Public Comment

The time for postal banking is now!

Harry Brill
Friday June 02, 2017 - 05:18:00 PM

The conservative leaning Postmaster General, Patrick Donahoe, in his farewell press conference claimed that postal banking was a bad idea because "We don't know anything about banking". Is historical memory that short? For 55 years, from 1911 to 1966, United States Postal Service (USPS) provided traditional banking services. Ironically, postal banking was initiated and strongly advocated by a conservative Republican, President Taft. But without any public discussion, postal banking was abolished by President Johnson, a Democrat who was liberal on domestic issues. 

It wasn't that Taft had an aversion to the private banking system. But hundreds of thousands of immigrants did. They were unwilling to take the risk of depositing their saving in private banks. For good reason, they feared the high risk of losing their money either because of the large number of bank failures and also as a result of the unprincipled practices of the banking industry. During the decade of the 1930s 9,000 banks failed. About the distrust of these financial institutions by immigrants, the bank executives blamed their economic ignorance. But actually, the problem for the banks was that these newcomers to the US made a thoughtful and sensible decision. 

For the entire life of postal banking, deposits were "guaranteed through the full faith and credit of the United States". That guarantee preceded the FDIC deposit guarantee by 22 years! During the depression years, FDR could have expanded the postal system. Doing so would have been consistent with the Administration's policy of promoting the role of government. Instead, he decided to rescue the private banks via FDIC. 

It is not that providing insurance to private bank depositors is wrong. But just guaranteeing deposits does not address some of the serious shortcomings of private sector banking. Unlike postal banking whose mission is to serve the interests of the public, the main objective of private banks is to make a profit. With the decline in government regulation the lust for profit has prevailed. Take for example the account fraud scandal committed by Wells Fargo, which is among the nation's largest banks. Millions of customers were being charged unanticipated fees for services that they never requested and used. 

But even honest banking is no assurance that customers, particularly the poor, will be adequately served. Since the deposits of poor customers yield very small profits, the banks are not enthusiastic about serving them. When the banks do serve poor customers, they charge high annual fees. Since the banks generally avoid low income communities it should not be surprising that many millions of Americans, disproportionately minority members, do not have a bank account. Without access to banks, many who need financial services are forced to turn to very expensive alternatives. To Just cash a legitimate check, then, the poor depend on unscrupulous businesses that charge high fees. 

More generally, when the poor obtain loans from these so called payday lenders, they are forced to pay much higher interest rates than most borrowers. When the poor default on their loans the costs are even more exorbitant and even punitive. According to the federal Consumer Finance Protection Bureau, one in every five persons who borrow against their automobiles have their cars repossessed. Many of these borrowers depend on their cars to go to work. As Bernie Sanders remarked, the payday lenders trap the poor "into a vicious cycle of debt". Clearly, the result of depending on these predators is that it further impoverishes the poor. 

The California state legislature recently considered an excellent bill in support of an interest rate cap on high cost consumer loans. About one hundred organizations around the State are doing their best to abolish predatory lending. But despite their efforts the lending lobby persuaded the Assembly's Appropriations Committee not to release the bill. 

What the public needs is not predatory banking institutions. It needs postal banking, which proved its worthiness in the 55 years of its existence. Moreover, the 32,000 local branches makes the post office accessible to almost everyone, regardless of income bracket. As the Washington Post noted, "customers could walk down the street to the post office with their money and deposit it in a savings account there". Poor Americans could cash their checks for a small fee and obtain loans on good terms at low interest rates. In fact, postal banking is able to charge for its services relatively low rates and with far more integrity than private banks and payday lenders. So for most Americans, not only the poor, postal banking would be by far their best option.