Bluff, New Zealand is the southernmost inhabited city in the Eastern Hemisphere. The post office there looks over the Foveaux Strait — if you were to sail south from the harbor, the next landmass you’d encounter would be Antarctica. Fewer than two thousand people live in Bluff, but any one of them can walk into the post office and cash a check or apply for a loan. Residents may be at the edge of the world, but thanks to the state-owned postal banking entity, Kiwibank, they still have access to basic financial services.
Meanwhile, the United States is riddled with what are called banking deserts — inhabited areas, many of them urban, where residents have no access to a bank. The problem got worse in the aftermath of the recession, when traditional banks started closing branches in low-income neighborhoods around the country. Many cash-strapped Americans were forced to turn to “alternative financial services” — that is, predatory payday lending and check-cashing operations, which offer small-dollar loans in a pinch. Known for hidden fees and exorbitant interest rates, these businesses don’t provide basic services like checking and savings accounts. They’re not banks, they’re shark tanks.
One in four US households is unbanked or underbanked, meaning they’re fully or partially boxed out of traditional financial services. Those 68 million people represent a growing market for payday loan sharks, and spend an average of 10 percent of their yearly income on the high interest and fees that go with alternative financial services — roughly the same proportion they spend on food.
Traditional banks show no signs of returning to the areas they abandoned during the recession. But there’s a collective solution to the banking desert: we could set up a public postal banking system like New Zealand’s. After all, we’ve done it before.
Poor Man’s Banks
A primary impetus for postal banking systems around the world has always been providing services to the poor. Great Britain’s post offices began offering savings accounts in 1861, at a time when poor people had to physically keep their savings under lock and key. But ordinary citizens weren’t the only beneficiaries. In Britain it quickly became clear that postal banking successfully provided the government with a valuable resource of its own, helping it securely finance the public sector — a win-win.
In the US, postmasters general advocated tirelessly for postal banking starting in the 1870s. But as legal scholar Mehrsa Baradaran has shown in her book How the Other Half Banks, the American Bankers Association fought it viciously from the outset. Most banks were concentrated in the northeast and the banks weren’t in a hurry to serve neglected areas — yet the industry was terrified by the prospect of competition from the federal government. Private bankers successfully lobbied against every postal banking bill for forty years.
After the Panic of 1907, when millions of Americans lost their savings, postal banking moved to the forefront of the national political agenda. “I am convinced that the people desire such banks,” President William Taft declared in 1909, since they would benefit “a great many people of small means who do not now have banking facilities.” A public banking proposal was passed in 1910 and the program was implemented starting in 1911.
Due to lobbying from the banks, however, the resulting system was relatively limited: the savings accounts had low ceilings, the interest rates were capped well below the private sector’s (leading to the colloquial denomination “poor man’s banks”), and the deposits were re-lent to local commercial banks rather than financing the public purse.
Still, the system operated successfully for fifty-five years. The banks were especially popular with poor immigrants, who’d been shut out of conventional financial services. In 1915, 70 percent of postal bank deposits were held by immigrants, though they were only 15 percent of the population. And in the 1930s and 1940s, postal banks sold government bonds to customers, helping ensure a steady source of financing for the public sector.
The relationship was symbiotic — poor people got access to a universal and convenient public service, and the government was able to use the deposits to finance its debts. Postal banking facilities were instrumental in paying off the budget deficit in the Great Depression and the program reached its American zenith during World War II, when four million Americans had savings accounts at post offices. During the war, $8 billion was raised through defense bonds sold through the postal banks.
But the limitations imposed on the system by bank lobbyists finally caught up with it after the war. As the economy boomed, the caps on interest rates paid to depositors started to bite and many postal banking customers sought out more sophisticated private banking arrangements instead. Demand for accounts flagged, enrollment dipped, and Lyndon B. Johnson ended the program without fanfare in 1966.
Less than a decade later, as white flight drained urban centers of affluence and wages began to stagnate, the postal banks weren’t there when many people needed them the most. It’s no coincidence that the predatory lending industry found its footing in the 1970s, filling the vacuum left by the United States Postal Service.
Water in the Desert
New Zealand’s Kiwibank isn’t out of the ordinary. Taiwan has Chughwa Post, Hungary has the Magyar Postatakarékpénztár, and the UK government operates the Post Office Ltd. Post offices serve as banks in Brazil, China, Finland, Greece, India, Italy, Japan, Latvia, South Africa, and South Korea — 139 countries in all, with varying degrees of full state ownership and public-private collaboration. Worldwide, three quarters of post offices offer financial services, including check cashing, savings, prepaid cards, bill payments, and even financial counseling and education. 1.6 billion people have accounts at post offices. An estimated one billion of them would be otherwise unbanked.
In the US, people boxed out of traditional banks spend an average of two hundred dollars per month just to have access to the funds they need to meet basic expenses and sustain their day-to-day lives. The money is funneled to payday magnates and loan sharks at the top of the food chain.
The answer to this problem is staring us in the face. Post offices are already an established presence in the communities that need basic financial services the most — 60 percent of post offices are in zip codes with only one or no bank branches. The United States Postal Service is trusted and well-liked — the highest rated of all federal agencies. It already has a mandate to provide a universal service, for the good of the public rather than for profit.
Unlike a private business, it’s prohibited from closing a branch for solely financial reasons, since it exists to serve the community. It’s centralized and systematized, employs a skilled workforce, and already has security measures in place. And due to congressionally imposed restrictions designed to hobble its finances and prepare the way for privatization, this necessary public institution is cash-strapped and imperiled. It could use a cash infusion, and a revitalized sense of purpose.
The bad news is that there are now 22,000 payday lender locations in the US. The great news is that there are 30,000 post offices, already operational, ready to drive them out of business.