AMERICA’S financial landscape is changing before our eyes. The absorption of major Wall Street investment banks by commercial banks threatens to create colossal universal banks that are too big to fail and might need to be bailed out in the future. Meanwhile, the structure of public and private finance in the United States chronically fails to address four problems: the almost 10 percent of Americans without a bank account; the concerns of all Americans about the security of their savings; the growing indebtedness of the country to foreign governments and financial institutions; and underinvestment in public assets like sewer systems and bridges.
These four problems may seem unrelated. But they can be addressed in the United States, as they have been in similar countries, by a single institution that is at once new and old: the postal savings bank.
Britain created the first postal savings bank in 1861, and by the early 20th century many other nations had postal savings bank systems. The details vary among countries, but the idea is simple: use the one government institution that can be found in most neighborhoods and rural areas ”” the post office ”” to encourage small savings and a habit of thrift.
Well, we don’t do things that way in America, you might object. On the contrary ”” we did! In 1910, Congress created a postal savings system. The Post Office offered small savings accounts to individual Americans. The system boomed during the Depression and World War II, with a balance of more than $3 billion in 1947 ”” almost $30 billion in today’s dollars.
Remember when the US made huge loans to foreign countries who never paid us back? Maybe we should call a few markers. Soon.
A reasonable proposal with good historical background to suggest it might be beneficial.
In the face of inflationary monetary policy, this quaint little scheme makes no sense. Better to buy now and pay later with depreciating dollars. If you want to encourage savings, then people need sound money that actually retains its purchasing power over time. Also, you should tax consumption rather than income.
3, agreed.
I was concerned when the laws were changed to allow banking across state lines. When banks were limited in how large they could grow, none would become “too big to fail.” And when banks grow huge, not only do they become “too big to fail,” they also become too big to oversee.
We need smaller banks. And it seems that investment banks, which (as far as I can tell) do not have depositors, but rather lend money that they themselves have borrowed or raise through selling shares, are inclined to take the biggest risks, and to fail most spectacularly.
The regulations and laws were changed so that banks could be “more creative” in their investment and lending programs. A little too creative, if you ask me. Let’s get back to basics. The basics do not earn the quick, large return – but they will earn something, instead of leading to a huge bath for many, including innocent bystanders.
Congress established the Postal Savings System after the Panic of 1907 to give super-cautious people a super-safe place to keep their money.
But federal deposit insurance enables savers to get the same degree of safety at any federally insured bank, savings institution, or credit union. There’s no need for a postal savings system now. And since banking can be done at least as well by the private sector as by the government, it should be left to the private sector.
Besides . . . the FDIC has a better reputation than the Postal Service. If people don’t trust the FDIC, they won’t trust the Postal Service either. And if people better understood how the FDIC insurance works, they’d have even fewer qualms about it.
“I was concerned when the laws were changed to allow banking across state lines”
Banks that operate over a wide geographic area are, other things equal, less likely to fail than strictly local banks. Geographic expansion helps banks diversify their loan portfolios and reduces the risk that a given setback (e.g., a drought, hurricane, plant-closing, or regional recession) will cause a bank to fail.
Local banks play an important role in our financial system (e.g., providing steadier, more attentive service than big banks) but big banks also strengthen the system.
How about offering something above zero fo the fixed rate on the I-series US Savings Bond?
And in a global economy, bigger banks are needed to help our businesses compete with the large, often government subsidized, financial institutions beyond our shores.
Could someone remind me what exactly has the Federal Reserve Bank done to keep us out of the “boom/bust” business cycle? Wasn’t preventing the mess we are currently in the exact reason they were chartered? How has the Fed helped?
They failed us during the great depression and they lead us to where we are now. We need another Paul Volker.
— Under William McChesney Martin (1951-1970), Paul Volcker (1979-1987), and Alan Greenspan (1987-2006), the Fed did a fairly good job of moderating the business cycle.
— Most of the 8,000 banks that failed from 1932 to 1934 had chosen to remain outside the Federal Reserve System. Put differently, Fed member banks had a far better survival rate than other banks.
— We had no financial panic from 1933 until this year. That record stands in striking contrast to the recurring financial panics of the era in which we had no central bank—panics in 1837, 1857, 1873, 1884, 1890, 1893, 1896, and 1907.
— Although the Fed’s loose monetary policy helped fuel this debacle, the federal government’s colossal fiscal deficits since 2001 made a huge contribution.