Federal Credit Unions: Origin and Development

Federal Credit Unions.: Origin and Development by ERDIS W. SMITH* HE attainments of Federal of the colonial government to this pose of buying raw materials at credit unions have aroused the s0ciety.l wholesale and selling them to mem- T interest of many individuals bers at cost. His second society-de- and groups during recent years. Although American colonial farm- veloped to raise capital for Persons Some basic questions are being ers may have been the flrst to organ- who had no money or to give them asked: Do Federal credit unions ize for cooperative credit purposes, credit without security-was organ- serve any useful purpose in the the beginnings of present-day credit ized in 1850. It was composed of present - day American economy? unions throughout the world can be poor mechanics and a few wealthy Haven’t Federal credit unions ex- traced to two plans that originated persons who provided the funds that panded their services beyond the in Germany about 1850. These two were loaned to the members. The area visualized for them by the systems were named for their found- loans were to be repaid, with inter- founders of the credit union move- ers, Schulze-Delitzsch and Raiffeisen. est, in small monthly installments, ment? Shouldn’t the size of Federal Detailed descriptions of their struc- and profits were to be used to build credit unions be limited because some ture and operating procedures are a fund from which further loans have grown beyond the point where available,’ but for the purposes of would be made. they can continue to be a credit this article only a few characteristic The third Schulze society, organ- union as defined by the early phi- principles that influenced the devel- ized in 1853, was founded on ‘the losophers of the movement? opment of Federal credit unions need principle that the capital would come Complete answers to these ques- be described. from the contributions of members tions would require several volumes Hermann Schulze, a judge in the alone. The following year Schulze of sizable proportions. The fact that Provincial court in Delitzsch, Prus- began a systematic promotional pro- they are being asked, however, is sian Saxony, was a student of co- gram, and a considerable number of evidence that a score of years and operative principles as then taught cooperative credit societies were es- $1 billion lay the groundwork for in England and France and had tablished. Their founder, while a some intensive, scholarly research in ideas on thrift adapted from the member of the Prussian Parliament, the field. It will be the purpose of plan of the English friendly socie- started a campaign that in 1867 re- this article to sketch the background ties. Schulze was shocked by the sulted in the adoption of Prussia’s for an objective appraisal of some of poverty of the working people during Arst cooperative law. Similar legisla- these basic questions. the famine of 184748, and in 1848 tion was adopted by the North Ger- he organized a society for the pur- man donfederation in 1868 and by European Antecedents the German Empire in 1889. It is The genesis of an idea or of an significant to note that the Schulze 1 James B. Morman, Farm Credits in the organization’s form is difficult, if not United States and Canada. 1924. _DBP~ _~ S. societies existed as vohmtary associ- impossible, to isolate with any real = Systemsof Rural &operativs Credit ations until 1867-for nearly 20 (S. Dot 574. 62d Cong., 2d se%%), Washing- years. certainty. Each generation of schol- ton. 1912: and U. S. Department of Agri- ars casts new light on the beginnings CultWe, Divklon of Statistics, Report No. A central bureau, composed of of many social institutions. The 2 (Misc. Series!, Washington, 1692. member societies, had been organ- credit union idea and form of, organization are no exceptions. One writer reports, for example: In 1954 the Federal credit union system passed two noteworthy In 1732, nearly 200 years ago, 61 milestones: It became 20 years of age, and, for the first time, aggre- farmers in Connecticut organized a gate assets exceeded $1 billion. Compared with the achievements cooperative credit society for trade of other financial institutions that concern themselves with per- and commerce. They subscribed for sonal savings and consumer loans, neither milestone may seem stock and paid for it by giving prom- issory notes which were secured by significant. Twenty years is long enough, however, to test the mortgages on their farms. But the feasibility of a plan, and $1 billion is a substantial amount of assets only borrowers from this society to be accumulated by working people in voluntary associationsthat were its stockholders who held com- invariably begin with no assetsand with a management composed plete control over its management. of part-time, unpaid volunteers. This effort, however, was soon dis- J. DEANE GANNON, Director continued because of the opposition Bureau of Federal Credit Unions *Division of Programs and Reports, Bu- reau of Federal Credit Unions. Bulletin, November 1955 ized in 1859 by Schulze to promote tained, regular office hours, and had none of his societies issued shares the cause of cooperatives, keep mem- paid employees. Management was of any kind. When it ‘became neces- bers informed on the progress of the by officers and committees, elected sary for all German cooperatives to movement, obtain loans from com- to carry out policies adopted by the have shares, the Raiffeisen societies mercial banks for members, and pub- members in their periodic meetings. issued shares of nominal value. No lish yearly statistics. They were paid by the society but dividends were paid. Net profits re- The Schulze societies drew their were not permitted to borrow from maining after transfers to reserves members from all occupations, it. Biennial inspections were made were earmarked for educational pur- though it is estimated that at one by inspectors appointed by one of poses and for community welfare time as many as one-fourth of them the 32 Provincial federations of projects. Upon dissolution of a so- were farm workers. The societies societies; such inspections were com- ciety, members received the amount were better adapted, however, to the pulsory after 1889. of their shares but did not partici- needs of workers in industry and Frederick W. Raiffeisen, like Her- pate in the distribution of the re- commerce because the loans were mann Schulze, was stimulated to ac- serves. Raiffeisen feared the influ- granted for only very short periods. tion by the 184’7-48 depression. He ence of selfish speculators, and the The average membership was about was then mayor of Weyerbusch, in plan for his societies was designed 600, but a number of the societies the Rhineland, and was a reformer to remove all possible temptation. had more than 10,000 members. The who worked to improve the charac- Savings deposits on which Axed rates members were carefully selected on ter as well as the economic status of of interest were paid were accepted the basis of character. the people. His flrst cooperative so- from both members and nonmem- The societies were organized to ciety was organized in 1848 to dfs- bers. obtain funds and to obtain them tribute bread and potatoes among Small loans were made to mem- from individuals, rather than from the poor. The following year he or- bers at reasonable rates of interest banks, as borrowed capital. Each ganized a society of wealthy men for maturities of up to 5 years. The member was required to own at least to sell cattle to poor farmers on easy loans were usually secured by liens one share, which could be paid for terms-a kind of cooperative bank; on personal property and were re- in small installments. High divi- a second society of this type was payable in five annual installments. dends were paid to encourage mem- established in 1854. His third co- The purpose of the loan was closely bers to save; dividends of 12 percent operative bank, which was an adap- scrutinized; it was recallable if the a Year were not uncommon. Deposits, tation of the Schulze plan, was estab- proceeds were used for other than on which interest was paid, were lished in 1862 at Anhousen. It was the approved purpose. This concern accepted from both members and this third cooperative credit society with the use of funds borrowed from nonmembers. Part of each society’s that was the beginning of the Raif- the society reflected Raiffeisen’s em- net earnings was set aside in re- feisen system, which. had spread by phasis on morality and his convic- serves, which were divided among 1920 to most countries of the world. tion that a loan obtained for a pro- the members in the event of the so- These societies were flrst organized ductive purpose and repaid in small ciety’s dissolution. In the beginning, to serve small groups of poor farm- installments would improve the eco to encourage deposits, unlimited lia- ers. The average society had fewer nomic status of the member. The bility of members was a feature of than 100 members, and some had member would become a capitalist, the societies. Although it never had only 15 or 20 members; members but his capital would be in the form to be put to the test, this feature were admitted on the basis of char- of land, cattle, or equipment. was dropped by the societies organ- acter. It was important to the plan A small number of members and ized after passage of the law of 1889. that each society serve a small group a limited amount of assets were con- Loans were made by the Schulze of persons who knew each other well.

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