Full text of Economic Review (Federal Reserve Bank of Cleveland) : August 1957

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MONTHLY

OuiitteMKeview
IN

FEDERAL RESERVE BANK of CLEVELAND

THIS

ISSU E

Spen ding By O h io City Governm ents....... 2
The Postal Sa vin gs System ...................... 8

r fu fc u t, J 9 5 7

N o te s ................................................... 12

Spending by city governments in Ohio shows considerable variation.
In a recent report, applying to the year 1955, general expenditures
per-capita by the 8 largest cities ranged from $54 in Cleveland down
to $35 in Youngstown

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CLEV ELAN D CINCINNATI TOLEDO




DAYTON

AKRON

COLUMBUS CANTON YOUNGSTOWN

Spending By Ohio City Governments
d a t a on expenditures, reven­
property; maintenance of highways, bridges,
ue, debt, and other significant items
and viaducts; sanitation; and health and
of municipal finance for all Ohio cities, aswelfare. Other items include major sources
of the year 1955, have recently been made
of revenue available to municipal corpora­
available by the State government.(1) The
tions, with special emphasis on property
141 cities embraced by the compilation have
taxes, and the amount of bonded indebted­
populations ranging from 5,000 up to close to
ness owed by different cities in relation to
a million. Total financial outlays covered by
the assessed valuation of the taxable property.
the report add up to about $835 million for
the year 1955.
Per-Caplto Spending
o m p a r a t iv e

C

Such data provide source material for in­
formation of broad public interest, espe­
cially in view of the current trend toward
expansion in activities and expenditures of
local governments. Among many possible
ways of selecting from the data, it may be
of interest to focus attention upon 44 of the
largest Ohio cities, classified according to
size, with special reference to some of the
key items of city expenditures revealed by
the report.
Four groups of cities are distinguished
below. Table 1 presents the size-group of
cities of 100,000 or more inhabitants— eight
in number—ranging in size from Cleveland,
with 933,827 inhabitants down to Canton
with 121,652. In Table 2, cities from 40,000
to 100,000 are listed—also eight in number—
ranging in size from Springfield, with 85,442,
down to Middletown with 40,550.Table 3 in­
cludes fourteen cities, ranging in size from
Portsmouth, with 39,050, to Tiffin, with 21,872. Suburban cities, because of their some­
what special characteristics, are listed sepa­
rately in Table 4. Suburban cities number
fourteen and range in size from Lakewood,
with 67,118, down to Upper Arlington, with
22,923.
The items selected for attention here are
per-capita general expenditures and the pro­
portions spent for certain selected functions.
The latter include: protection to persons and
(1 ) Comparative Statistics, Cities of Ohio, 1955, by the Audi­
tor of State, Columbus, 1957.

2




A comparison of general expenditures by
different groups of cities reveals that the
eight largest cities spent nearly 40 per cent
more per capita in 1955 than did the other
three groups. There were also wide differ­
ences in spending among the cities within
each particular group as is shown by the ac­
companying charts presenting per-capita gen­
eral expenditures for the four groups of
cities. (Compare also per-capita general ex­
penditures of different cities shown in the
third column of the accompanying tables.)
Among the group of eight largest cities,
Cleveland had the largest expenditures percapita, with $53.77 as against $46.45, the
average for the group. Youngstown and Can­
ton were the lowest in the same group, with
per-capita expenditures of $34.50 and $35.78,
respectively.
Among the suburban cities, Shaker Heights
was highest, with $62.10, while the average
for the suburban group amounted to $32.47.
There are many reasons for the differences
in the amount of per-capita expenditures.
Some municipal governments are more econ­
omy-minded than others, and some munici­
palities perform fewer services. Also, such
factors as size, geographical location, indus­
trial character, growth rate, and the average
socio-economic status of its residents, influ­
ence the amount of spending by any particu­
lar municipality. Somewhat less obvious fac­
tors influencing the relative amounts spent

O H IO C IT IE S 40,000 TO 100.000

O H IO S U IU R B A N C IT IE S

Per-capita General Expenditures

Per*capita General Expenditures
(a*

(a* o f y eor 1951)

y e o r 1955)

O H IO C IT IE S 20.000 TO 40,000

PROPERTY TAX A S PERCENT OF TAX REVENUE

Per*caplta General Expenditure*

Ohio Cities 100,000 and Over

(<h

ia t « t y e « r I t i S )

y*ar 1*11)




O■

3

for municipal services are found in the shifts
of responsibilities among governmental units
and also in variations in accounting prac­
tices. For these reasons, differences in spend­
ing disclosed by the tables and charts should
be interpreted with caution.
Protection
All cities in all four groups spent the
largest share of their 1955 general expendi­
tures for protection to persons and property
(police, fire, traffic lights, inspections of
buildings, etc.) The group of eight largest
cities spent almost 35 percent of their gen­
eral expenditures for this purpose. Next in
importance with respect to the share spent
on protection was the group of suburban
cities. The smallest share for protection was
spent by the group of cities with 20,000 to
40,000 of population.
Highways and Bridges
The expenditures for highways and bridges
in this comparison include street and side­
walk repairing, street lighting, maintenance
of viaducts and bridges, etc. These figures
do not include capital outlays for highways
and bridges, nor do they include the main­
tenance expenditures of other government
agencies serving the same area.
A comparison of highway and bridge ex­
penditures by different groups of cities indi­
cates that smaller-size cities spent a larger
share of their 1955 total general expendi­
ture for this purpose than did the large
cities. Outlays for highways and bridges by
the group of fourteen cities, having a popu­
lation of 20,000 to 40,000, averaged 18 per­
cent of the total, whereas the proportion of
the eight largest cities was 11 percent. Among
individual cities, Warren, Zanesville, and
Chillicothe, showed a considerably larger pro­
portion spent on highway and bridges than
that of other cities.
Sanitation
Street cleaning, garbage collection, and
refuse disposal are strictly the functions of
4




municipal corporations. No other government
agency performs these functions in city areas
and therefore, municipal expenditures for
sanitation reflect the total of such services
extended to the community. Expenditures for
sanitation by suburban cities accounted on
the average for over 18 percent of their total
general expenditure— a proportion by far
greater than the average for any of the
other three groups. Cleveland Heights spent
over 25 percent for sanitation, using the
highest proportion for this purpose of any
of the 44 cities listed in the accompanying
tables. Other cities which spent one-fifth or
more of their general expenditure for sani­
tation were Cuyahoga Falls, Lakewood, and
Norwood, all in the suburban category, and
Lima in the 40,000 to 100,000 size-group,
where expenditures for sanitation averaged
11 percent. Among the large cities, shown in
Table 1, Toledo was highest at 17 percent,
compared with the average for the group of
14 percent. Youngstown was lowest at 10
percent.
Health and Welfare
Although more and more of health and wel­
fare functions are being taken over by strong­
er governmental units, nearly all municipali­
ties maintain boards of health which are re­
sponsible for the treatment and prevention of
disease, issuing regulations and making ap­
propriate inspections. Expenditures for health
and welfare varied widely, from 16 percent
of total general expenditure in Alliance to
less than 1 percent in Upper Arlington.
Suburban cities spent the least for health and
welfare, 3 percent on the average, while ex­
penditures for this purpose in other cities
averaged close to 8 percent. (With a greaterthan-average proportion of high-income fam­
ilies residing in the suburbs, the need for
public health and welfare facilities is corre­
spondingly lower.)
Revenues
Nearly 70 percent of the general revenue
of Ohio cities comes from taxes, partly col­
lected locally and partly collected by the

State. Included are general and classified
property taxes, income taxes, liquor and beer
permit revenues, cigarette license fees, motor
vehicle license fees, gasoline and sales taxes,
inheritance taxes, and others. The remaining
30 percent is derived from such sources as
State and federal grants, sales of services
such as sewer rental and safety inspections,
special assessments and charges, court fines,
and parking meters. The most important
source of tax revenue for municipal corpora­
tions is the property tax, with lesser amounts
being derived from municipal income taxes
and receipts from the State’s distribution of
gasoline taxes, sales taxes, and fees for motor
vehicle licenses.
The ratio of property taxes to total tax
revenue varies from city to city. Suburban
cities rely more than other cities on property
taxes for their revenue. On the average, the
fourteen suburban cities listed in Table 4
(see column 7) derived over 63 percent of
their total tax revenue from property taxes.
South Euclid and Euclid were the highest in
the group, with 79 percent and 77 percent,
respectively. The lowest in the group were
Norwood, with 29 percent of its tax revenue
from property taxes, and Barberton, with 30
percent; however, they are the only cities in
the suburban group to obtain revenue from
income taxes.
In the group of eight largest cities as a
whole, about 54 percent of total tax revenue
was derived from property taxes. The ratio
of property tax to total tax revenue ranged
from 75 percent in Cleveland to 20 percent
in Toledo. However, Cleveland and Akron
were the only cities which did not have an
income tax in 1955. Naturally, in the cities
with income taxes, the property tax repre­
sented a much lower proportion of tax rev­
enue than in Cleveland and Akron.
In general, it seems that suburban cities
and the cities of size-group 20,000 to 40,000
depend more on property taxes than do large
and medium-size cities. The eight cities of the
size-group 40,000 to 100,000 collected less
than 50 percent of their total tax revenue
from property taxes.




Bonded Indebtedness
Nearly all municipal governments find it
necessary to borrow money in order to meet
certain types of expenditures, mainly those
for capital outlays. General expenditures can
usually be met from general revenue. Out­
lays for permanent improvement, however,
force municipalities to go to the market and
compete for funds with the private sector of
the economy as well as with other types of
government units.
Municipal corporations in the state of Ohio
have been granted the power to borrow funds,
within statutory limitations as to the amount
of debt which that municipality may incur.
Two general rules must be followed: (1) No
municipality may incur debts of more than 1
percent of the assessed valuation of the tax­
able property located within the municipality
without the approval of the electors; and,
(2) with the approval of the electors, such
debt is limited to 5 percent. (Certain types
of bonds are exempted from this rule, mak­
ing it possible for a municipality to exceed
the 5 percent limit.)
In recent years, municipal corporations in
Ohio have been required to equalize property
valuation procedures for tax purposes. This
equalization of property valuation makes the
figures of the last column of the accompany­
ing tables more meaningful than they other­
wise would be. Comparison of general bond­
ed indebtedness per $1,000 of property valu­
ation shows that most cities were well under
legal limits of indebtedness in 1955. The
group of eight largest cities had an av­
erage bonded debt of $28.22 per $1,000 prop­
erty valuation. These are cities best equipped
and most willing to go to the market for
funds. Cincinnati was pushing close to the
ceiling, with 4.825 percent. Canton was the
lowest in the group, with bonded debt of only
i/s of one percent of its property value.
The group of suburban cities had an aver­
age bonded indebtedness of $16.38 per $1,000
property valuation. Maple Heights was the
highest in the group, with $34.08, and Upper
Arlington the lowest, with only $2.92.
Medium and smaller size cities had the low­
est percentage of bonded debt on their books.
5

Table 1 — OHIO CITIES OF 100,000 AND OVER

Municipal Expenditures, Revenue, and Debt, 1955
Property
Tax as %
of Tax
Revenue

General
Bonded
Debt per
$1,000
Property
Valuation

GENERAL EXPEN DITU RES2
C IT Y

Population1
(Apr. 1,1956)

% for
Total per
Highways
% for
Capita
Protection &. Bridges

% for
Sanita­
tion

% for
Health &
Welfare3

Cleveland.................
Cincinnati...............
C olum bus................
T o le d o ......................

933,827
551,220
435,027
328,778

$53.77
$51.93
$36.82
$47.74

3 6 .5 %
3 5 .4 %
3 3 .4 %
3 2 .6 %

1 0 .8 %
8 .6 %
8 .1 %
1 1 .8 %

1 4 .9 %
1 0 .6 %
1 4 .1 %
1 6 .9 %

6 .8 %
9 .4 %
4 .7 %
7 .9 %

7 5 .4 %
4 9 .6 %
3 5 .8 %
2 0 .0 %

$37.94
$48.25
$19.84
$ 2.01

A k ron ........................
D ay ton .....................
Y oungstow n............
C anton .....................

294,153
281,802
180,540
121,652

$38.47
$45.43
$34.50
$35.78

2 8 .3 %
3 3 .0 %
4 2 .8 %
3 0 .8 %

1 7 .8 %
9 .8 %
1 5 .6 %
2 0 .2 %

1 5 .6 %
1 5 .0 %
1 0 .4 %
1 3 .8 %

1 5 .9 %
9 .1 %
2 .7 %
1 2 .6 %

6 5 .4 %
4 4 .9 %
3 3 .1 %
2 5 .4 %

$10.19
$30.25
$17.58
$ 1.25

$46.45

3 4 .7 %

1 1 .1 %

1 4 .0 %

8 .1 %

5 3 .7 %

$28.22

Average for G roup

*Ohio Department of Liquor Control estimates.
’ Excludes expenditures for municipally operated public utilities, hospitals and universities.
’ Includes expenditures for Board of Health Administration, treatment and prevention of disease, regulations and inspections, poor
and outdoor relief, workhouse, detention home, etc.

Table J — OHIO CITIES OF 20,000 TO 40,000*
Municipal Expenditures, Revenue, and Debt, 1955

Property
Tax as %
of Tax
Revenue

General
Bonded
Debt per
$1,000
Property
Valuation

GENERAL EXPEN DITU RES3
C IT Y

Population2
(Apr. 1,1956)

% for
Total per
Highways
% for
Capita
Protection & Bridges

% for
Sanita­
tion

% for
Health &
Welfare4

Portsm outh..............
Steubenville............
N ew ark.....................
M a rion .....................

39,050
38,506
38,232
37,418

$33.94
$37.35
$25.48
$31.48

3 5 .3 %
2 7 .4 %
3 6 .7 %
3 1 .7 %

1 4 .3 %
1 6 .1 %
2 1 .4 %
1 7 .2 %

1 0 .1 %
7 .8 %
8 .5 %
1 1 .6 %

8 .7 %
7 .0 %
3 .0 %
1 4 .5 %

6 8 .0 %
7 3 .3 %
4 8 .5 %
5 5 .4 %

$ 8.83
$ 7.51
$ 6.8 9
— 0—

M assillon..................
E lyria........................
Sandusky..................
Lancaster.................

35,979
35,348
32,880
30,059

$26.02
$39.61
$29.50
$24.92

3 4 .3 %
2 8 .6 %
3 8 .8 %
2 9 .3 %

1 3 .2 %
1 9 .2 %
1 2 .8 %
2 0 .1 %

1 5 .7 %
1 7 .1 %
9 .6 %
1 3 .4 %

1 0 .0 %
2 .3 %
5 .1 %
3 .1 %

4 0 .7 %
6 3 .7 %
6 0 .3 %
4 3 .7 %

$ 4 .7 9
$38.13
$ 7.4 6
$ 6.61

A llian ce ....................
Findlay.....................
East L iverp ool........
A shtabula................

29,618
26,861
26,363
25,941

$27.71
$25.42
$26.44
$34.07

3 1 .0 %
2 9 .2 %
3 2 .2 %
3 3 .4 %

1 6 .1 %
1 9 .2 %
2 0 .5 %
2 2 .6 %

7 .3 %
8 .0 %
1 0 .8 %
1 3 .5 %

1 6 .1 %
2 .5 %
1 0 .5 %
2 .0 %

5 2 .1 %
4 9 .2 %
6 2 .9 %
6 7 .4 %

$11.43
$ 1.90
$ 5.02
$18.37

C h illicothe...............
T iffin .........................

25,130
21,872

$25.81
$30.83

3 4 .0 %
3 1 .0 %

2 5 .7 %
2 3 .8 %

9 .3 %
1 6 .0 %

2 .6 %
4 .1 %

4 4 .7 %
4 0 .5 %

$ 4 .0 3
$ 3.99

$30.18

3 2 .3 %

1 8 .2 %

1 1 .4 %

6 .7 %

5 8 .4 %

$10.09

Average for Group

1Excludes “ suburban” cities which are shown in Table 4.
3Ohio Department of Liquor Control estimates.
’ Excludes public utility expenditure* and expenditures for municipally operated hospitals.
4Includes expenditures for Board of Health Administration, treatment and prevention of disease, regulation* and inspections, poor
and outdoor relief, workhouse, detention home, etc.

6




Tabic 2 — OHIO CITIES OF 40,000 TO 100,000*

Municipal Expenditures, Revenue, and Debt, 1955
Property
Tax as %
of Tax
Revenue

General
Bonded
Debt per
$1,000
Property
Valuation

GENERAL EXPEN DITU RES3
C ITY

Population2
(Apr. 1,1956)

% for
Total per
Highways
% for
Capita
Protection & Bridges

% for
Sanita­
tion

% for
Health &
Welfare4

Springfield...............
H am ilton.................
W arren .....................
L orain .......................

85,442
67,669
58,481
57,307

$35.34
$39.10
$41.22
$36.47

3 6 .8 %
3 7 .6 %
2 8 .6 %
2 9 .6 %

1 4 .9 %
9 .4 %
2 7 .0 %
1 6 .3 %

1 0 .5 %
8 .4 %
9 .7 %
1 0 .2 %

5 .7 %
1 2 .4 %
2 .1 %
9 .8 %

3 6 .7 %
4 5 .2 %
3 2 .9 %
6 8 .7 %

$ 3 .4 0
$15.87
$21.12
$26.24

L im a .........................
M ansfield.................
Zanesville................
M iddletow n ............

55,919
49,978
43,830
40,550

$32.65
$31.79
$22.06
$44.48

3 0 .0 %
3 3 .3 %
3 1 .5 %
3 6 .5 %

1 7 .6 %
1 7 .9 %
2 6 .0 %
1 2 .5 %

2 2 .2 %
6 .9 %
1 1 .6 %
7 .4 %

4 .8 %
1 3 .5 %
5 .2 %
7 .1 %

4 3 .1 %
4 9 .1 %
4 1 .9 %
6 8 .6 %

$ 2.91
$ .08
$ 6 .0 7
$13.48

$35.61

3 3 .3 %

1 7 .0 %

1 0 .7 %

7 .6 %

4 7 .6 %

$12.02

Average for G roup

1Excludes “ suburban” cities which are shown in Table 4.
IOhio Department of Liquor Control estimates.
!Excludes public utility expenditures and expenditures for municipally operated hospitals.
^Includes expenditures for Board of Health Administration, treatment and prevention of disease, regulations and inspections, poor
and outdoor relief, workhouse, detention home, etc.

Table 4 — OHIO SUBURBAN CITIES OF 20,000 TO 100,000
Municipal Expenditures, Revenue, and Debt, 1955

Property
Tax as %
of Tax
Revenue

General
Bonded
Debt per
$1,000
Property
Valuation

GENERAL EXPEN DITU RES2
C IT Y

Population1
(Apr. 1,1956)

% for
Total per
Highways
% for
Capita
Protection & Bridges

% for
Sanita­
tion

% for
Health &
Welfare3

L akew ood................
Cleveland Heights.
Parm a.......................
E u clid.......................

67,118
61,207
59,946
54,959

$36.28
$43.97
$23.43
$34.56

3 1 .6 %
30 .7 %
3 2 .6 %
3 4 .5 %

1 1 -5 %
1 3 .3 %
2 0 .0 %
1 6 .7 %

2 2 .6 %
2 5 .1 %
7 .2 %
1 4 .3 %

3 .5 %
2 .5 %
3 .0 %
1 .6 %

6 6 .8 %
6 7 .2 %
7 2 .6 %
7 7 .4 %

$24.00
$11.37
$29.82
$16.65

Cuyahoga F a lls.. . .
K ettering.................
East Cleveland........
N orw ood ..................

43,518
43,366
40,457
37,727

$27.55
$ 9.5 5
$33.88
$43.20

3 1 .3 %
3 1 .0 %
4 1 .1 %
3 7 .9 %

1 2 .0 %
2 5 .1 %
1 1 .9 %
1 7 .4 %

2 2 .6 %
— 0—
1 8 .4 %
2 0 .5 %

4 .5 %
1 .3 %
3 .2 %
1 .4 %

6 9 .3 %
5 0 .5 %
5 7 .9 %
2 9 .1 %

$ 2.0 2
$ 8.12
$ 2 .3 4
$23.37

Barberton................
Shaker H eig h ts.. . .
Garfield H eights. . .
M aple Heights........

33,282
32,048
28,517
24,562

$36.05
$62.10
$21.99
$28.36

2 9 .6 %
3 3 .7 %
3 8 .3 %
3 0 .5 %

1 7 .4 %
1 2 .6 %
1 8 .3 %
2 3 .8 %

1 4 .2 %
1 8 .3 %
1 2 .7 %
1 7 .6 %

1 1 .1 %
1 .3 %
2 .4 %
2 .2 %

3 8 .4 %
7 0 .2 %
5 7 .1 %
6 8 .0 %

$23.80
$ 9.9 3
$17.57
$34.08

South E u clid...........
Upper Arlington.. .

24,098
22,923

$29.90
$15.38

4 5 .2 %
3 9 .0 %

1 6 .0 %
1 0 .1 %

1 6 .2 %
1 8 .7 %

1 .9 %
0 .6 %

7 9 .0 %
5 4 .7 %

$15.16
$ 2.9 2

$32.47

3 4 .0 %

1 5 .1 %

1 8 .1 %

3 .0 %

6 3 .1 %

$16.38

Average for Group

^ h io Department of Liquor Control estimates.
2Excludes public utility expenditures and expenditures for municipally operated hospitals.
•Includes expenditures for Board of Health Administration, treatment and prevention of disease, regulations and inspections, poor
and outdoor relief, workhouse, detention home, etc.




7

The Postal Savings System

P o s t a l S a v i n g s S y s t e m , as an ad­
experience in saving through postal depos­
junct of the nation’s banking structure,
itories in their homelands.
has had an interesting history. But after Whether the Postal Savings System still
nearly a half century of existence, its days
serves the purposes for which it was created
may be numbered, either through Congres­
depends a good deal upon one’s evaluation
sional action or through the workings of
of changes which have occurred since that
economic influences.
time in the nation’s banking structure.

T

he

Original Purposes Outmoded
It is frequently claimed that the fortysix-year-old Postal Savings System “ no
longer meets today’s social conditions and
savings habits.” This statement requires a
review of the conditions existing when the
Postal Savings System was created. The
driving force behind the passage of the
Postal Savings Act of 1910, after forty sim­
ilar bills had failed, was the money panic of
1907. Confidence in banks was then at a
low ebb. Agitation for guaranty of bank
deposits and the creation of postal savings
banks gained new vigor. It was also argued
that a Government depository would pro­
vide security for small savings of low-income
wage earners.
Neither of these ends necessarily pointed
towards the Post Office Department as the
means of providing Federal banking service.
However, the Post Office Department was
well known in many rural areas which were
largely isolated and remote from savings
facilities and, therefore, appeared to be a
convenient means for providing savings facil­
ities for farmers and others. In addition,
large numbers of immigrants were still com­
ing to the United States with little knowledge
of American banking but with considerable
8




First, the Federal Deposit Insurance Corpo­
ration and the Federal Savings and Loan
Insurance Corporation now secure deposits
and share accounts up to $10,000. Second,
wage earners that are largely located in large
industrial centers are adequately served by
banking facilities. (See Standard Metropol­
itan Areas1 on the accompanying map of
postal savings depositories and banking fa­
cilities in the Fourth Federal Reserve Dis­
trict.) Although in the early nineteen hun­
dreds, banks were not noted for accommodat­
ing small savings accounts and national
banks could not accept such deposits until
1913, banks now actively solicit such ac­
counts. Further, many wage earners have
accumulated savings in excess of the $2,500
maximum placed on individual postal sav­
ings deposits.
The argument that postal savings banks
are needed to attract savings of immigrants
and farmers similarly has lost much of its
former logic. The immigrant flow has slowed
to no more than a trickle since the ’thirties.
Improved supervision of banks and the
strength of banking displayed since the
(1 ) The Standard Metropolitan Areas shown on the
map include all those on the official list of the Bureau of
the Census plus two areas— Mansfield, Ohio, and New
Castle, Pennsylvania— treated as “ metropolitan” here since
the most recent estimates of population make it appear
appropriate to do so.

PLACES W ITH POSTAL SA V IN G S AND BA N K IN G OFFICES




Fourth District, June 30. 1956

LEGEND
Places with postal savings offices only
Places with banking offices only
Places with both postal savings
and banking offices
The 19 Standard Metropolitan Areas
in the Fourth District are shown in color
Scale of Miles

20

40

Banking Holiday has undoubtedly instilled
confidence in banks on the part of native
citizens as well as immigrants. The tremen­
dous improvement in private and public
transportation and communication since 1910
has brought town and country areas together.
As shown on the map, not a single postal
savings office in the Fourth Federal Reserve
District is as far as twenty miles away from
a banking facility and most offices are located
in towns or cities where there are banking
facilities. Incidentally, many persons use the
facilities of the Post Office Department to
mail their savings to banks and savings and
loan associations.
Competition with Banks
Much of the opposition to the Postal Sav­
ings System, even before it was established,
arose from the American distaste of public
institutions competing with private business.
The original legislation attempted to meet
this objection by requiring postal savings
offices to redeposit their savings in banks
in localities where the funds had been re­
ceived. Banks were required to secure such
deposits with collateral in the form of Gov­
ernment, State, or municipal bonds. Banks
have always been required to pay 2y2 per­
cent interest on such deposits.
Such provisions appear to have worked ade­
quately until 1933. At that time, roughly 85
per cent of postal deposits were redeposited
with local banks. Beginning late in 1933,
however, banks were finding it increasingly
difficult to invest the funds, as well as to
make use of excess reserves, at rates that
would warrant payment of 2y2 percent in­
terest. Accordingly, banks began to decline
to act as depositories for postal savings and
the Postal Savings System was forced to
invest in Treasury securities. Today only a
nominal share of postal savings funds is
held by banks. In the Fourth Federal Re­
serve District, postal deposits currently
amount to $125 million, but only $1 million
is deposited in 48 of the District’s 600 mem­
ber banks. About half that amount resides
10




in one bank; about forty banks accepting
redeposits hold token accounts of $10,000 or
less.
Thus it appears that the banking com­
munity itself has little to fear today from
competition from postal savings depositories.
The geographic distribution of postal savings
depositories in relation to banking facilities
shown on the accompanying map might be
somewhat indicative of competition.
The
distribution of postal savings offices, how­
ever, by the number of depositors in each
office shown on the following table reveals
that, at least currently, the Postal Savings
System is a weak competitor. Nearly fourfifths of the postal savings offices in the
Fourth District have less than two hundred
depositors; one-quarter of the offices have
less than twenty-five depositors. Only 12
percent of the postal depositories are in non­
bank towns and three-quarters of these have
less than fifty depositors. Total deposits in
many post offices hardly warrant their exist­
ence and certainly fall below the volume re­
quired to make a banking facility worth­
while.

DISTRIBUTION OF POSTAL SAVINGS OFFICES
BY NUMBER OF DEPOSITORS
June 30, 1956
Fourth Federal Reserve District

Depositors

Offices

Per Cent
of Total

Offices
in NonBank
Towns

Per Cent
of Total

Less than 25
25 to 49
50 to 99
100 to 199
200 to 299
300 to 399
400 to 499
500 to 999
1,000 to 4,999
5.000 to 9,999
10.000 and Over

121
92
86
71
36
15
11
25
10
3
3

2 5 .6 %
19.5
18.2
15.0
7 .6
3 .2
2.3
5 .3
2.1
.6
.6

29
15
4
4
4
0
0
1
0
0
0

6 .1 %
3 .2
.8
.8
.8
0 .0
0 .0
.2
0 .0
0 .0
0 .0

Total

473

100.0%

57

1 1 .9 %

The Record
It must be acknowledged, however, that
there were certain periods of remarkable
growth on the part of the Postal Savings
System during its forty-six years.

C O M P A R IS O N OF TIM E DEPO SITS AT
C O M M E R C IA L BANKS A N D POSTAL
S A V IN G S
1926

DEPOSITS
•

1956

U n ite d 5 t a f e *

The accompanying chart compares time
deposits at all commercial banks in the
United States with total postal savings de­
posits. A comparison of these data for the
Fourth District would yield similar results.
The first period of rapid growth, 1930-1933,
began with the decline in confidence in banks
during the period of bank suspensions and
closings. During this period, postal savings
deposits quadrupled while time deposits
dropped roughly one-third.
After the establishment of deposit insur­
ance, both types of deposits recorded mod­
erate gains of similar proportions until 1942.
Between 1942 and 1947, however, time de­
posits increased about two and one-half times
while postal savings deposits nearly trebled,
to reach a peak of nearly $3.4 billion at mid1947. During most of that period, liquid sav­
ings of individuals grew rapidly as incomes
rose and goods became scarce.
Postal savings had a competitive advantage
in their 2 per cent interest rate at a time
when most banks were paying iy 2 percent
or less. In addition, swing-shift workers prob­
ably found post office hours more convenient
than banking hours. Even the savings bond
at 3 percent was, in some respects, at a com­
petitive disadvantage because of its ten-year
term and low rate of return during the first
few years held.
Liquidation by Default
Since 1947, however, postal savings have
lost considerable ground, dropping by nearly
one-half while time deposits continue to
grow. The Post Office Department recently
estimated that deposits were being reduced
by $20 million a month. Part of the decline
since 1947 was probably a postwar reaction
to long-delayed purchases of goods, but in
recent years it is most likely that postal sav-




ings suffered a reversal of their earlier rate
advantage. While postal savings continue to
this day to pay 2 percent, bank rates and
savings and loan rates have moved to a range
roughly between 2 percent and 3y2 percent.
Thus, the Postal Savings System has been
gradually liquidating in response to a de­
clining patronage. From the all-time high
of $3.4 billion reached in 1947, postal sav­
ings deposits have declined below $1.6 bil­
lion, with further shrinkage in sight. Com­
plete liquidation of the largest “ savings
bank” in the nation would mean that nearly
2.5 million depositors would have to find
other havens for about $1.6 billion currently
deposited at some 7,600 post offices, postal
stations, and postal branches.
In only a few of the places served by the
Postal Savings System would depositors be
inconvenienced by the demise of the postal
savings banks. For example, in Bascom, Ohio,
45 percent of the town’s population of 400
have a postal savings account. In the great
majority of Ohio towns, however, less than
11

1 percent of the population use the avail­
able postal savings facilities. As already
shown, nearly every postal savings depositor
could find a conveniently located banking
facility.
It would seem that the Postal Savings
System has outlived any social or economic
need it may have once satisfied. It has not
grown competitively. Perhaps, the only in­
convenience of its dissolution would be that
experienced by the Post Office Department

and the United States Treasury. The Postal
Savings System has earned a profit in every
year but one of its operation, thus contrib­
uting to the financial support of the Post
Office Department. Moreover, the Treasury
does not have ready cash available to re­
deem the $1.5 billion of postal savings funds
now invested in Treasury securities. But it is
unlikely that liquidation would be so rapid as
to pose a real problem for the Treasury.

NOTES
Among the articles recently published in Monthly
Business Reviews of other Federal Reserve banks,
the following may be of special interest to our readers:
“ Recent Inventory Developments,” Federal Re­
serve Bank of Kansas City, July 1957.
“ The Expanding Role of State and Local Govern­
ments in the National Economy,” Federal Reserve
Bank of New York, June 1957.
“ Managing Other People’s Money: Trust depart­
ment operations a big business at District banks. ”
Federal Reserve Bank of Atlanta, June 1957.
“ Trade Credit: a Factor in the Rationing of
Capital.” Federal Reserve Bank of Kansas City,
June 1957.
Copies may be obtained by writing to the Federal
Reserve bank named in each case.

12