Editor’s Note: This is the fourth in a series of articles by Paul Thompson, author of “What You Need to Know About Today’s Credit Unions,” that is aimed at new CU employees and volunteers and which offers a background on the history of credit unions.
By Paul Thompson
In the 1920s, with increasing wages and credit now available to many households, the United States became the world's first mass market. Consumer debt skyrocketed to the accompaniment of jeremiads that the nation was abandoning the old virtues. But it turned out that Americans were usually careful in their use of credit and repaid loans on time. Consumer debt was as much a taskmaster as the meanest Victorian boss, requiring steady work, budgeting, and its own kind of thriftiness.
As credit unions, finance companies, and installment lenders showed that the average worker was a good credit risk, a few banks began to test the waters. In 1928, National City Bank in New York established a consumer loan department. The Depression led more banks into the field when business lending fell sharply and it became clear that, even in the greatest downturn the nation had ever experienced, most consumers faithfully paid their debts. Interestingly, after a falloff following the Crash of 1929, consumer borrowing rose through the Depression.
No More Runs on Banks
Banks' deposits, on which they did not pay interest, gave them a low-cost source of funds that enabled them to undercut competitors. The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corp. (FDIC), which largely eliminated the fear of bank runs and encouraged banks to start making longer range loans like mortgages. By 1939, 20% of commercial bank loans were going to households. The market was bifurcated, however, with banks catering to white collar workers and professionals and credit unions and finance companies serving a less affluent clientele.
The Glass-Steagall Act also set the credit mission of each type of depository institution. Banks provided commercial and consumer loans. Savings banks and Savings and Loans provided home mortgages. Credit unions provided consumer loans.
By the 1940s, commercial banks were the leading consumer lenders, a position they have held since, but credit unions and finance companies have continued to flourish. In 1980, credit unions gained their own deposit insurance fund, which encouraged consumers to make greater use of these institutions. Additional legislation and regulatory changes have made it easier for credit unions to expand membership and have put them into direct competition with banks and other lenders.
Paul Thompson, CUDE, is a former speechwriter with CUNA. His book, "What You Need to Know About Today's Credit Union," can be found on lulu.com.