By establishing a federal credit union system, the Federal Credit Union Act of 1934 legitimated the developing credit union movement in the United States. It encouraged savings and made credit more available to people of limited means, providing American consumers with greater spending power.
A federal credit union is a nonprofit, member-owned cooperative. The union encourages its members to put money into savings, and it uses these accumulated savings to make loans to individual members. It also educates members on how to manage their finances. The U.S. government, through the National Credit Union Administration
In order to generate and maintain a feeling of mutual responsibility, members of a federal credit union generally have a common bond of employment, association, or residence. The members, with one vote each, elect a volunteer board of directors from the membership at an annual meeting. The board has the authority to determine the maximum limits on loans and the interest rates to be charged. Interest rates tend to be favorable in comparison to those offered by other lenders because of the lower labor costs in volunteer organizations, lower losses on defaulted loans, and lower marketing costs. In addition to an unpaid board of directors, credit unions have officers who are generally unpaid or receive nominal salaries. The ratio of delinquent to outstanding loans is generally far lower than that of federally insured commercial banks. Personal contact and personal credit judgments play a large role in keeping this ratio low. Two major marketing advantages are the bond of clients to the credit union through membership and the close proximity of clients, with the credit union often located at an employee’s place of work.
Loans can be designed to meet the needs of individual members. Federal credit unions must comply with all federal consumer protection laws, such as the Truth in Lending Act (1980) and the Equal Credit Opportunity Act (1975). Deposits by members take the form of purchases of shares in the credit union and are frequently made through payroll deductions. Profits from lending money and other sources may be distributed to the members as dividends.
The development of credit unions resulted from the needs of lower income groups. Prior to the existence of credit unions, there were a limited number of outlets for small savings or loans. In 1844, the first credit union was organized in Belgium. Around the same time in Germany, Hermann Schulze-Delitzsch organized cooperative credit societies and developed the principle that the funds to be loaned to members would come from the savings of members. By 1880, about three thousand cooperative credit societies had been organized in Germany. Friedrich Wilhelm Raiffeisen also organized cooperative credit societies in Germany but put greater emphasis on unselfish service to the organization. By 1920, his model for the earliest credit unions was being used in most countries in the world.
The credit union movement spread to the North American continent with the help of Alphonse Desjardins, a Québécois legislative journalist who was studying economic conditions in Europe in the late 1890’s. In 1900, Desjardins used ideas from the Schulze-Delitzsch and Raiffeisen financial cooperatives to establish the first cooperative bank, La Caisse Populaire (the people’s bank), in the city of Levis in the province of Quebec, Canada. Edward A. Filene, a wealthy Boston merchant and philanthropist, was influential in bringing credit unions to the United States. His interest in the subject resulted from extensive travel throughout the world. He convinced Pierre Jay,
Jay asked Desjardins to assist in passing a credit union act in Massachusetts. The Massachusetts Credit Union Act, the first complete credit union act in the United States, was enacted in 1909. In the same year, in Manchester, New Hampshire, Desjardins helped organize the first legally chartered cooperative credit society in the United States. Growth in the credit-union movement was slow during the decade after passage of the Massachusetts act. By 1919, however, Filene believed that there was a sufficient number of credit unions to justify an organized move toward national legislation. He organized the National Committee on People’s Banks
Three factors were necessary to expand the movement: legislation allowing the chartering (incorporation) of credit unions, education of the general public regarding the movement, and voluntary associations of credit unions at the state level to further expand the movement. To facilitate each of these, Filene created and financed the Credit Union National Extension Bureau
The Great Depression had a favorable impact on the movement. In 1932, Congress authorized credit unions in the District of Columbia and allowed them to borrow from the Reconstruction Finance Corporation. By 1934, thirty-eight states had enacted credit union laws and more than twenty-four hundred credit unions were in operation.
Bergengren became increasingly convinced that national legislation was necessary. He argued that a federal law would permit the organization of credit unions in states that had refused to pass such legislation; that there was some possibility that other states might repeal their credit union laws, as West Virginia had done in 1931; that a federal statute would be useful as a basis of organization in those states that had weak or defective laws; and that federal legislation should be complete before credit unions formed a national association.
The culmination of the legislative efforts of the Credit Union National Extension Bureau came on June 26, 1934, when the U.S. Congress enacted the Federal Credit Union Act. The act provided for the chartering, supervision, and examination of federal credit unions by the U.S. government. The writers of the act tried to incorporate the best ideas from state laws.
In the same year, Congress chose the Farm Credit Administration (FCA) to supervise credit unions because of its expertise in examining other types of financial cooperatives chartered by the U.S. government. Claude R. Orchard was appointed the first director of the Credit Union Section, FCA. More than eighty-seven hundred federal credit unions were chartered during the nineteen years he served as director. Also in 1934, Bergengren and Filene held a national meeting of credit union delegates that led to the development of the Credit Union National Association (CUNA).
The most important result of the Federal Credit Union Act of 1934 was the confidence it inspired in the American public regarding credit unions. Involvement by the federal government played a major role in the growth of credit unions, from almost 2,500 credit unions when the act was passed to 3,372 by the end of 1935. In 1937, Congress passed legislation prohibiting the taxation of federal credit unions except on the basis of real or personal property. This legislation further supported growth in the number of entities, which approached 8,000 by 1939.
Individual credit unions also grew at an impressive rate. By March, 1936, Armour and Company employee credit unions had more than twenty-two thousand members, had $1.25 million in assets, and had made loans up to that date of almost $7 million. There were twenty-four credit unions among Sears, Roebuck and Company employees, with almost eight thousand members, and credit unions associated with the United States Steel Corporation had almost twenty-three thousand members. A credit union served employees of the U.S. Senate. Another credit union at the Twentieth Century-Fox film studio had more than one thousand members.
Many employers considered a credit union to be an important fringe benefit, with the advantage of involving no necessary cost to them. Space for the credit union’s offices often was provided on the premises, perhaps at reduced cost. Payroll withholding both for regular savings and for installment collection of loans was another service commonly provided by employers.
In 1935, CUNA’s national board of directors agreed to establish the CUNA Mutual Insurance Society.
In later years, new legislation designed to modernize credit unions, combined with favorable regulatory changes, made credit unions more competitive with banks and savings and loans. The industry was permitted to use a greater variety of sources for both assets and liabilities, and a greater range of financial activities was allowed. The interest rates that credit unions could pay on savings and charge for loans were relatively free from government control. Finally, credit unions still enjoyed the political and economic benefits of being nonprofit organizations. The benefits of credit union membership combined with the decline in reputation of savings and loans in the late twentieth century to ensure that credit unions remained an attractive, and in some cases a vital, option for financial services.
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Bergengren, Roy F. “Achievement: United States.” In Credit Union: North America. New York: Southern, 1940. Gives a detailed summary of the growth of credit unions by state. -
_______. Crusade: The Fight for Economic Democracy in North America, 1921-1945. New York: Exposition Press, 1952. A detailed history of the credit union movement, written by the man who had the greatest influence in passage of the Federal Credit Union Act and growth of credit unions. Reads like an autobiography in parts. Includes a six-page photograph section of early crusaders and administrators in the movement. -
_______. CUNA Emerges. Madison, Wis.: Credit Union National Association, 1935. Summarizes the functions and operations of credit unions one year after passage of the Federal Credit Union Act of 1934. Discusses the organization of CUNA. The final chapter offers an interesting, almost philosophical, explanation of how credit unions can lead to a better society. -
Croteau, John T. The Economics of the Credit Union. Detroit: Wayne State University Press, 1963. Credit unions have many unique economic characteristics because they do not maximize profits as their sole goal. After analyzing data from credit union questionnaires, the author recommends ways to improve financial efficiency in large credit unions. Topics include reserves, liquidity, growth, and investment yields. Written to be comprehensible by noneconomists. -
_______. The Federal Credit Union: Policy and Practice. New York: Harper & Brothers, 1956. An analytic study of the growth, policies, and practices of credit unions on a national scale from 1934 to 1954. Provides statistics on assets and liabilities, operating costs, earnings, and dividends. Includes an interesting chapter on structural change and suggested improvement. -
Emmons, William R. Bank Competition and Concentrations: The Impact of Credit Unions. Ann Arbor: Institute for Social Research, University of Michigan, 2000. Discusses the effects on the U.S. banking and finance sector of direct competition between for-profit instutions (banks) and not-for-profit institutions (credit unions). -
Isbister, John. Thin Cats: The Community Development Credit Union Movement in the United States. Davis: University of California, Center for Cooperatives, 1994. A history of the community development and credit union movements and their intersections in helping communities to grow and flourish in the United States. Bibliographic references. -
Moody, J. Carroll, and Gilbert C. Fite. The Credit Union Movement: Origins and Development, 1850-1970. Lincoln: University of Nebraska Press, 1971. Traces and analyzes the history of credit unionism as a national social movement, with a focus on the founders and leaders. Detailed and comprehensive. Source of many of the statistics in this article. -
Pugh, Olin S., and F. Jerry Ingram. Credit Unions: A Movement Becomes an Industry. Reston, Va.: Reston Publishing Company, 1984. A comprehensive look at the growth of the credit union movement. Describes the structure of the industry, regulations, financial management, and role in the financial marketplace. Also discusses the future of the industry from an early 1980’s perspective, including likely effects of legislation of that era. -
U.S. Department of the Treasury. Credit Unions. Washington, D.C.: Author, 1997. Overview of all federal legislation through 1997 relating to credit unions and to deposit insurance covering credit unions. Bibliographic references. -
U.S. National Credit Union Administration. Development of Federal Credit Unions. Washington, D.C.: Author, 1972. Focuses on the role of the U.S. government in the credit union movement. Explains the benefits of federal government participation in the movement. Also describes the Credit Union National Association, Inc. (CUNA) and organizations associated with it.
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