This article first appeared in the St. Louis Beacon, April 23, 2012 - Encouraging Americans to save more could begin at the local post office, says a Princeton University history professor who is making a case for bringing back a 20th century financial tool: postal savings accounts.
When Americans drop by their local post offices to buy stamps or ship packages, they could also deposit money into postal savings accounts — a practice popular throughout the world, explains Sheldon Garon, author of “Beyond Our Means: Why America Spends While the World Saves.’’
“It’s something that sounds like lunacy here, but it just happens to be perfectly normal everywhere else in the world,’’ said Garon, who will speak Thursday at a program on the importance of saving at the St. Louis Federal Reserve Bank.
“In Japan, the world’s largest bank is the Japanese postal system. The French system is very strong; the British system is somewhat privatized but very strong. Germany is semi-privatized but very strong,’’ he said. “In other words, they’re everywhere and also in the developing world.’’
Garon said government-backed post office accounts are very accessible and they carry no fees or minimum balances.
“And they’re capped at a certain amount, about $10,000, so affluent people can’t put lots of money into the postal savings system,’’ he said. “It’s designed for people of modest means and for children.’’
Most Americans today don’t know that the U.S. Post Office offered savings accounts from 1911 to the mid-1960s, he said.
Congress approved the postal savings system in 1910, according to a history by the U.S. Postal Service. The program was aimed at attracting deposits from small savers, people who didn’t trust commercial banks and immigrants who were familiar with similar banks in their native countries. The initial legislation required the post office to redeposit the money in local commercial banks where it earned 2.5 percent interest; the postal accounts paid 2 percent interest. Deposits peaked at $3.4 billion in 1947. The system ended in 1967.
Garon said that reviving postal accounts would have a two-fold benefit: They would provide an option for unbanked Americans — and a boost for the U.S. Postal System that is facing cuts.
“People like their local post offices,’’ he said. “This is a way of promoting small savings quite effectively. It’s not hard to do. The post office already handles international and domestic money orders. We’re not talking about sophisticated financial instruments.’’
Garon said that surveys show that poor and low-income Americans want to open savings accounts but are often discouraged by mandatory minimum balances and hefty fees charged by commercial banks for check overdrafts.
“They walk into a bank and immediately feel ripped off,’’ he said.
Garon said the postal systems of other countries are also experiencing declining revenue but are making up for some of the deficit in delivery revenue with the expansion of postal financial services.
“In Japan, you can get postal life insurance,’’ he said. “Various types of checking accounts can be offered. We’re knocking our heads against the wall saying we can’t have a post office anymore. We’re knocking our heads against the wall saying it’s impossible to ever make the unbanked bank and this is one solution that kills two birds.”
Garon said that commercial banks opposed the postal saving system in the 1900s — and would probably oppose it now.
“They would hate it,’’ he said. “Just as they hated it the first time around in 1910. They spent 40 years opposing it. Some people call it the public option, thinking about the health-insurance debate. Simply by proposing that the post office come in and make it an alternative probably would compel the banks to be more friendly to small savers to try and get back some of that business.’’
Garon said he decided to write a book about saving because he wanted to show that the American pattern of saving little while spending on credit is distinctive and not the norm globally.
“Americans tend to think that everywhere else in the world — the Chinese, the Germans — everybody’s taken up the American way of the credit card and being in debt,’’ he said. “I wanted to show not only how the rest of the world promotes saving but also the various points at which the United States adopted this pattern of very high-scale spending and borrowing.’’
Here are more excerpts from a recent telephone interview with Garon:
How did Americans come to be such big spenders and small savers?
Garon: In the vast majority of American states as late as 1910, most people had no saving institution nearby that would take their small savings. The commercial banks weren’t interested. Why we didn’t set up a nationwide institution that promoted small saving has a lot to do with our federal system and the enormous unevenness in our country. Some states did it well; most did not do it.
While other nations by about the 1860s were using their central governments’ power to set up postal savings banks, Congress balked at that; it was too much federal power. Commercial banks were strong and opposed it. In terms of institutions, we’ve chosen a different route from everywhere from Japan to Europe, which all use the massive power of the central state to promote saving.
It wasn’t really until the two world wars that we began to see systematic U.S. promotion of saving through savings bonds and the FDIC system, but then we pulled back from that again by the 1980s. And we got to the point that we believed that consumption is the only way to promote the economy — that it didn’t really matter if people have savings.
That might be a result of the optimism that we came out of World War II with. Other nations had to dig out from the rubble and extreme war debt, but the U.S. in 1945 was in a league of its own. It had no war damage. Its factories were humming. People were living much better than they did before the war. It unleashed a tremendous euphoria that consumption could be a new form of economic democracy — that everybody could engage in mass consumption.
And then we expanded credit. So, one part of the answer is that we did not systematically promote savings through savings institutions. The other part is that we expanded credit in a way that no other nation on earth did.
You make the point that leaders of other nations encourage people to save. But Americans seem to prefer to hear that there will be a chicken in every pot. How would they respond to a political message about saving for bad times ahead?
Garon: President [Barack] Obama gave a powerful speech for saving in the early phases of his administration. I put it in the last chapter of my book. But even though he might philosophically love to do that, I think he feels politically constrained. It will be bad news. It will smack of decline and not the eternal optimism that we like to feel, and so he’s pulled back, too. We’re not doing enough policy-wise or even culturally. A lot of leaders around the world regularly give pro-savings messages.
After 9/11, the administration of President George W. Bush also encouraged Americans to keep the economy rolling.
Garon: That was an unprecedented move. Because wars in the past, even in our own country, have usually been accompanied by calls for sacrifice, taxation, more saving. You didn’t see any of that after 9/11. That was indicative, maybe, of the problem.
Americans who lived through the Great Depression tended to save for rainy days, but what has been the impact of the Great Recession on younger Americans?
Garon: You have a whole generation that really doesn’t know much about the habits of saving. They haven’t had school savings programs. Modern financial education programs are few and far between. Until 2010, they could get credit cards at 18 without their parents' permission; now they have to wait until 21. And student loans are just taking over, particularly these private sector student loans.
So you have a whole generation, except for the very privileged, who are constantly in debt and it’s debt that they can’t even imagine paying off, particularly given the economy and the level of debt. Even the jobs they are trying to get wouldn’t be able to pay these loans off, they’re so massive. I think it creates pessimism. A sense of being stuck. It’s amazing that we let the system develop as we did, but nobody seemed to care that much about it. They just assumed that everything would take care of itself if people borrowed and spent.
Interest rates on savings accounts and certificates of deposit are extremely low these days. Does that make it more difficult to convince Americans to save?
Garon: Economists tell us that people will save when interest rates are high, and they won’t save when they’re low. But interest rates were quite high in the 1990s — 5 or 6 percent — and nobody saved. Interest rates are effectively zero now, and actually lots of Americans are saving now. People do become risk-averse. They sometimes save more when interest rates are low and there’s nothing else they can do with their money. It makes it difficult, but any American who says there is no point in saving because interest rates are so low has to consider the alternative. It’s better to have something than nothing.
Americans got used to the idea of chasing higher rates in the late 1980s. The stock market became popular rather than an elite thing. People started putting money into this c.d. and that c.d., and they got very adventurous and chased higher returns. That can be rational, but at a certain point one has to realize that money in the bank is more important in a sense than the return on it.
To think the only reason to save is when you can get rich quick is not how saving is done in most parts of the world where people are content with 2 percent interest. We’d love 2 percent. Europeans still get it, partly because of state subsidies. It’s something I recommended here.
Our tax code is set up to subsidize the affluent. I would propose what the French do: The French state gives a small commission that offers a tax-free small savers account for lower-income people. It raises the interest rate up to about 2.25 percent. That’s low but a lot higher than we’ve got. As a result, everybody in France, even poor people, have savings accounts. It’s a social good that is relatively cheap considering how much we give away in our tax code to the affluent.
