Bit by bit.

Photographer: Carla Gottgens/Bloomberg

Goldman Brings Back the $1 Account

Stephen Mihm, an associate professor of history at the University of Georgia, is a contributor to the Bloomberg View. Follow him on Twitter at @smihm.
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For 147 years, Goldman Sachs has restricted its clientele to wealthy investors, speculators, corporate leviathans and others at the pinnacle of the economy. So what drove the decision to create a new retail banking operation, GS Bank, which ostentatiously welcomes the smallest of savers, with deposits starting at $1?

The new savings bank, which opened for business earlier this month, may seem like a departure or a publicity stunt aimed at softening the bank’s elitist reputation. Yet the idea would have been intimately familiar to Goldman's founders who undoubtedly patronized similar kinds of institutions as customers.

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When Marcus Goldman emigrated to the U.S. in 1848, he followed the classic immigrant path, working as a street peddler and tailor, painstakingly amassing savings. This presented a new set of problems for Goldman and other hard-working immigrants: Where to store the nest egg?

The mattress wasn’t an option. “It is dangerous to carry money in your pocket or leave it at home,” the "Guide to the United States for the Jewish Immigrant" informed new arrivals. The book also warned against trusting “private bankers” -- a category that would have included Goldman Sachs itself. Such companies had been known to gamble away immigrant savings on ill-considered speculations.

There was an alternative: savings banks, which, the guide noted reassuringly, "are under the constant supervision of the state, and your money with them is entirely safe.” “An account can be opened with as small a sum as $1.” The handbook explained that these institutions had been expressly created “for the purpose of encouraging thrift and the habit of saving on the part of the people.”

These savings banks had a long and distinguished history. They first appeared in the U.S. a century earlier in the cities that were gateways for immigrants: New York, Boston, Baltimore and Philadelphia. They quickly became a mainstay of the American financial system, allowing small savers to gather together their pennies in accounts that could be opened with as little as a dollar.

One of the foremost historians of these institutions, Daniel Wadhwani, estimates that by the 1870s, they held a quarter to a third of all the wealth held in American financial institutions. 

These banks had been chartered not to encourage economic growth, but to cultivate what one proponent described as the “instincts of frugality, sobriety, and industry.” They were designed to help the “deserving poor,” immigrants and anyone else chasing the American dream accumulate savings, along with funds for use in times of unemployment and to keep afloat in old age. For this to work, the savings banks had to be shielded from the vicissitudes of the marketplace.

The government played a role in ensuring this protection. State legislatures kept savings banks on short regulatory leashes, minimizing competition, capping interest rates paid to depositors  to discourage bank managers from making high-yield bets with depositors’ money, and otherwise discouraging risk-taking in all forms. As a consequence, depositors might not have gotten great returns, but they rarely lost their money.

In effect, these savings banks were public trusteeships or charities overseen by state legislatures.  Even as the rest of the financial system promoted risk-taking, savings banks established themselves as rock-solid institutions that enjoyed the public trust by virtue of government protection. As a judge in Massachusetts wrote in 1852: Savings banks “very much depend upon their being under the wholesome inspection and control of government.”

True, some middle-class folks and even the wealthy used them, too. But the restrictive regulatory regime made these banks the putative guardians of the poor’s savings. And it worked, enabling generations of immigrants to accumulate the wealth necessary for success.

In the 20th century, the federal government got into the game, creating the Postal Savings Bank system in 1911 to welcome deposits from ordinary people. Again, the minimum deposit was $1, making it possible for almost anyone to participate in the system. And as an added bonus, the full faith and credit of the federal government stood behind these deposits.

By the 1920s, commercial banks, which were much more lightly regulated, sought to lure deposits to their vaults, inaugurating decades of decline in the once-thriving savings bank sector. Although commercial banks suffered setbacks in the Great Depression, the creation of the Federal Deposit Insurance Corporation helped restore faith to the sector. The old 19th-century savings bank model went into further decline, and even the U.S. Postal Service closed its program in 1967.

And now Goldman Sachs has repurposed the idea of the small-scale, frugal saver who can start building a nest egg with no more than a dollar.  True, this isn’t a charity.  But $1 deposits? It’s a strange venture for a financial institution synonymous with high-risk, billion-dollar banking.

Wall Street may be baffled by Goldman's decision. But for the bank's chief executive officer, Lloyd Blankfein -- born and raised in a hardscrabble community of working-class Jewish immigrants and their descendants -- the idea probably makes as much sense for for sentimental reasons as it does for financial  ones.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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