Editor’s Note: This is the first in a series of articles by Paul Thompson, author of “What You Need to Know About Today’s Credit Unions,” that is aimed at new CU employees and volunteers and which offers a background on the history of credit unions.
By Paul Thompson
Credit unions were one of a number of American institutions that tackled the credit problems of the urban working class in the early 20th Century.
From earliest times, the American economy relied heavily on credit. Despite this, moralists preached that debt was the road to ruin. Benjamin Franklin typified the divergence between preaching and practice, and his publications praised thrift and staying out of debt. He told his friend, Dr. Benjamin Rush, that credit produced idleness and vice and that he wished all debts were irrecoverable under law. Yet Franklin borrowed and lent freely during his business career.
During the 19th century, America shifted from a rural economy to a capitalist industrial economy. Cities were flooded with newcomers, some fleeing the privations of farm life, others arriving from Europe and Asia seeking what has come to be called the "American Dream." The new economy provided wealth to the robber barons such as Rockefeller and Carnegie, but was not so kind to most Americans, many of whom lived in squalid conditions and toiled for long hours in dangerous and dirty jobs at low wages. They found it difficult to get credit at reasonable rates.
One reason was contradictory attitudes toward credit. When a millionaire borrowed to build a factory, it was considered praiseworthy "productive" debt. When a housewife borrowed to feed or clothe her family, that was "consumptive" credit, which did not contribute to society but wasted its resources. "Consumption" was the name used for what we call tuberculosis, and the term "consumptive credit" carried connotations of illness and disease.
Why Banks Ignored Consumers
Commercial banks catered to the needs of business and the wealthy. They did not attempt to provide credit to ordinary working people, for a number of reasons:
- Bankers shared the popular prejudice against "consumptive credit."
- Banks needed to maintain high liquidity to guard against "runs," and restricted their lending to short-term notes. This prevented them from extending long-term credit such as mortgages.
- It was hard to judge the creditworthiness of working people. In addition, workers were vulnerable to layoffs, illness, and workplace accidents, which could interfere with their prompt repayment of loans.
- Workers borrowed small amounts, which were uneconomical to lend without violating state interest rate ceilings.
A variety of other institutions arose to meet the credit needs of working people. In the next installment in this series, we'll discuss three of them, the pawnshop, the small loan broker, and installment purchasing.
Paul Thompson, CUDE, is a former speechwriter with CUNA. His book, "What You Need to Know About Today's Credit Union," can be found on lulu.com.