Credit unions: Origins - Business in United States of America
Credit unions: Government Deregulation
Credit unions originated in Western Europe during the late nineteenth century. The idea spread to Canada and from there to New Hampshire, where the St. Mary’s Bank Credit Union was formed in November, 1908. Massachusetts adopted enabling legislation in 1909. Edward Filene, a prominent retailer and philanthropist, was an influential promoter. He recognized that many low-income persons were victimized by loan sharks. State “usury” laws prohibiting high interest rates on loans caused banks and other reputable lenders to avoid the personal loan market, where credit risks were high and loans typically very small.
Initially, the credit union movement spread slowly—there were only 190 in 1921. Employers encouraged credit unions in the workplace, giving them office space and management advice. By 1931, there were 1,244 credit unions, but their total assets were only $34 million, so the average size was less than $30,000. However, the Great Depression of the 1930’s brought many new members, fleeing the disastrous problems among banks and other deposit institutions. Congress adopted in 1934 the Federal Credit Union Act, which authorized federal charters for credit unions, giving some assurance of regulatory oversight (but not deposit insurance), and opening the entire country to credit union organization. Credit unions were exempt from the federal corporate income tax—a condition that has infuriated the banking industry. When tax rates went sky high during the 1930’s, tax exemption became attractive to many entrepreneurs who could achieve high salaries and favorable borrowing opportunities through organizing credit unions.
The number of credit unions grew rapidly from two thousand in 1934 to more than nine thousand by 1941. The numbers actually declined during World War II and passed ten thousand only in 1950, at which point they had about $1 billion of total assets—so average assets were still less than $100,000 per institution.
After 1950, market interest rates moved steadily higher, but regulations prevented banks and other deposit institutions from matching the increases. Credit unions were able to pay higher rates, and steadily increased market share. By 1970, there were nearly twenty-four thousand credit unions. Their assets had risen to about $16 billion. This was still only about 10 percent as large as the savings and loan industry. In 1970, Congress created the National Credit Union Administration (NCUA) to charter and regulate federal credit unions. A National Credit Union Share Insurance Fund was created to insure federal credit unions. The new insurance covered 22 million credit union members. Many state-chartered credit unions chose not to take federal insurance, and by 1981, sixteen states had created their own share-insurance programs.