Recreate Postal Banking to Slow Inflation

Once again we are using a dysfunctional approach to stopping inflation. Inflation is when too much money is chasing too few goods. But the Federal Reserve relies solely on a cost-of-borrowing tool, which suppresses supply as well as demand, instead of using a return-on-savings tool to absorb excess demand by getting people to spend less and save more.

When I was a young boy in the 1950s, you could go to any post office and set up a savings account. The Postal Savings Act of 1910 allowed for postal savings for 56 years from 1911 to 1966. The postal savings accounts were limited in size so you couldn’t put in much money. If postal savings accounts existed today, a high return on savings could get the marginal saver to put off buying that new phone or television and save the money. Getting people to save more and spend less will slow inflation.

The Federal Reserve is raising interest rates, which is shifting demand (and inflation) from goods that require a loan (automobiles and homes) to ones that don’t require a loan. By raising the cost of borrowing, the Federal Reserve causes businesses that rely on credit to cut hours, lay off workers, and close outlets. It is suppressing supply! But it also suppresses demand, because less money to workers means less demand for goods and services. You can’t spend the money you don’t have. That slows inflation, but at a great cost to the people with the most debt – the poorest Americans. It could also push our economy into a recession.

Most poor people are too poor to save any money. The wealthy just move their money around to get the best return on savings without changing their consumption behavior. Any attempt to reduce excess demand needs to target the marginal saver, who typically earns around $50,000 a year and is among the two-thirds of Americans with no college degree. Getting marginal savers to save more and spend less will help slow inflation. To divert money from spending to saving, any opportunity for a high return on savings needs to be vigorously promoted and advertised at popular athletic contests, Nascar races, and other venues frequented by the marginal saver.

Some observers claim that 30-year U.S. Treasury I-bonds already offer a high return on savings. I-bonds work well for the wealthy, but the severe withdrawal restrictions make I-bonds a non-starter for the marginal saver, who needs immediate access to their money to deal with an automobile accident, a medical emergency, or an unexpected rent increase or job loss.

Why rely exclusively on the stick of a cost-of-borrowing tool and ignore the carrot of a return-on-savings tool? Congress needs to recreate the Postal Savings Act of 1910 and bring in the Federal Reserve to oversee savings accounts at our 30,000+ post offices. With inflation running between 6 and 7 percent, postal savings accounts could offer 10 percent on savings with a limit of no more than $10,000 per person to avoid the transfer of large amounts of money.

When the Fed acts to slow the economy, banks cut back on loans in fear of an economic downturn. You can’t rely on them at such times to offer a good return on savings. Under our fractional reserve banking system, they typically have excess reserves and don’t want more money. Banks don’t want to pay for additional deposits to get money they don’t need and won’t use.

Congress needs to act now to authorize the Federal Reserve to create savings accounts at the 30,000+ post offices throughout the United States and offer a 10 percent return on savings. Getting people to save more and spend less will slow and eventually stop inflation without causing a recession.

Once excessive inflation is fully suppressed, then the promotional advertising of postal savings accounts can be dropped and the high interest rate on postal savings can be lowered. Thus, this new return-on-savings tool can be used to counter the irrational exuberance during booms that drives inflation and the excessive contraction of the money supply by private banks during economic downturns.