Credit Unions, Usury, and the Rise of Consumer Credit in the United States

Guest Post from 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. Taken together, these institutions helped to demonstrate that industrial and salaried workers were safe credit bets, opening the door to consumer lending by commercial banks and helping to foster our "consumer culture."

The question of credit for Jane and Joe worker was bound up with the issue of usury. "Usury" narrowly defined means the charging of interest on a loan, but more broadly it can mean "excessive" interest, illegal interest, or simply dishonest or abusive lending practices.

The Judea-Christian heritage frowned on the charging of interest, particularly on loans to individuals in need. In Exodus (22:25 RSV) we read: "If you lend money to any of my people with you who is poor, you shall not be like a moneylender to him, and you shall not exact interest."

Nehemiah (5:1-6), hearing the complaints of the people of Israel in a time of famine, scolds the nobles and says, "Let us abandon this exacting of interest. Return to them this very day their fields, their vineyards, their olive orchards, and their houses, and the percentage of money, grain, wine, and oil you have been exacting from them." As a result of such teachings, Jewish law forbade charging interest on loans, except loans to non-Jews.

The New Testament also encouraged generosity in lending without expectation of gain and voiced suspicion of accumulated wealth. The Christian church continued the ban on lending at interest, but, of course, such bans could not prevent people from having to borrow, nor lenders from getting around the bans in one way or another. One escape hatch was the proviso in Jewish law that Jews could lend to non-Jews. This led to some Jews, excluded from most occupations, becoming lenders to Christians, ranging from pawnbroking to financing wars.

With the Industrial Revolution, starting in England in the 18th Century, it became more and more evident that credit was a necessary lubricant for business and trade. Economists like Adam Smith saw interest as a useful tool, although he advocated limits on how much could be charged. The churches themselves, especially the Protestants, began conceding that some interest was morally allowable. England eventually abolished its usury limit of 6 percent in 1854, leaving control to market forces. (Borrowers who feel an interest charge is exorbitant can take the lender to court, but this obviously doesn't happen often. In recent years, consumer advocates have pushed for usury limits to protect borrowers.)

The Future of America's Credit Union Museum in Peril?

When I first got into credit union history, one of the few resources I could easily locate was America's Credit Union Museum in Manchester, NH. I reached out to the director, Peggy Powell, who had helpful reading suggestions, and I ended up spending two days in the Museum's reading room working my way through some rare literature. Given the dearth of institutional support for credit union history in general, the Museum is an incredibly valuable resource.

As such, I was taken aback to receive the following message from Peggy on Tuesday:

Thank you for sending a copy of the article you wrote for Financial History magazine. I have added it to the reading room.  

I want you to know that I am retiring from my position as Executive director of the Museum effective this Friday [8/29/2014]. Thank you for the support you have provided over the years and for your interest in the Museum. 

Never lose your passion for credit unions. 

Best wishes to you in the future. 

Peggy

As I'd been thinking about visiting New Hampshire in the near future to meet with a food co-op organizing group, and was considering taking them on a field trip to the Museum, I wrote Peggy back inquiring as to what the Museum's next steps would be in her absence. She replied:

At this point a new Executive Director has not been hired which means the Museum will be temporarily closed until a replacement has been found. I do not know how long that will be. I suggest you call the Museum at 603-629-1553 prior to your trip to see if someone is in place. If nothing else there should be a message with a phone number of a person to contact.

The fact that there is no-one lined up to replace her is definitely a worrisome turn of events that might suggest that the future of the museum itself could be in peril. I poked around the website to see if any statement has been posted, but there's no mention of the change, and the last newsletter was sent out in August of 2012. I've sent a message to the Board President, Michael L'Ecuyer, through his credit union's contact page to inquire as to the museum's next steps, and I'll update this post if he responds.

###UPDATE - 9/2/2014###

Received this response this morning, which suggests things will be back to a semblance of normalcy by November:

I received your inquiry to Michael L’Ecuyer about the accessibility of the America’s Credit Union Museum in Manchester, NH.  The Museum is temporarily closed during the change of Executive Directors.   

We hope that the Museum will be open within the next six to eight weeks.  As soon as we have the re-open date finalized, I will be in contact so that you can continue your plans to visit.   I’m sorry for any inconvenience this has caused.

Thank you for your interest in America’s Credit Union Museum.

Lori

America’s Credit Union Museum, Board Secretary

Article in Financial History Magazine!

I'm pleased to report that I had an article published on the coming to America of credit unions in the Spring, 2014 issue of Financial History magazine! They've expressed interest in a follow-up piece on the controversy surrounding the creation of National Credit Union Share Insurance Fund (NCUSIF) during the Nixon years, so I'd welcome any source suggestions on that topic!

Dora Maxwell Banker Joke from January, 1940

Did you ever hear the one about the ex-banker who opened up a gas station after his bank failed? Every time a fellow drove in and asked for ten gallons of gas the banker asked, "Won't five do?" The gas station failed too. It reminds me of some people I know on credit Committees.

--Dora Maxwell, The Bridge. January, 1940.

 

Book Review - Soul: A Fourth Credit Union Book by Roy F. Bergengren

Photo from the cover page of Soul

Written in 1938 very much in response to the death of his confidant and early financial supporter Edward Filene, Soul: A Fourth Credit Union Book represents a departure from the practical nuts-and-bolts approach and subject matter of Roy Bergengren's earlier writings. Where his previous books tended to function as mixtures of how-to guides and reports as to the legislative progress of the organized movement, the agenda of Soul is self-consciously philosophical. Comprised primarily of a series of speeches interspersed with excerpts from the Credit Union Bridge and a few poems, Bergengren lays out the volume's agenda in his explanation of its name:

Hunting 'round for a name for this collection of prepared speeches I have decided to call it "Soul". My old dictionary says that, "the soul is the essence, heart or animating force of anything--the spirit, meaning, or significance of things." The animating force which motivates the credit union is the one thing I am hunting for in these pages. And there is another meaning of the word "Soul," long since lost through disuse. In provincial English the word was used to mean, "a relish, eaten with bread." Possibly this book may indeed be a sort of relish, taken with the bread, the very staff of the cooperative movement, to-wit, the operating principles on which the plan of cooperative association is based. (Pg. 8-9)

In his quest to lay bare the soul of credit unionism, Bergengren covers a variety of topics. The collection begins with the memorial speech to Edward Filene that he delivered to dozens of meetings around the United States over the course of 1937, and an he then proceeds to a discussion of the "immortality" of the underlying mission of credit unionism, which he summarizes as "to prove on Earth that the brotherhood of man is something more than a fine principle; we prove its practicality and we make it work." (pg. 35) Bergengren then goes on to provide an overview of the historical background of the movement, its place in the larger international context, and the important role of that he believes young people have to play in its long-term success.

While all of these essays are important and interesting, one that most clearly and explicitly fulfills Bergengren's stated mission of locating the "soul" of credit unionism is titled "Fundamentals." In it, he breaks down and discusses what he understands to be the key values at the core of the credit union idea. He begins with a discussion of the motivation of credit unionists, which he argues must come from a desire to serve, rather than accumulative, materialistic motivations. As he puts it:

The purpose of the organization is simply the maximum service to the membership; we exist solely for service; let that burn itself into your very soul; not for profit, not for charity--but for service! If the system of capitalism has failed--and certainly right now it is under critical scrutiny--it is solely because of wrong motivation. We have been trying to build an economic society on the basis of the survival of the smartest, the shrewdest, the cleverest, the most unscrupulous of our number; that the highest objective of the right life is the accumulation of things, regardless of the effect of such accumulation on society as a whole. This is the established principle of the jungle; it has no place in civilized society. The results of any system must be the justification of that system. I make no attack on capitalism; I am not interested in it. But the perpetuation of capitalism depends entirely on a prompt reformation of motive. (pg. 62)

Once correct intention is established, Bergengren goes on to identify and discuss four fundamentals of the credit union project. First, he affirms the cooperative character of the movement, and highlights the importance of not just being cooperative in name, but also "cooperative in fact." (pg. 63).

Second, he notes the diversity of communities that have found use in the credit union model, and argues that the movement must remain ecumenical. To foster and maintain such broad-based participation, credit unionism must retain its autonomy and neutrality; it "must never become the tail to any particular kite. There are enough differences in the world, enough conflicting principles which drive men apart. Let us build one great credit union solidarity on this principle of cooperative credit on which we are agreed[.]" (pg. 64)

Third, he argues for the importance of maintaining "simplicity of operation and control" of credit unions. While Bergengren sees the credit union project as having disproved early naysayers who believed that "the fundamental weakness of the credit union was its assertion of the power and right of working people to manage their money," (pg. 60) he also perceives a risk inherent in the movement's success. He argues that "as we increase and multiply and grow in strength and in power ... there will be those who cannot refrain from attempting our exploitation. We shall be told that we must employ experts for this and that; that we must delegate to those who might exploit us the opportunity for such exploitation." (pg. 64-5)  To counter this dynamic of what present-day economists refer to as "management capture," he recommends that credit unionists "not become prone to call in professionals who, not knowing how to think credit-union-wise, will drag into our councils all of the bad thinking on which so many professional thinkers are trained." (pg. 65) While some professionalization might be unavoidable, Bergengren concludes that "the right credit union is the credit union wherein the average member has understanding of his credit union in all phases of its potentialities of service." (pg. 66)

Finally, he argues that a commitment to education is essential if the movement's fundamentals are to be successfully transmitted to successive generations of credit unionists. Bergengren argues that the league chapters will be key institutions for advancing the educational agenda, and he holds up as worthy of emulation examples of work being done by the Antigonish Movement, which boasted an extremely extensive cooperative educational program in Nova Scotia.

In most of Roy Bergengren's "A Credit Union Book" series, the question of values tends to take a back seat to the concerns of the moment and the conveyance of the practices and techniques necessary for the hands-on work of building the credit union movement. In Soul, however, Bergengren takes a step back and addresses the 'why' of the credit union movement head on; what was it that motivated literally million of people of modest means to devote their volunteer time and energy to the collective task of constructing a system of cooperative finance. His explanation of the "soul" of credit unionism both serves to deepen the reader's understanding of the subjective side of the movement's origins, and offers an opportunity for reflection on the ways in which contemporary credit unions have both lived up to, and fallen short of, the aspirations of the people who laid the foundations of the modern credit union system. Covering all this ground in under 100 pages, Soul is a must-read for anyone who cares about credit unions.

Roy Bergengren on the Dangers of Credit Union Professionalism

Excerpted from Roy F. Bergengren's 1938 Soul: A Fourth Credit Union Book (pg. 65-66). Original emphasis in italics, my emphasis in bold:

"[I]t seems to me, among the fundamentals [of the credit union movement] is the basic simplicity of what we are trying to do. We learn in credit unions how to manage our own business; we are brave enough not to accept bad practices just because of their antiquity. Much precedent is nothing but uncorrected bad habit. We pioneer when we have to. We try--and successfully to--to build men and women in their self respect, in their capacity to reach out and up and to accomplish what they have hitherto never dreamed to be within the realm of their latent capacities. We belong with the masses of the people, not working on a level which is beyond their reach but working with each other and helping each other up to new levels which we thought to be unattainable. As we increase and multiply and grow in strength and in power; as our accumulation becomes increasingly great and our army swells to many millions--there will be those who cannot refrain from attempting our exploitation. We shall be told that we must employ experts for this and that; that we must delegate to those who might exploit us the opportunity for such exploitation. Some of our leaders will not know how to grow with the growth of their respective responsibilities. They will forget their humble origins and, forgetting how they emerged from the ranks, they may easily fall into the pitfalls of those who, not knowing how to use power, abuse it. We must not get lost to accountants, and lawyers and bankers; we must not become prone to call in professionals who, not knowing how to think credit-union-wise, will drag into our councils all of the bad thinking on which so many professional thinkers are trained. There must not be too many rules for in the complicity incidental to too many rules comes confusion as to the fundamentals. The credit union is the true democracy; it is the real hope of working people because it comes from and belongs to working people.

...

I know some splendid credit union treasurers whose credit unions are well managed, one man shows. The directors are rubber stamps; the credit committee sits idly by and leaves the matter of determining credit to the treasurer. Everyone leans on him and no one knows anything about the credit union except as he interprets the credit union, and, too often in the process of his interpretation proves conclusively that he doesn't know what a credit union is. The right credit union is the credit union wherein the average member has an understanding of his credit union in all phases of its potentialities of service.

If we are understanding we will not make mistakes like one I heard recently debated in a credit union league meeting; it was proposed that the law be amended to relieve the credit committee of all its obligations on unsecured loans and to give the treasurer arbitrary power to determine all loans up to one hundred dollars. The meeting hooted down the suggestion and we must be aware of suggestions for changes in our basic law which violates principles which are a part of the fundamental character of which I have been speaking."

Book Review - "Minding Our Own Business: Community, Consumers, and Cooperation" by Jennifer E. Tammi

While doing some research on the roots of the contemporary banker campaign against the credit union tax exemption, I stumbled upon reference to an organization called the "National Tax Equity Association" (NTEA) in an old copy of the Credit Union Bridge from the 1950's. Curious for more information, I Googled the NTEA; the results were pretty slim pickings, with one exception: a link to a 50+ MB PDF file of a fascinating and engaging 2012 Columbia University PhD dissertation on the rise and decline of the organized consumer cooperative movement movement in the first half of the 20th century.

In Minding Our Own Business: Community, Consumers, and Cooperation, Dr. Jennifer E. Tammi starts off by examining the roots of the American co-op movement in the experiences of the labor and farmers' movements in the late 19th century, as well as in self-help efforts among marginalized populations such as African Americans and immigrants. She then goes on to discuss the establishment of the Cooperative League of the USA (CLUSA) in 1916 as a umbrella organization to advance the agenda of "Cooperative Democracy," which, according to founder Dr. James P. Warbasse, "is to be reached not by voting, not by sabotage, not by the general strike, nor through revolution or the class struggle, but by putting into operation co-operative democracy – first on a small scale, and then ever increasing and expanding." (pg. 90)

Tammi then proceeds to chronicle the fight between Warbasse's faction and the Communist Party (CPUSA) over the principle of political neutrality in the 1920's, as well as the rapid growth of the organization as the Great Depression drove people looking for alternatives to the existing economic order to form co-ops in unprecedented numbers. She then examines the rise to hegemony of a centralizing, bureaucratic, and increasingly conservative agenda among the leadership of the CLUSA that, she argues convincingly, eroded the local, particular social foundations of the constituent co-ops upon which the long-term viability of the cooperative movement rested. As a result, by the early 1960's the consumer co-op movement was in steep decline, and the CLUSA (which changed its name to the National Cooperative Business Association in the 1980's) was a shadow of its former self.