy for the common consumer to understand. Reihan Salam thinks that maybe there should be a "public option" that could sell these simple products. The state would sell these products by using an existing goverment agency that has some history doing just these things: the United States Postal Service. Salam explains:
In many countries, including the United States in decades past, the demand for consumer-friendly financial products has been met directly by the state, e.g., through postal savings accounts invested in ultra-safe state assets. We've moved away from this model and towards explicit guarantees for for-profit firms. It's hardly surprising that these guarantees come with strings attached — more and more strings all the time.
Indeed, the Postal Service did just that during the early and mid decades of the 20th century. Here's a snippet of an article from the National Postal Museum:
In 1871 Postmaster General John A. J. Creswell first recommended a postal savings bank (such as Great Britain started in 1861) to generate funds for a postal telegraph network. Nearly four decades of debating the proposed federal savings institution peaked when the 1907 Panic shook the public's trust of private banks. President Theodore Roosevelt advocated using post offices to fulfill the needs of moderate depositors and communities without banks. Under his successor, William H. Taft, legislation for the postal savings system passed on June 25, 1910. It authorized the Post Office Department "to establish postal savings depositories for depositing savings at interest with the security of the Government for repayment thereof, and for other purposes." Politicians instilled the postal savings system with their intents to: provide a safe financial institution in communities across the country; entice hoarders to get their money out of hiding; offer immigrants the familiarity of postal savings common in many of their home countries; encourage thrift among the working, poor, and children; and pose no competition for banks.
While it wasn't very popular in the early years, during the heights of the Depression it became a shelter in the financial storm. Because of better interest rates and banking reforms (such as the FDIC), the system lost favor and was abolished in 1966.

It seems to me that re-establishing a postal banking system might be a way to provide some financial products that aren't confusing and out to fleece consumers and also provide a way for people to save. In 2008, Michael Lind wrote about why have a postal banking system again. He states:
A new postal savings system should be part of America’s post-meltdown financial architecture. When Congress created the postal savings system nearly a century ago, one of its goals was to encourage savings among the large number of low-income immigrants. A new system would help today’s immigrants as well as the native poor. Banks are not interested in people with so little money, many of whom are preyed upon by payday lenders and credit card companies.

A postal bank could also supply middle-class and affluent Americans with an extra layer of financial security. The accounts would be limited to a small amount per person. They would provide a government-guaranteed, low-risk, low-return investment, even for those who put most of their financial assets in conventional bank accounts and the stock market.
In essence, this would provide a safety net in the financial system, which sounds a lot easier than trying to force banks to provide simple banking services or forcing them to move into neighborhoods they aren't interested to move into.

Not only that, but it could also help buy down our public debt and bring the Postal Service out of its own debt.

I dunno, it looks like a good idea that can solve a lot of issues. Could it happen? I don't know about the Democrats, but since it seems that the current thinking among conservatives is that any form of government involvement is socialism, it may not get very far.

But why not give it a shot?

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