Banking for People: Lessons from the UK’s Girobank

May 27, 2021

In the comments of a recent Positive Money blogpost on central bank digital currency (CBDC), Stephen Hart raised an interesting question:

“A public company to provide accounts direct to ordinary people, run by the Post Office – do you remember the Girobank? That was its exact description, when it was set up by the Wilson government in 1968. It worked so well that it was privatised by the Thatcher ministry in 1989-90, then taken over by Alliance & Leicester, and in turn became part of Santander. In other words, it disappeared, becoming part of the private sector. What makes Positive Money, or anyone else, think a new such enterprise would fare any better?”

While I sadly wasn’t old enough (I was only 10 when it was fully absorbed into Alliance & Leicester) to remember it, I agree we have a lot to learn about the experience of the Girobank today.

As Stephen explains, the Girobank, named after the ‘giro’ method of transferring money between bank accounts (and not to be confused with Venetian public bank established in the 16th century bearing a similar name!), was set up by the Wilson government in 1968. Originally named the National Giro, it not only introduced a new payments system which laid the foundations for the modern means of money transfer we enjoy today (finally bringing the UK up to speed with continental Europe, who had introduced postal giro systems more than 100 years before), but also provided a new public banking option.

The Girobank is often seen as resulting from the Radcliffe Committee’s report on the Working of the Monetary System in the 1950s, as one of the few recommendations which were actually adopted. But the Girobank was actually a demand of the trade union movement since the early 20th century, as a trade unionists’ bank to provide financial services to the working classes who were served poorly by the shareholder owned banks (sound familiar?). Before the introduction of the Giro, 75% of the adult population in the UK did not have a bank account, primarily because banks did not consider them profitable customers.

In addition to its ambition to be the ‘People’s Bank’, the Girobank was also sometimes referred to as “Benn’s Bank”, named after Tony Benn, who took enthusiastic responsibility for the bank both as Postmaster General and Secretary of State for Industry, seeing it as an opportunity to establish a ‘working class financial institution’. Benn even had ambitions for the Girobank to also act as some kind of national investment bank as part of the Labour left’s Alternative Economic Strategy, linking it to the National Enterprise Board and using it to mobilise savings to support productive investment. Such an idea has been vindicated in the decades since, as British finance has continued to neglect industry, instead opting to use their credit allocation powers to bid up the price of unproductive assets such as property. Indeed, the government is finally introducing a UK Infrastructure Bank to help unlock productive investment.

It is true that Girobank was privatised by the Thatcher government (alongside a number of other useful utilities like BT, British Gas and water, in a historic rip-off to the public purse). But this does not tell us much about the successes and shortcomings of the initiative.

Far from being a failure, the Girobank revolutionised payments by introducing computerised systems for the first time, and it is in large part thanks to it that we have widespread access to free current accounts. The Girobank was the first bank to offer free banking to the UK public, including free cheques and deposits, and even free postage for the remittance of documents.

A public banking option in the form of the Girobank provided a competitive floor which forced private banks to improve their services in order to attract customers. There are interesting parallels here which we can draw between the Girobank then and the prospect of a CBDC today. As our ‘Money We Trust’ report explored, a key benefit of a CBDC is that it forces private banks to step their game up. With the introduction of a risk-free public banking option in the form of a CBDC, banks will have to compete to attract deposits, either by increasing the interest they pass on to customers or by improving their services.

By the end of the 1980s, the Girobank was Britain’s sixth largest bank. At its peak, one pound in every three deposited in cash at UK banks was deposited with the Giro. This is not to say the Girobank did not have shortcomings, but many of those shortcomings were imposed by governments which did not want it to be overly competitive towards the private banking sector. For instance, the Girobank was subject to much higher liquidity requirements than commercial banks (20% compared to 12.5%), and relied on debt-financing from the Post Office. Conservative governments shied away from giving it its full support, holding only £6m of its balances with the Girobank compared to £200m with the big clearing banks in 1974. Unsurprisingly, the government received strong opposition to the Girobank from the banking sector and their allies in the media.

Despite the dismantling of the Girobank in the UK, public post banks have remained successful around the globe, in countries such as Japan, France and New Zealand.The idea of a Post Bank is not just popular among leftists like Tony Benn, but has also been something the Federation of Small Businesses have been calling for since at least 2009, running a campaign with unions such as Unite, the CWU and our friends at the New Economics Foundation, which attracted cross party support.

The introduction of a CBDC, expected to happen within the next few years in the UK, gives a new lease of life to the idea of a Post Bank. A CBDC would involve opening up digital central bank money to the general public, but it appears that much of the infrastructure users will rely on will be entrusted to the private sector. We believe there should be a public option, provided by a trusted public institution like the Post Office, for those of us who want to make payments without handing over all of our data for extractive private companies to monetise.

As well as being a crucial institution for maintaining access to cash, we think the Post Office could be an ideal candidate for allowing people to access digital public money. A Post Office branch, where people can access both cash and a CBDC should be seen as a public necessity across every high street. Encouragingly the Post Office is keen to make banking as much of a focus as its traditional mail services, acknowledging that it has “a social and moral responsibility to focus on cash and banking as one of our main strategic pillars”.

More than 50 years since the establishment of the Girobank we still have a banking sector which is unfit for purpose, dominated by a cartel of shareholder banks who are more interested in bidding up asset prices and extracting profit than serving communities who remain underserved and continue to find it difficult to even access basic banking services in the face of banks’ ruthless costcutting. It seems the need for a public banking system is as urgent as it was back then.