Like almost everything else, access to banking services is often unappreciated by those who have it. Yet, it is so important to economic development and improving the standard of living of ordinary people that it is often a key policy focus of developing countries, and not just their governments. From microfinance to fintech, new approaches and technologies have made it easier to provide financial services to people in every corner of the globe, poor and rich alike.
From Kenya to China, modern technology in areas like payments and lending have transformed the nature of personal banking, democratized access to it, and given rise to massive new businesses from M-Pesa in Africa to Ant Financial in China. However, without the digital revolution, it is hard to see how anything like this could have developed. Nonetheless, even a century or more ago, governments were grappling with how to expand access to banking services. More often than not, the solution came with the entry of postal systems into the banking business.
Postal Savings System
To this day, postal banking systems are to be found in large swathes of the globe, but in the United States, it is a concept occasionally talked about but not yet acted on. Or has it? Though it may surprise many, the US had a postal banking system for about half of the twentieth century but it has been nearly completely forgotten about. This is the case despite the fact that, at its peak in 1947, the system held over $3 billion in deposits.
Though it had been conceived of earlier, the US Postal Savings System was created in the wake of the Panic of 1907. That crisis saw the crumbling and near collapse of many financial institutions following runs on some of the nation’s banks. After 1907, confidence in the country’s depository intuitions had faltered, and interest in a public alternative grew. President Theodore Roosevelt was a fan of the idea and the National Monetary Commission that followed the crash of 1907 looked into postal banks.
The National Monetary Commission, led by Senator Nelson Aldrich, was established to investigate the nation’s financial system and possible reforms. It was the early 20th century’s Dodd-Frank Act. Such a broad mandate sent the Commission looking all over the world for models of a new monetary and financial system. It too had an interest in postal banking systems; so much so that the Commission published a 130 page report titled “Notes on the Postal Savings-Bank Systems of the Leading Countries.” So established were postal banking systems around the world that the report included information on the systems not only of major economies like Britain and Japan, but also Bulgaria and the Bahamas. The report was published in 1910 and it did not take Congress long to act; legislation was passed that year establishing the United States Postal Savings System, effective in January 1911. It made its debut with a trial run at 48 post offices.
How it Worked
When it was established, the US Postal Savings System limited customers to a balance of $500, though this was increased to $2,500 by the end of the decade. The system offered its depositors a single product, interest-bearing certificates of deposit. The physical certificates came in denominations as low as $1 and as large $100 in 1911. In 1917, $200 and $500 certificates were introduced. A logical question is how useful a savings system was that only sold certificates in specific amounts. The answer came from the post offices’ other products. Savers could save up for a certificate by collecting stamps until enough were pasted into a booklet allowing them to be redeemed into certificates. Who knew stamp collecting came from such humble origins.
The interest rate on the accounts was nothing to write home about, 2% per year. Once deposited by a customer, the postal system then deposited most of the money in banks that paid out interest at a higher rate, with the difference used to pay the system’s expenses. But what was the appeal of a system that simply shuffled the money to other banks and paid its depositors less? For one, the system was more accessible for those farther from a private bank. But more importantly, the postal bank was designed to be safer and more dependable.
The system’s investments were tightly controlled by the law establishing it. To start, 5% was placed in reserve with the U.S. Treasury, no less than 30% was to be invested in US government bonds, and the majority of the money was deposited with local banks. The reserves held with the Treasury provided a second layer of reserves in case some banks in which it had deposited funds had their own reserves exhausted and failed. However, the postal savings system was also backed by the credit of the US government giving the postal banking system a competitive advantage. Recall that this was two decades before the creation of the FDIC extended the same guarantee of deposits to private banks.
Postal Banking Around the World
The National Monetary Commission examined the postal banking systems of over a dozen countries, some of which still have such systems in one form or another, hence their ubiquity elsewhere in the world. One of the most notable systems was that of Britain, the country which the Commission’s report said pioneered postal banking. The scale of Britain’s system was immense. In 1908 alone, for example, over 1.6 million accounts were opened; after accounting for account closures, net growth was still over 300,000 accounts that year. In aggregate, over 11 million people used the system out of a total population of just over 30 million, and deposits totaled over US$780,000,000.
Britain’s system also made use of mobile banking technology, by telegraph. During the year of the Commission’s study, over 125,000 withdrawals were made by telegraph. An interesting idea; perhaps the money would then come by mail. Beyond post offices, to increase accessibility even further and to encourage saving among children, more than 5,000 school buildings were incorporated into the system.
Elsewhere, postal banking systems were slower to take off but were nonetheless well established by the time the US implemented its own. Both France and Italy created postal banking systems in 1875, and other countries followed suit. Many of these systems were discontinued or privatized later in the 20th century or more recently in countries like Bulgaria and Greece. However, other countries have developed new postal banking systems even in the 21st century, such as Brazil, which implemented its own in 2002, albeit with a private partner.
Sometimes advocated for by skeptics of big private banks, postal banking systems are by no means an untested or revolutionary idea. Though they have diminished in number around the world, such systems still exist and used to be a part of the financial systems of many countries. This includes, though many Americans may be unaware, the United States. But perhaps the most important lesson here is how access to personal banking services was seen as a priority for economic development and improving the livelihoods of ordinary people. In the US, some worry about the declining number of branches of traditional banks across much of the country. Fear of leaving many without easy access to traditional banks has been among the arguments of those in favor of recreating a postal banking system. However, just as digital-first banking systems being built in much of the developing world show, there are also modern alternatives to fix some of the problems postal banks aimed to solve a century ago.
1. Barnett, George Ernest, et al. Notes on the Postal Savings-Bank Systems of the Leading Countries. Government Printing Office, 1910.
2. Heidelbaugh, Lynn. Postal Savings System. Smithsonian National Postal Museum, Aug. 2006.
3. United States Postal Service. “Postal Savings System.” The United States Postal Service – An American History 1775 – 2006.