When commentators discuss the era of deregulation, they tend to focus on the creation of too-big-to-fail financial giants and their size, power, and riskiness. No less consequential, however, was the loss of banking services for average people. For much of U.S. history, the answer to banking for the poor—whether the rural farmer or the working-class city dweller—was local and community-controlled credit. Local banking institutions, such as credit unions and savings and loans, were supported by the government and enlisted to meet the clear-cut mission of lending to the poor.
Eventually, though, these institutions failed because after deregulation, they couldn’t compete with larger, better-funded, and more diverse financial institutions. Once community banks left the scene, fringe lenders filled the void. As long as half the population needs to borrow money to deal with emergencies, and the banks won’t or can’t lend to them, the payday industry will remain vibrant. It has made policymakers, the media, and the public deeply uncomfortable since it arose, despite the industry’s assertion that its rates are justified by market prices. In fact, though, they are not charging market prices, but the highest interest rates allowable by law.
Federal and state governments have engaged in a frustrating game of whack-a-mole to ban the unscrupulous practices of payday lenders and the like. These lenders skillfully avert new rules by creating new products, crossing state lines, or escaping to do business from Native American reservations. They cannot be regulated away because the payday lending industry is doing what any successful business does: fill a market need.
There is a solution, though: a central bank for the poor. The core function of the Federal Reserve, the U.S.’s central bank, is to infuse liquidity into troubled banks so that they can withstand temporary credit crunches and get back on their feet. A public version of this would provide the same short-term credit help to individuals so that they, too, can withstand a personal credit crunch and get back on their feet. Indeed, in the modern banking landscape, only a large, liquid lender is able to lower the costs of lending to the poor. The federal government is in a unique position to lend to the poor and cover its costs without having to answer to shareholder pressure to maximize profits. Economies of scale and government backing can be used to bring down the costs of lending to the poor.
One way the federal government might do this is through the existing U.S. Postal Service structure. In fact, postal banking was the largest and most successful experiment in financial inclusion in U.S. history and remains the primary tool for financial inclusion across the world. The basic idea of modern postal banking is a public bank offering a wide range of transaction services, including financial transactions, remittance, savings accounts, and small lending. These institutions would remain affordable because of economies of scale and because of the existing postal infrastructure in the U.S. Plus, in the absence of shareholders, they would not be driven to seek profits and could sell services at cost.