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The Austrian Postal Banking System

by Sylvester Baxter

1891

There is a possibility that the plan for the establishment of postal savings banks, so ably advocated by the postmaster-general, may result in a radical change in our entire banking system. The demand for postal savings-banks is so popular that it is not likely that there will be much further delay on the part of Congress in realizing the project. Now it happens that among the new political issues that have arisen, the question of the currency has assumed a most prominent place. There can be no doubt of the intensity of the feeling that has developed against the national banks, which have supplied a large proportion of the circulating medium since the war, and the demand for a currency issued directly by the government, without the intervention of the banks, is growing both in volume and in force.

The sense of the inadequacy of the national banks to the financial necessities of the country is by no means confined to those who, by theory or experience, have been made hostile to them, and regard them as detrimental to our institutions, and as dangerous instruments for the oppression of the common people. It extends to those who recognize that the national banks have been of invaluable service to the country, and are a vast improvement over the banking system that preceded them. Nevertheless they feel that grave defects are showing themselves, and that for the security of the community something better is needed. There is not the confidence on the part of the business community that there should be, and events like the recent occurrences in connection with the Keystone National Bank, in Philadelphia, are not likely to enhance that confidence. One of the most frequent of surmises is as to how many similar cases there may be, and a very commonly heard query is that as to the state of affairs that a general financial panic might reveal, with the banks loaded with collateral upon which it would be hardly possible to realize at such a time.

Then there is the moral aspect of the case, so well expressed in an essay by one of the soundest philosophical and political thinkers whom America has known, the late David Atwood Wasson. Said he: "At present the government permits itself to become indirectly,—or, if we speak of the State governments, worse, sometimes, than indirectly,—confederate with those who amass fortunes by making credit precarious, and forcing the hazards of the gaming-table into all the legitimate operations of business. The comptroller of the currency has publicly said that about one half, on an average, of the means of the national banks, in one chief city—institutions, observe, created by government, and charged, in effect, with one of its most distinctive functions, that of supplying a medium of exchange—are loaned to speculators; that is, to men who subsist largely on artificial disturbances of credit, upon corners in the stock market and money market, upon alternations of inflation and stringency, the ups and downs of a disordered constitution. Without going into the matter closely, which is aside from my present purpose, I leave before the reader the main facts of the case: that the system of credit centred in the modern banking system plays a vast and increasing role in our civilization; that while of a utility not easily overstated, it affords peculiar opportunities of fraud and exaction; that aside from these, its unregulated condition is dangerous, resulting in alternations of inflation and depression, like the alternate extremes of fever and ague; that vast and growing combinations exist for producing artificially this disorder; that those institutions which credit has created under the express sanction of government, at once to supply its necessities and hold it healthily in check, are managed only as private property; that much oppression, alike of labor and capital, and also, I fear, much demoralization—which is an interior and worse oppression—are suffered in consequence; and that hitherto our statesmanship wants the studious leisure, and our method of government the stability and precision of operation, which these exigencies demand."

A truer statement of the case never was made, and these words should be well pondered by patriotic citizens.

Probably the reason why the feeling against our present banking system has not yet taken shape in legislation is because no sound constructive measures have been proposed. Faulty as the system is, what is there better that can take its place? is asked, and to this no satisfactory reply has been given. Even though the notes of the national banks should be retired, and currency issued directly from the national treasury should take their place, we must have banking facilities of some kind.

Absolute security of bank deposits is what is desired, and any measure that would secure that end could hardly fail to be joyfully welcomed by the business community, with the exception of the small minority either selfishly interested in present banking corporations, or whose prosperity is derived from operations based upon a state of insecurity. Powerful as these interests are, there is no reason why they should be permitted to stand in the way of the realization of a better condition of affairs, should that prove attainable.

The leading merit of the national banking system comes from the absolute security of its circulating medium, proceeding from the governmental guarantee. Meanwhile the interests of the depositors, in supplying whose convenience the bank derives its business, remain inadequately guarded. Is not some system possible whereby in place of this partial guarantee we may have a complete guarantee, covering both circulating medium and deposit?

Fortunately, with the experiences of other countries furnishing examples so available as they do nowadays, we are not left entirely to our own resources in devising solutions for problems that confront us. We have but to look to Austria for a most successful example of a truly national banking system, that completely meets the demand. When Austria established its postal savings bank, in 1882, a regular check and clearing system was made a feature thereof. This, offering substantially the same convenience as our ordinary private or national banks in this country, together with the additional advantages of absolute security of deposits, and checks good in all parts of the country, has become enormously popular with the mercantile public, so that the regular banking department has quite overshadowed the savings department, important as the latter is.

Every post-office in Austria, therefore, has the function of both a savings-bank and a bank of deposit. A permanent deposit of one hundred florins, or forty dollars, is sufficient to make a person a member of the check and clearing department. No limit is placed on the amount that may be deposited, but a single check cannot be drawn for more than ten thousand florins [four thousand dollars]. Interest is paid on deposits at a rate not exceeding two per cent., while the interest on savings may not exceed three per cent. A charge of two kreutzers [eight mills] is made for each entry, together with a commission of one fourth per mille. Another function of the postal bank is the buying and selling of government securities, for which a commission of two per mille is charged, with a commission of one per mille for the cashing of coupons.

It is interesting to learn that two years before the adoption of this system by Austria, a very similar plan was advocated by an able American student of finance, the Hon. L. V. Moulton, of Grand Rapids, Michigan. In his book, "The Science of Money and American Finances," published in 1880, he said: "The government ought to provide a deposit system of absolute safety to depositors for all who choose to avail themselves of it. A system of postal savings-banks somewhat similar to the British should be adopted. The government receiving a deposit, and allowing the depositor to check out at the same or any other office, paying no interest and doing no loaning, receiving the use of the funds while on deposit, as compensation for storage and transportation of funds. No actual transportation would, of course, be required, except to settle balances between offices. This would be the safest possible deposit and most convenient exchange system, and is quite as proper for the government to undertake as the postal or money-order business. As it is, the government coins money and transfers money, but will not take it on storage, which is absurd, and forces the people to deposit with loan and discount concerns, liable to explode at any time and leave them penniless."

Although interest on deposits is paid in Austria, there appears to be no good reason why it should be paid were the system adopted in this country. There is no need of it as an inducement, for the absolute security and the greatly increased convenience of the system would be sufficient for that. The present national banks pay no interest on deposits, the facilities afforded being adequate to secure all the deposits needed.

It appears desirable, however, to pay interest on deposits of savings. In the bill prepared by Postmaster-General Wanamaker, it is provided that this shall not exceed 2.4 per cent. This low rate is fixed upon in order that the interest may be considerably less than the average paid by private bankers to depositors. The great obstacle to the establishment of postal savings-banks in this country has been the lack of available means for the investment of the funds, the rapidly decreasing national debt making government bonds out of the question for the purpose. Mr. Wanamaker proposes to overcome this obstacle by loaning the funds to national banks within the State where the deposits are made. The objection to this course lies in the objection to the national banks themselves, as heretofore stated. To give them disposition over such a vast amount—it is estimated that the deposits in the postal savings-banks would soon reach $500,000,000—would be to increase vastly their power for harm.

Mr. Wanamaker's alternative proposition, to utilize the funds in the direction of greater and much needed expenditures for public buildings, particularly post-office structures, is, on the other hand, a sound one. They might also be employed to advantage in providing the means for the much needed extension of the postal service now so widely demanded, as in the adoption of a parcels post equal to that of Germany, England, and other countries, and in nationalizing the telegraph and telephone and incorporating them into the postal department.

The deposits in the proposed check and clearing department would place an enormous amount at the disposal of the government, in addition to the postal savings-bank funds. Paying no interest on these deposits, the government might utilize the money in its own expenditures, and thus to a considerable extent reduce taxation. Or, just as the ordinary banks loan their deposits, the government might loan this money for mortgages on land and on staple products, somewhat as demanded in recent agitations.

A person so eminent in the discussion of these questions as Mr. Edward Atkinson has recently stated, in substance, that, increase the volume of the currency as we may, still it would not be adequate to certain exigencies of regular recurrence, like the annual moving of the crops. He thus practically concedes the justice of the farmers' demand, as formulated in their "sub-treasury project," but he would supply this want through private banking institutions organized expressly to loan money for this purpose.

Such institutions would, however, naturally take advantage of the necessities of the farmers by obtaining the highest rates of interest possible, while the underlying purpose of the other plan would be that of making the loans at the lowest rates consistent with the expense of the transactions. Is it not better, it may be asked, and more in accordance with the principles of true self-help, for the people thus to supply their own financial needs in the cheapest way possible through the instrumentality of their governmental organization, rather than depend upon "private enterprise" organized to take advantage of their necessities for its own profit?

At first glance there might seem to be an objection in the fact that, while the government was lending money at two per cent. it was paying on savings deposits interest possibly as high as 2.4 per cent., which would appear to be an unbusiness-like and unprofitable proceeding. But on striking an average between the sums on which it was paying that rate and the large amounts on which it was paying no interest, but receiving two per cent., it would probably be found that it was getting the whole at a rate considerable less than two per cent.

A more valid objection to the lending of money by the government at a fixed low rate of interest, instead of at whatever rates it might obtain according to the state of the money market, as private banking institutions would do, might be found in the liability that the parties to whom it was loaned might reloan it at higher rates, and thus use the good offices of the government as a means of personal profit. The measure could hardly fail, however, to lower very greatly the general rate of interest in the business world. It would be important, of course, to keep this large sum in circulation, and thus avoid the evils arising from hoarding. Its utilization for the regular expenditures of the government would be likely to do this, and the consequent reduction of taxation would be a great public advantage. Although the idea of loaning money at fixed low rates upon certain securities, such as land and staple products, might prove impracticable from various considerations—such, for instance, as the injustice of discriminating in favor of any particular classes in the community, as such a scheme would appear to do—there should be no difficulty in devising some practicable system for using to the advantage of the entire public the extensive funds which thus would be placed at the disposal of the government.

The postal banks would doubtless very largely take the place of present institutions of deposit. To what extent this would be the case, it is, of course, impossible to say. For all ordinary purposes, and for the needs of the average business man, their advantages could not fail to be great. Their effect would probably be to withdraw from the market large sums now available for speculative purposes, and divert them to legitimate uses. The speculative tendency would, therefore, be likely to be discouraged by so much. Necessary limitations might make the postal banks unavailable for those whose financial transactions are conducted on a great scale, and their wants would continue to be met by private institutions, which would offer special inducements to large depositors, just as the trust companies now offer special inducements over the present national banks by paying interest on deposits.