March 12, 2012
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By David Bennett
Bank Transfer Day represented the tipping point for a nation engulfed in economic turmoil, and a credit union renaissance is the prize that is being won in the wake of this current economic crisis.
Ironically, while the general mood is good, there is also a distinct urgency and trepidation as the credit union movement pushes forward beneficial initiatives and works to understand a new regulatory agency and new rules—all in the midst of economic uncertainty, geo-political conflict, government division and war.
There is so much to ponder in what some are calling a “new era” for credit unions, to the extent that many credit unionists are left asking, “Just what exactly is happening?” Luckily, the same question has been pondered—and answered—before.
More than 90 years ago in a report on the status of the credit union movement in Massachusetts and nationally, an aide to Edward Filene, a founder of the American credit union movement, wrote that the movement was lacking capital and was simply one good cause among many others.
“It has no dramatic or compelling appeal to the general public,” the aide wrote. “Credit unions could succeed only when they serve the selfish or personal interests of a group of men or women and were certain to fail if organized in a response to an artificially stimulated demand.”
Filene’s reaction was to infuse hundreds of thousands of dollars of his personal fortune into the movement and to hire Roy Bergengren in 1920 to organize credit unions.
In 2011, just like 1920, consumers needed a compelling reason to change their financial institution, and in 2011, men and women nationwide served their own personal interests. They did it together, and as a mass they put big banks on trial, becoming the judge and jury and then executing the punishment: Bank Transfer Day.
Whether the actions that resulted in more that 1.34 million new members in 2011 were taken as a way to strike back and punish an institution and an industry or were simply a way for consumers to save a few dollars a month, the credit union movement finally had “compelling appeal to the general public,” and consumers across America moved their money last fall from big banks to credit unions.
But Nov. 5, 2011, wasn’t the first mass movement away from banks and into cooperative financial institutions. It happened several times in America during the 20th Century under circumstances similar to those that occurred during 2011’s fourth quarter. However, at two specific points in time—in 1934 and again in the mid-Seventies—there was a confluence of events very similar to those that led to last fall’s Bank Transfer Season.
2011 marked the third significant membership milestone in the 100-year history of American credit unions. While most economists argue that one needs at least three-to-five times that amount of information to establish clear cycles, it is at least enough time to unearth possible corollaries between events inside and outside of the credit union movement that are related to membership spikes. These events may not be a direct cause, but much like meteorologists using past data to forecast opportunities to prepare for winter driving, the credit union corollaries may help identify opportunities to increase membership, push for legislation or prepare for tough times.
Without the benefit of perspective, credit union membership spikes can be flummoxing. Why now? Why not five years ago? Why not 20 years from now?
Pulling back to look at the long history of credit unions—and laying that history on top of patterns of artistic and scientific innovation, technological advances, economic trends, social and political climates, and generational archetypes—gives us the context to not only begin to explain and understand the events of last fall’s Bank Transfer Season, but to begin forecasting what opportunities might come next
The history of credit unions in the United States is as complicated as the conditions that brought them to its shores. It’s important to note, however, that while credit unions themselves didn’t exist before the first state credit union act became law in Massachusetts on April 15, 1909, the conditions that spawned them did.
Cooperative finance was originally based in agriculture in the United States, but the idea moved quickly to the women’s and labor movements. Some of the earliest and most effective credit unionists were women, including Louise Herring and Dora Maxwell. And those who took most advantage of credit unions were industrial laborers and tradesmen, who during the early and middle part of the 20th century were regularly involved in violent, sometimes-deadly labor disputes and strikes.
The 1909 Massachusetts Credit Union Act was passed on the heels of a systemic banking failure and crisis in 1907-08, when the labor and women’s movements were converging, and progress was being made to advance their causes. Personal lending was scarce but desperately needed, and most of the nation’s citizens lived in rural communities where access to credit was almost nonexistent. Parallel to the interest in credit unions was an interest in maintaining a stable economy. So, with the first state credit union act also came the implementation of the first major bank reform in the United States.
The Federal Reserve Act was passed in 1913, and its primary purpose and original structure remain consistent: “to coin money and regulate the value thereof.” Concurrently, a war was breaking out in Europe that would draw in the U.S. following the 1915 sinking of the British ocean liner Lusitania. The end of the Gilded Age spawned this unraveling environment in which credit unions got a toe-hold in America, giving them operational and organizational experience on the state level that would enable their popularity and effectiveness on a national level during the next crisis.
Great Depression, World War II and the Federal Credit Union Act (1929-The Sixties)
The first credit union membership spike occurred between 1934 and 1939 during the height of the Great Depression and following the passage of the Federal Credit Union Act. While the number of credit union members prior to 1939 is unknown, a survey by Filene places the number of credit unions at 1,612 in 1932. The earliest national data available in 1939 show that the number of credit unions increased to 8,039 cooperative institutions serving more than 2.25 million members.
Industrial production had tanked along with the stock market and GDP early in this era. Unemployment rose to 25 percent. Labor activists were being murdered and strikes were being broken. Banks were closing, food lines were forming, and people were moving their money. Americans were angry.
The modern consumer movement was just beginning, as women’s suffrage, boosted by the passage of the 19th Amendment giving women the right to vote, soon began transforming into the women’s liberation movement. All this trouble at home also eventually led to a double crisis as World War II erupted.
For credit unions, this was a heyday. Membership was growing, the number of credit unions was increasing and credit unions were offering consumer loans underwritten by life insurance—a market banks had not yet entered. Forty years later, in his book, “The Credit Union Movement: Origins and Development 1850-1980, Dr. Carroll Moody wrote, “…the depression of the 1930s had a beneficial effect on the movement. Many banks were forced to close their doors, leaving communities without banking facilities and creating some general hostility toward and fears of banking institutions.”
The many forces that were factors in sweeping Franklin Delano Roosevelt, a transformational president, into office were also responsible for kick starting the credit union movement by making cooperation popular—especially in economic and social activities.
The war years were lean ones for credit unions. Between 1940 and 1945, membership decreased by 35.58 percent before stabilizing in 1946 with the soldiers’ return. The membership spike that had been on hiatus since 1941 would turn into a credit union revolution running concurrently with a new economic and post-war industrial revolution. Markets were hopping and the world was getting a grip. Times were good, and people grew satisfied, but they also grew complacent over the course of the 18-year high that followed. The times, they were about to be a-changin’. But credit unions were preparing.
In addition to organizing more credit unions and raising awareness about their benefits, the industry as a whole was busy advocating for the creation of a separate regulator of credit unions, as well as share insurance for deposits and the ability to offer checking accounts. Credit unions were also laying the groundwork for the creation of a system of corporate credit unions to provide investment services and liquidity to natural person credit unions, an idea that Edward Filene had earlier claimed as his own.
By the end of this run in 1963, credit unions nationally had increased their membership by more than 168 percent—from 3 million to 14.5 million—and were still rolling. Confidence and the standard of living were rising, but the end of this era also saw its share of tumult as the Civil Rights movement neared its apex.
Vietnam War, Recession and establishing the NCUA (the 1960s to 9/11)
Many historians consider the period between 1963 and 1974 to be “the Sixties,” and credit unions in this era were living on a high fueled by the double-digit membership growth of the ‘50s, which seemed to be coming to a slow halt as the world around them unraveled.
Those who lived it (and are able to remember it) will describe the times as a period of counter-culture movements and social revolution; the rejection of old ideals was common among the young people known now as Baby Boomers. Radically new, often subversive ideas were emerging and gaining popularity.
Africa’s political structure was modernizing, and some governments, just like 40 years prior, were becoming progressive. The Peace Corps was founded following the election of John F. Kennedy, who would also advocate for access to publicly sponsored healthcare for the elderly and poor. The Civil Rights Movement was gaining in intensity, and its attempts at change were often met with violence.
There was also war and fear of war-related catastrophe, as the Gulf of Tonkin incident sparked a full-on conflict with Vietnam after years of tension. The Cold War was also ratcheting up, and historic Arab-Israeli anxiety reached a boiling point, leading to lasting divide.
Between 1969 and 1975, the U.S. entered two recessions. The first one lasted 11 months between 1969 and 1970 but occurred during a time of full employment following what was then the largest economic expansion in history. The only other time to see a longer period of growth was in the 1990s—just prior to the current crisis.
Politically, what happened in the early 1970s is nearly identical to what we are seeing today. The recession then coincided with a government try at closing the Vietnam War budget deficit. It was known as fiscal tightening. Additionally, the oil and gas crisis the nation was experiencing due to a decision by OPEC to curb production helped maintain the poor economic situation until the stock market finally crashed and the economy recessed in 1973. This put a complete end to the post-World War II industrial boom and ushered in terms like ‘stagflation’ as prices of goods rose and the economy slowed.
Credit unions were maturing during this time, but leaders knew that the environment was changing. Competition by aggressive banks and revolving retail credit added to the rising tension within the movement. The full switch to a credit-based economy was beginning, and the rise of the ATM meant more convenience for bank customers. It was do-or-die time for credit unions, so they did.
The movement pushed for sweeping changes to the Federal Credit Union Act that allowed credit unions to become full-service financial institutions and instituted a system of corporate credit unions to provide them with services and liquidity. The amendments to the Federal Credit Union Act increased regulation significantly, but the trade-off was literally the survival of the movement.
They also prompted the loss of 6,000 credit unions over the next 15 years, but these closures amounted to culling the herd more than any great tragedy. This was a time when the movement devoted less time to organizing new credit unions and spent more time organizing mergers and consolidations of weaker credit unions. The credit unions that were lost were shoebox operations that had run their course, and the ones that survived were those positioned to thrive in the new environment. Overall, credit union membership more than doubled, going from 22.7 million to 51.9 million from 1971 to 1985.
Like the post-war expansion between 1946 and the 1960s, economic and industrial engines hummed after sweeping early-1970s changes to the financial system—at least until a downward economic spiral and energy crisis, prompted by OPEC’s decision to curb production, swept the nation and the world. The savings and loan crisis of the early 1980s had similar results to the previous crisis eras, but only a few of the typical factors were present, making the result less dramatic but still visible.
Like in 1901, the social climate also unraveled as the Cold War came to an end and the culture wars began taking hold. Politics of division became en vogue as the war on drugs, AIDS and the Gulf War I captured the nation’s attention.
Still, the number of credit union charters continued to decline as assets and memberships increased. The socio-economic climate made it possible for individual states to improve state credit unions acts. Like the time following the 1909 Massachusetts Credit Union Act, states became incubators of new regulatory and legislative ideas. Charters advanced, and some regions managed to cultivate especially positive climates for credit unions.
And it’s a good thing, too, because the next big test would begin on Sept. 11, 2001, and continue to amplify during the 2008 economic collapse and the Great Recession that continues to this day.
The Current Crisis (2001-?)
Like other major crises of the 20th Century, 9/11 and the 2008 crash have no single cause, though we can pinpoint the 2008 market crash to banks behaving badly, just like in 1929 and 1970 (and 1909 and 1981).
In this case, though, terrorist attacks prompted a downward economic spiral and an increase in non-domestic government spending. The nation was distracted as economic indicators began showing signs of a slowdown, and unregulated investment products, fueled by greed, created a bubble that led to an economic crash and recession.
As in 1934 and the 1970s, the systemic issues that are said to be the cause of the 2008 crash prompted increased regulatory pressure on credit unions and the creation of an entirely new regulatory agency—in this case, the Consumer Financial Protection Bureau (CFPB).
The recession also caused tens of millions of people to lose their jobs as factories and other businesses closed, reducing government tax revenue and forcing “austerity” measures. As banks got bailed out, ordinary people felt shut out from their own democracy. Corporate raiders were getting bonuses; homeowners were getting eviction notices. Before Nov. 5, 2011, people asked, “Why aren’t people marching in the streets over this?”
That question isn’t asked anymore.
On Sept. 29, 2011, Bank of America announced its plans to implement a $5 monthly debit-card fee. On Sept. 30, 2011, Americans began protesting not only the fee, but bad bank behavior all around. It restarted the credit union membership spike that had begun in 2008, and it likely represents a new plateau for credit unions, a new baseline for expected membership growth.
And it spread. More people got involved, more people felt empowered and more people took action.
Suddenly, a new question was being asked: Why? Why all this growth? And why now?
What credit unions provided to consumers in 2011 was the opportunity to act in their own combined personal best interests. Credit unions became a positive outlet for the public’s bank-directed anger. Credit unions gave the public an opportunity to punish an industry in the court of public opinion when the justice system couldn’t—or wouldn’t—punish it in a court of law.
Additionally, the 2011 movement to credit unions was driven by a generation that has more in common with the Greatest Generation than with Generation X, according to generational archetype theory. Millennials—those young people who were born in between about 1980 and the mid-1990s—not only moved their money in 2011, but compelled and empowered others to do the same. This generation, like the Greatest Generation, is brimming with people of action who are not content to wait for someone else to solve their problems.
The attached graphic illustrates 111 years of the United States credit union movement, from 1900-2011. It includes a timeline of social movements, economic indicators and credit union milestones. By looking at the movement with a 100-year view, it is easy to identify spikes, patterns and corollaries. In some cases the patterns appear near-identical and occur under such strikingly similar economic and social conditions that it is all but impossible to avoid acknowledging any connection.
For example, consider the 1976 membership spike that lasted three-and-a-half years before free-falling briefly and then spiking again. This took place just after (and just before) the implementation of significant new credit union regulation.
The exact same pattern appears both in 1938 and 2008. In both cases, unusual membership growth happens in close proximity to major regulatory changes and in the midst of either a depression or major recession.
In both 1938 and 1976, an elevated membership plateau was reached as more people than in previous years joined credit unions. This bodes well for credit unions in 2012 and beyond—especially for those who worried about an aging membership base and finally saw some growth.
Credit unions are lucky in that their existence is based on a socio-economic need that is elevated during turbulent times. The movement’s future has always been self-fulfilling because it is based on people.
Edward Filene understood what made credit unions tick and what they needed to thrive; Roy Bergengren not only knew how to make Filene’s vision a reality but was also a leader of men and women. At 38 years old, he enlisted in WWI when he didn’t have to. He joined on the front lines of that war the men who would be organizing credit unions for the next 20 years. He had an intimate understanding of what they went through because he experienced it with them.
Filene’s embracing of the Greatest Generation’s future, making its dreams his own, is what drove the success of the early credit union movement. Credit unionism was his creation, his contribution.
Credit unions have reached a tipping point again as all the social, political and economic signs are flashing. History is calling on credit unions again to be pillars during this time of need, to serve American consumers on a day-to-day basis in the present, but also to focus on the future of the movement and all that it can be as opposed to just the well-being of individual institutions.
What will be the needs of credit unions in 10 or 20 years? It’s an easy question to answer. Just look around. At this time, some need access to supplemental capital, while others need to be able to expand their member business lending and access to public funds. Others need access to technology that they cannot afford individually.
But what a handful credit unions need today is what all credit unions will need tomorrow. History shows that during times like these, it is vital to pass legislation and make changes to credit union operations that set the movement up for the future. Now is the time to not only embrace this idea, but to become more active than ever before as a single movement, harnessing the social climate to enable credit unions to better serve members. This is the natural course of credit unions.
In the 1920s, Bergengren reached out and embraced the women’s and labor movements. There he found passionate organizers who understood how to reach their generation. Bergengren took this and built a movement that has withstood the many tests of time. Credit unions have a similar opportunity today with the Occupy Wall Street movement.
The Occupy Wall Street movement and some of its members have embraced credit unions. This hodgepodge of people—students and retirees, the homeless and the unemployed, the professional and the angry—have placed their trust in credit unions to help them do the right thing. This solidarity is not shown to just any group or individual; it requires a high moral and social standing—just the opposite of what it takes to incur Occupy’s wrath. And it’s too late for credit unions to back out anyway, as their relationship with Occupy has been codified.
Credit unions answer to the greater good and not the bottom line. It’s the difference between banks and credit unions, it’s why credit unions fit so snugly with the Occupy movement, and it goes a long way toward explaining why credit unions flourish when society stumbles. When people need help, when people need an outlet, when people are seeking community and refuge, credit unions have historically been an answer.
Everyone involved in the credit union movement should be proud of this role, but it is particularly vital that the movement simply remains aware of this role, because the future of credit unions depends on it. Credit unions will continue to grow, continue to be a part of positive change, of progress, as long as they remember where they came from.
Because whether it’s a member service rep helping a member save a few dollars a month or the entire movement helping the nation save itself from an economic crisis, credit unions are about people helping people.
Questions? Comments? Concerns? Contact Matt Halvorson, Anthem Editor: email@example.com.