A Brief History of Credit Unions

 

In my last post, I outlined what I hoped all members of the board of directors at my credit unions knew.  The first thing on that list was that they had a good background in the history of credit unions.   I listed three main reasons this topic was so important.  First, I wanted my board to understand that a credit cooperative is not a non-profit or a capitalistic enterprise.  It is its own entity with its own objectives and optimal behavior.  Second, to broaden their thinking of the kinds of financial problems that credit unions were truly meant to solve.  And third, so that those working in credit unions could truly appreciate the giants upon whose shoulders we stand, and take our responsibilities far more seriously (or get out of the movement entirely).

To gauge your understanding of credit union history, see if you know the answers to the following questions:

• What do Napoleon and the Irish Potato Famine have to do with the establishment of credit unions?
• Which descendant of a founding father of the United States established the first authorizing legislation for credit unions in the United States before becoming the first President of the New York Federal Reserve Bank?
  
• Which future president introduced a bill to authorize credit unions in his home state before becoming the President of the United States?
   

In this post, I will present (primarily in video format), the history of credit unions.  The video history will answer all of the questions above.  As I have noted earlier in this blog, I am a university professor (and a dad), so no “brief” story is really short.  It’s just brief (meaning I could expand well beyond that).  I don’t know what you did during the COVID pandemic, but I decided to create these video presentations, to educate those with no background into the historical roots of credit unions.

 

The Background

My children all seemed to have hated history at school.  To them, it was an endless listing of names and dates.  The story portion of history was lost on them.  For anyone to really understand the story, its setting must first be understood.  Credit unions grew out of a broader cooperative lending movement that started in mid-nineteenth century Europe.  The oldest direct ancestors of today’s credit unions were in Prussia.  This first video sets the stage for the founding of the first cooperative lending institutions.  It runs for about 52 minutes.

 

 

 

Two Cooperative Lending Models

Cooperative lending was part of the solution to a natural catastrophe around 1850.  They say that necessity is the mother of invention.  The political and economic systems in Prussia were not able to provide sufficient food, goods, or capital for people at the lower rungs of society.  Cooperation was the only sustainable way out of the catastrophe.  Two cooperative economic systems were invented in different parts of the Kingdom of Prussia at about the same time.  Each of those systems created its own cooperative bank.  One of those coined the term Kreditverein - or credit union.  The two founders knew of one another, but the two systems ironically never cooperatively joined forces.  The story of their founding takes another 45 minutes in the video below.

 It is interesting to note that we usually think in binary terms:  right/wrong, good/bad, capitalism/socialism, etc.  The world is much more complex than that.  In these two videos we have presented absolute monarchies, constitutional monarchies, and representative democracies.  There were not two options, but many more.  In addition, we have presented a feudal economic system, as well as capitalism, cooperative economics, and communism/socialism.  It is worth noting, that Hermann Schultze-Delitzsch knew (and corresponded with) Friedrich Wilhelm Raiffeisen, and Karl Marx.  He disagreed with both (although he disagreed more vehemently with Karl Marx than he did Raiffeisen).  

 

Tailoring Cooperative Lending to a New Location

The cooperative solution that was pioneered in Prussia was tailored to the needs of the people of Prussia – under a rather despotic government.  To adjust it for use in the United States would take two countries adjusting it first for their use.  Late nineteenth century Italy was a constitutional monarchy.  And Luigi Luzzatti was a genius at tweaking the model of liberal Hermann Schulze-Delitzsch to his conservatively democratic agenda.  In tailoring the cooperative system for Italy, it became more practical, and more self-sufficient. His innovations would serve as a starting point for the next iteration.

Further innovation was made to a cooperative lending model as it crossed the Atlantic Ocean in a Canadian incarnation.  Canada became its own dominion – free from direct political influence from Great Britain – in the late nineteenth century.  Their most successful form of cooperative lending began in the early twentieth century.  This brief video regarding both of these critical transitionary steps runs for just half an hour. Both innovations were critical adjustments in bringing cooperative lending to the United States.  In fact, Alphonse Desjardins (the founder of cooperative lending in Canada) was also directly instrumental in starting credit unions in the United States.

 

Bringing Cooperative Lending to the USA

To truly appreciate how credit unions arrived in the USA, we have to understand life in the early twentieth century.  In the video below, we will follow cooperative lending as it makes its way onto the American stage, and what it took for credit unions to finally take off.  It came during the progressive movement (think Robert La Follette and Theodore Roosevelt).  In the hour long video that follows, we will trace the rise of the US credit union through the passage of the Federal Credit Union Act of 1934.