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The Postal Savings System in the Depression

Published online by Cambridge University Press:  11 May 2010

Maureen O'Hara  and
David Easley
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Abstract

This paper examines the behavior of the postal savings system in the Depression. It is shown that because the system was created with an inflexible structure it was unable to carry out its prescribed function when economic conditions changed in the Depression. Instead, the system evolved from a small-scale government program designed for the low-income saver into a financial force capable of causing problems for the savings and loan industry, the housing market, and even the banking system.

Type
Articles
Information
The Journal of Economic History , Volume 39 , Issue 3 , September 1979 , pp. 741 - 753
Copyright
Copyright © The Economic History Association 1979

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References

1 Although $1.2 billion does not seem large today, it should be noted that the assets of the Postal Savings System were equal to approximately 10 percent of the assets of the entire commercial banking system in 1934.

2 Kemmerer, Edwin W., Postal Savings, (Princeton, 1917), p. 6.Google Scholar

3 Sprague, Oliver M. W., History of Crisis Under the National Banking System, National Monetary Commission Report, Sen. Doc. No. S38, 61 Cong., 2 Sess. (Washington, D.C., 1910), pp. 259–60.Google Scholar

4 As the Democratic platform noted,

We favor a postal savings bank if guaranteed banks cannot be secured, and that it be constituted so as to keep the deposited money in the communities where it is established. But we condemn the policy of the Republican Party in proposing postal savings banks under a plan by which they will aggregate the deposits of rural communities and redeposit the same while under government, charge in the banks of Wall Street, thus depleting the circulating medium of the producing regions and unfairly favoring the speculative markets.

5 , Kemmerer, Postal Savings, p. 15.Google Scholar

6 An exception was noted in American Bankers Association, The Postal Savings System of the United States, (New York, 1937), p. 11 where it says thatGoogle Scholar

Senator Bailey who in a debate on the floor pointed out that in almost every town in which one of the postal savings depositories was to be located, there was a local building and loan.

7 American Bankers Association, The Postal Savings System, p. 21.Google Scholar

8 , Kemmerer, Postal Savings, p. 32.Google Scholar

9 The exact requirements are listed in American Bankers Association, The Postal Savings System, p. 53.Google Scholar

10 Senator Albert Cummins of Iowa stated that,

The banks of the United States are opposed unanimously to the institution of a postal savings system.…I have received the protests of nearly every bank in my state against any such scheme, and those protests have usually been accompanied by a very large number of petitions, secured, I have no doubt, through the industry and energy of the bank officers.

American Bankers Association, The Postal Savings System, p. 11.Google Scholar

11 As noted in “Banks Competitor,” Business Week, August 24, 1935, p. 30, “The postal savings system pays 2 percent on deposits.…Majority of banks pay only 2 percent or 2.5 percent on small time deposits.”

12 The inaccuracy of S&L asset figures has been noted earlier in the paper. Because S&Ls were able to go on notice, the published balance-sheet figures for this time represent book values and not actual values. This discrepancy will tend to understate the actual decline of S&Ls at this time and make econometric estimation totally misleading.

13 Savings and Loan Annals (Chicago, 1930).

14 Ibid.

15 ibid.

16 Examining the relationship between the interest rate on mortgages and other interest rates at this time would be one way to determine the effect of this supply shift; unfortunately interest rates on mortgages were not collected at this time.

17 One might expect banks to use postal savings redeposits to meet part of this demand for mortgages that was left unfilled by S&Ls. Banks, however, were legally discouraged from holding many mortgages and had little expertise in mortgage lending. So although banks may have absorbed some of the excess demand, the time necessary for their adjustment to an increased role in the mortgage market was probably substantial.

18 Representative articles voicing such complaints were “Unwanted Money,” Business Week, July 21, 1934 and “Banks Competitor,” Business Week, August 24, 1935.

19 See American Bankers Association, The Postal Savings System, p. 54.Google Scholar

20 For sources, see American Bankers Association, The Postal Savings System, p. 54.Google Scholar Board of Governors of the Federal Reserve System, Banking and Monetary Statistics 1914-1941 (Washington D.C., 1934), pp. 17, 286.Google Scholar

21 The rank correlation between the percentage of postal to bank savings deposits and bank failures is 0.488, which is significant at the 1 percent level.

22 Consider Illinois as an example. By 1935 postal savings deposits originating in Illinois had reached $152 million or approximately 20 percent of total Illinois bank savings deposits. Of this sum, only 5.8 percent (approximately $8.8 million) was redeposited in the state with the remaining $143 million being withdrawn from the state. These figures however, understate the absolute impact of postal savings since this $143 million of potential reserves could have supported a large volume of deposits under a fractional reserve system.

23 Regardless of how the Treasury used any funds it received from the postal savings system, there is a considerable amount of disagreement about the money supply (M2) during the Depression. The Federal Reserve in Banking and Monetary Statistics includes postal savings deposits in the money supply as it would any other time deposit. However, Friedman and Schwartz, in A Monetary History of the United States, 1867-1960, do not include postal savings deposits in their definition of M2. They group postal savings with mutual savings deposits (both of which grew rapidly during the Depression) and then decide not to include this group in the money supply. Although they have a number of reasons for this exclusion, the only one applying directly to postal savings deposits is that a fixed rate was paid on them whereas the rate paid on commercial bank time deposits was variable. From the point of view of an individual, however, a postal savings deposit was a time deposit; it paid interest and could be withdrawn on demand just like a time deposit at a commercial bank. In fact, during the Depression postal savings were even more liquid than time deposits because many banks required a thirty-day notice on withdrawals. Between 1929 and 1933 under the Fed's definition of the money supply, M2 fell by 22.2 percent, whereas Friedman and Schwartz's M2 fell by 30.6 percent over the same time period. If postal savings are included in Friedman and Schwartz's M2, the decline is 28.2 percent.

24 The Postal Savings System adds another dimension to Hughes, Jonathan R.T. “statement]The Government Habit, (New York, 1977), pp. 7–8]:Google Scholar

… economic controls are living social artifacts.… From the ICC and the Sherman Act down to the latest federal regulatory agency our federal controls were created to cope with specific problems and specific points of time. The control bureaucracy tends to linger on long after the event that called the original controls into being has passed and been forgotten … such control bureaucracies, by continuing to exist even when they don't work, make efficient economic decisions impossible to achieve.