This is intended behavior. Since GenericMappingTools/gmt#4735, modern mode ignores any PS_MEDIA set before gmt begin, because modern plots use an auto-cropped canvas. -Xc/-Xf need a fixed page, so set it inside the session:
gmt begin test1 ps
gmt set PS_MEDIA letter
gmt basemap -R0/1/0/1 -JX4i -Baf -Xc
gmt end