Savings History & Future Potential

Countries as diverse as Japan, Germany, and the United Kingdom have postal banks. Their citizens can pick up mail, send packages, and order postage at the post office. Plus,  they can perform a whole range of basic financial tasks Americans can do only at a bank branch or ATM.

Americans today, that is. For more than 50 years in the 20th century, the United States had a limited postal banking system that accepted savings deposits and paid interest. The United States Postal Savings System was a lifeline for rural and low-income workers with limited access to the traditional banking system. At its peak in 1947, it held more than $3 billion in assets, or about $45 billion in today’s dollars — enough to crack the top 50 biggest banks in the United States.

The Postal Savings System stopped accepting deposits in 1967 and liquidated a few years later. Few nonhistorians remember it today. But as account fees rise and bank failures call the private banking system’s stability into question, public interest in postal banking is growing once more. Maybe its time has come again — or maybe its inherent limitations are too much for modern consumers.

What Is Postal Banking?

Postal banking means that the national postal service provides financial services through its existing network of post offices. Post offices effectively serve as bank branches that accept deposits, cash checks, change currency, and perform other basic financial transactions.

Postal banking is common throughout the world. It’s also quite popular. Some countries’ postal banks rank among their biggest homegrown financial institutions. Japan Post Bank and the Postal Savings Bank of China are among the 20 largest banks in the world.

Although their business models and service menus vary from place to place, postal banks generally focus on retail financial services rather than investment banking or high finance. But many nonetheless offer an expansive range of services. For example, Deutsche Postbank, Germany’s postal bank, is one of Germany’s biggest housing lenders.

Postal banks aren’t limited to providing banking services through post offices only. Like most private banks and credit unions, modern postal banks generally offer online and mobile banking. This helps them compete with private banks for customers who increasingly expect to be able to bank from anywhere with an Internet connection.

Postal banks can be wholly government-owned, partially government-owned, or wholly owned by private shareholders. Most are part-owned by the national government and part-owned by private shareholders. 

Deutsche Postbank is a notable example of a postal bank where the national government has no ownership stake at all. However, its parent bank (Deutsche Bank) is a systemically important private bank that the German government considers too big to fail and has bailed out in the past.  

History of Postal Banking in the United States

The United States never had a dominant postal bank like Japan and China do today. And since it only ever provided limited financial services that relied heavily on existing private banks, some argue that the United States Postal Savings System wasn’t a true postal bank.

What’s not up for debate is that between 1911 and 1967, most Americans could walk into their local post office branch and deposit or withdraw cash — with interest.

Origins of the United States Postal Savings System

For the first 140 years of American history, deposits in U.S. banks were protected only by the faith and credit of the banks themselves. Banking customers could (and often did) lose their life savings in bank failures, which is why bank runs were so common back then.

After a spate of bank failures now known as the Panic of 1907, political momentum built for a durable solution. Some advocated for a national deposit insurance system, while others argued for a national bank that leveraged the existing post office system. The debate largely broke down along partisan lines, and pro-postal bank Republicans’ victory in the 1908 election settled the question.

Congress authorized the U.S. Postal Savings System in 1910. The first branches opened the following year. From the start, those most likely to be impacted by bank failures or underserved by traditional banks — rural folks, low-income workers, and immigrants everywhere — were most likely to use the system.

Services & Limitations

Policymakers envisioned the U.S. Postal Savings System as a sort of safety net bank that wouldn’t have an unfair advantage over private banks, which were already a powerful political force. They set it up with some important limitations:

  • Limits on banking services. The U.S. Postal Savings System took deposits from the public but didn’t hold onto them and didn’t use them to fund loans. Instead, postal bank branches redeposited customers’ funds into private banks in the same state. This provided those private banks with critical liquidity but ensured the Postal Savings System would never be a full-service financial institution.
  • Limits on interest payments. By law, the Postal Savings System paid 2% interest on deposits. This was intentionally lower than the going rate for private banks (around 3.5%) in the early 1910s. A lower interest rate ensured the Postal Savings System wouldn’t undercut private banks. It also encouraged in-state private banks to take Postal Savings System deposits by allowing those banks to pay below-market rates on them. This seemed like a win-win at the time, but it caused problems later on.
  • Limits on deposits. Congress initially set the deposit limit at $500 per account, or about $14,000 in today’s dollars. The deposit limit increased to $2,500 per account in 1918 (about $48,000 today). That’s a lot of money, but not quite enough to make the post office a one-stop bank for wealthier people.

The system had some other, more technical limitations as well. One that turned out to be important later on was a ban on redepositing funds with savings and loan banks (S&Ls). At the time, S&Ls made most of the country’s mortgage loans, so this restriction prevented Postal Savings System deposits from flowing back into the housing market.

Growth During the Great Depression

Through the 1910s and 20s, the Postal Savings System remained a relatively small player in the U.S. financial system. As its creators envisioned, it was mostly a safety net bank for lower-income industrial workers, farmers, and immigrants with limited access to traditional financial institutions. 

This changed during the Great Depression. Hundreds of S&Ls and many more small, independent banks failed between 1929 and 1934. Interest rates crashed as well. Seeking safe haven (and a now-competitive yield) for their money, many more Americans opened Postal Savings System accounts. Total system deposits swelled past $1 billion in 1930 dollars.

However, even as it grew, the Postal Savings System’s weaknesses began to show. 

Once an incentive for participating private banks to take system deposits, the interest rate cap became a liability as interest rates crashed. Private banks began to refuse postal deposits. 

But more money than ever was flowing into the system in search of higher yields. So its administrators began buying public bonds, which paid higher interest rates. Ironically, this starved struggling banks of the capital they needed to make loans and may have worsened the depression.

Decline & Closure

In 1933, Congress authorized the Federal Deposit Insurance Corporation (FDIC), the United States’ first national deposit insurance system. The FDIC guaranteed private bank deposits up to $2,500, then $5,000. Safety-wise, this put private banks on the same footing as the Postal Savings System and reduced the pressure on both systems.

Money continued to flow into the system amid lingering fears around bank safety and above-market interest rates on deposits. Total deposits didn’t peak until 1947. But by then, the seeds of the Postal Savings System’s decline were already sown:

  • Consumers eventually got comfortable with the FDIC, which prevented millions in banking losses during the 1930s and 40s
  • The federal government vastly expanded bond sales in the 1940s to fund the World War II effort, creating a safe alternative to high-yield savings accounts at the post office  
  • Private banks stepped up lobbying efforts against the system in the 1940s and 50s
  • Private banks expanded coverage and services, strengthening their appeal relative to the Postal Savings System’s more limited menu
  • Privacy concerns grew around the system’s practice of fingerprinting depositors, despite assurances that it wouldn’t share fingerprint records with law enforcement

Deposits declined through the 1950s and 60s. By 1967, when it officially stopped taking deposits, the total system balance was just $50 million.

Recent Developments in U.S. Postal Banking 

Even after the Postal Savings System shuttered, the United States Postal Service continued to issue and cash money orders. The USPS put out reports in 2014 and 2015 that envisioned how it might layer other financial services atop this foundation:

  • Payroll check cashing
  • Domestic and international money transfers
  • Bill payment services
  • Surcharge-free ATMs

The idea was to reduce low-income America’s reliance on predatory financial services providers, such as payday lenders and check-cashing shops, while reducing incidental banking and money transfer fees for everyone else.

The American Postal Workers Union strongly advocated for more post office-based financial services and got USPS management to agree to a small check-cashing pilot at a few locations in the eastern United States. But the poorly publicized pilot was a bust, and more substantive action would require an act of Congress.

In 2022, Congress took the first tentative step toward expanded postal financial services, if not quite a second U.S. postal bank. After removing a federal budget line item that would have expanded the USPS pilot, three Democratic senators introduced a standalone bill that went beyond the USPS’s recommendations. In addition to check-cashing, money transfer, bill payment, and ATM services, it authorized post offices to offer:

The bill didn’t even get a vote. Republican lawmakers were unified in opposition, and USPS management was lukewarm at best. Advocates can and probably will try again in the future, but it’s not clear the political will exists to make a modern U.S. postal banking system anytime soon.

Arguments for Postal Banking in the United States

Arguments in favor of establishing a new postal banking system in the United States focus on its potential to reduce the chronically underbanked population while providing a low-cost alternative to private banks for everyone else. 

  • Straightforward, low-cost banking services. A U.S. postal bank would focus on providing basic banking services at low or no cost. Think free checking and savings accounts, fee-free ATMs, and maybe low-interest loans or lines of credit. 
  • Real-world convenience. The USPS has nearly 20,000 post offices around the country. Many rural communities without physical bank branches (or much else in the way of physical retail) have their own post offices.
  • Alternative to predatory financial services providers. Payday lenders and check-cashing shops charge triple-digit interest rates for their services. But many users don’t realize this because they deal in relatively small amounts of money over short periods of time. A U.S. postal bank could reduce or eliminate low-income folks’ reliance on these predatory companies.
  • Builds on an existing foundation. It’s not like the USPS has no recent experience in financial services. Millions of people already use its money order services for transactions where cash, personal checks, or credit cards won’t do. Postal banking isn’t as radical a shift as you might think.

Arguments Against Postal Banking in the United States

Opponents of a U.S. postal banking system argue that it would cost billions to set up and scale a system that could have an unfair advantage over private banks and credit unions.

  • Could take years and cost a lot to set up. It might not be a radical change in direction for the USPS, but a modern U.S. postal bank would still take years to set up and cost hundreds of millions or even billions of dollars upfront. There’s also no guarantee it would ever turn a profit, especially if it focused on keeping account costs and loan interest rates low.
  • No modern history of U.S. postal banking. At this point, the USPS has no institutional memory of postal banking. Everyone who worked for the United States Postal Savings System is retired or dead. So the modern version would essentially start from scratch — not that it couldn’t poach employees from the private sector.
  • Could undercut private banking. This is certainly private banks’ big fear of postal banking: that it would be successful enough to take significant market share from them. Depending on your perspective, that could be a good thing, but private banks do have powerful friends in Washington.
  • Financial access is increasing without postal banking. Public access to basic financial services has increased in recent years thanks to rapid growth in online banking and mobile finance apps. Millions of American adults remain underbanked, but the problem is less dire than 15 years ago. 

Final Word

For more than 50 years in the 20th century, the United States Postal Savings System provided ordinary Americans with a limited range of financial services. Though it never grew into a dominant bank or threatened the private banking system, it had billions in deposits at its peak and probably helped some customers avoid financial ruin in the days before deposit insurance.

But it’s fair to say that the Postal Savings System never lived up to its potential. The reasons are complex, but the system’s built-in limitations and weaknesses likely prevented the sort of success postal banks have seen in places like Japan and China.

Looking ahead, it’s unlikely we’ll see a new U.S. postal bank anytime soon. If and when we do, let’s hope its founders learn from their predecessors’ mistakes.

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