Canada Post workers rally as part of a nationwide strike organized by the Canadian Union of Postal Workers, protesting sweeping government reforms to the postal service, in downtown Toronto on Oct. 1.Wa Lone/Reuters
John Turley-Ewart is a contributing columnist for The Globe and Mail, a regulatory compliance consultant and a Canadian banking historian.
The Liberal government led by Justin Trudeau did Canada Post no favours by stalling modernization. But Mark Carney, in his efforts to reform the Crown corporation, could do all Canadians a great service.
He would do this by ignoring the absurd idea the Canadian Union of Postal Workers, the federal NDP and some of their supporters are making now and have been making for years – resuscitate Canada’s dead and long-buried Post Office Savings Bank (POSB).
CUPW’s website on this cause declares “post offices would provide everyday financial services like chequing and savings accounts, loans and insurance.”
The profits made from taking deposits and lending money at higher interest rates would apparently help fund “government loans, grants and subsidies to boost renewable energy projects and energy-saving retrofits.”
Canada Post removes signing bonus in new offer to union
The union notes that there was a Post Office Savings Bank in this country till 1968, “when the big banks successfully lobbied for the service to be cancelled.” And herein lies the problem with CUPW’s call for a financial Frankenstein: the union has taken the wrong lesson from Canada’s POSB and its demise.
Its early story is well hidden, and much of it has lain largely undisturbed in the handwritten journals of John Mortimer Courtney, who was charged with managing the country’s finances from 1878 until his retirement in 1906 as Canada’s top bureaucrat.
Soon after Confederation in 1867, the federal government founded a national Post Office Savings Bank run out of Canada Post branches. It collected deposits, and Ottawa used the funds to help finance federal operations and infrastructure projects.
Mr. Courtney’s diaries reveal the expected. Partisan politics drove many of the hires in the POSB, creating a dumping ground for the connected and party donors whose friends and family members needed jobs.
Unexpectedly, the diaries also reveal Ottawa’s fierce battle for deposits with Canada’s banks. The POSB would hike deposit interest rates when it needed money for government projects, the banks would respond in kind. The result was instability in government finance and liquidity problems for banks.
The POSB model entailed paying 3-per-cent interest for deposits, which, even with operating costs, was a cheaper source of funding than London’s capital markets in the late 19th century. In theory, the model made sense; in practice, it did not account for banks competing for those deposits and paying well above 3 per cent.
In May of 1891, the banks increased deposit rates to such an extent that they drained the Post Office Savings Bank of millions of dollars. Then-prime minister John A. Macdonald wanted to fight back with higher rates. Mr. Courtney advised against it, saying such a move would likely cause some banks to fail and dividends to be reduced at others. Markets would be roiled. He had a different plan.
Mr. Courtney tried to rig the market. The means to that end, as the country’s top civil servant and with full knowledge of the governments he served, was putting pressure on bankers to form an association. Collusion in banking became government policy, however unofficial. This led to the founding of the Canadian Bankers Association. It marks its 134th year this December.
But Mr. Courtney’s strategy hit a snag. The Canadian Bankers Association proved to be an ineffective cartel. Its members reluctantly signed interest-rate agreements to appease Mr. Courtney and ultimately the government, but in practice, ignored them if it meant winning new business or retaining it.
Editorial: The Liberals push the envelope, finally, at Canada Post
The Post Office Savings Bank lost the interest-rate war. But it did offer Canadians stability, and that became its winning strategy through a spate of bank failures in the late 1890s and early years of the 20th century. That is when the Post Office Savings Bank saw deposits pour in, reaching their height in 1908 when they amounted to roughly $1.3-billion in today’s dollars.
Over the next 60 years, as consolidation, improved risk management, and bank inspection all but eliminated bank failures, Canada’s POSB deposits fell to the equivalent of $150-million today, a decline of almost 90 per cent.
During the same period, deposits at Canadian banks witnessed explosive growth, climbing by 5,300 per cent based on Statistics Canada historical data. The Canadian banking system modernized and thrived; the POSB did not and died.
What the Post Office Savings Bank offers CUPW is not a lifeline from the past for today’s Canada Post, but a glimpse of the future if Canada Post fails to modernize.