Making A FEDERAL CASE Out of It

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America's credit unions have long offered an antidote to their members' personal financial challenges. But there also was a time when that same emphasis on thrift, individual responsibility and economic self-sufficiency provided similar relief for a financially struggling nation.

The Great Depression of the 1930s nearly brought a United States newly emerging from an historic isolationism to its knees under the rigors of a collapsing financial system. Fortunes, families and lives were lost as banks collapsed, jobs evaporated and the national economy was plunged into financial devastation and despair.

When credit unions come to Washington this week for CUNA's Governmental Affairs Conference, all of that will seem far removed, if not forgotten. The discussion of federal legislation will be dominated by talk of ramifications from the Credit Union Membership Access Act and desire to see the Credit Union Regulatory Improvement Act (CURIA) passed by Congress, along with bankruptcy law reform. The U.S. Treasury secretary's appearance at this year's GAC is considered a highlight of the first day's agenda, yet few know that the Treasury Department initially opposed federal legislation for credit unions.

And while there certainly will be talk of serving the underserved and lower-income groups during GAC, few will recall the roots of credit unions at a time when much of the nation was underserved and struggling, and tiny credit unions labored to shore up their members' financial well-being and, by extension, that of the U.S. as well. Such were credit unions' values during the Great Depression, in fact, that legislators rewarded what was then a fledgling industry with influence no less sweeping than passage of the Federal Credit Union Act, which enabled the establishment of a national federal credit union system.

The new law, which also provided for the development of corporate central credit unions to further strengthen the new system, was not without detractors. Passage of the law, which followed passage of numerous similar state credit union laws, required years of effort by dedicated industry leaders and forward-thinking legislators. The law did pass on the evening of June 16, 1934, but not without tireless efforts on the part of proponents who labored in the shadow of the Depression and its aftermath.

Black Tuesday

During the 1920s, America found itself on a joyride of self-actualization. Fresh from victory in Europe and flush with new Industrial Age inventions, the U.S. had begun emerging as a world power at a time when the psychology of nations had begun to change. Its European allies were exhausted from hosting the battlefields of World War I, but the U.S. embraced an assembly-line approach to a new world order that traded cultural traditions for consumer goods and rapid economic expansion.

In concert with that newfound energy, America's banking industry had begun an unprecedented expansion, tripling to some 30,000 institutions by 1920. State and national charters required the establishment of local institutions, and nearly every city, town, village and crossroads in American had its own banks. Credit was still tight for wage-earners, who increasingly relied on the usurious rates of loan sharks, helping foster a concurrent rise in the number of credit unions in individual states across the land.

But economists are quick to point out that economic expansion, often built as much on speculation as on true corporate financial strength, doesn't last. The expansion of the 1920s came to an abrupt and dramatic halt just when the nation least expected it, drawing the Roaring 20s to a screeching halt.

On Oct. 28, 1929, the Monday before Halloween, stock prices began to deflate, losing value and affecting the wealth of the country's economic elite. Stocks dropped 13% across the board on that Monday and another 12% on Tuesday, Oct. 29, as panicked investors attempted to unload shares for whatever they could get. By the end of "Black Tuesday," as the day became known, entire fortunes had been wiped out. By the end of November that year, investors had lost more than $100 billion, setting the stage for a worldwide depression.

The resulting losses plunged the nation deep into financial chaos as bankrupt industrialists and financiers began closing factories and businesses, forcing workers out of jobs and into bread lines. Mortgages went unpaid and families were evicted, leaving the banks holding devalued property no one could afford to buy, and men, women and children living in shanties, automobiles and transient camps. Farm and crop failures in the following years reduced the amount of agricultural exports, which then comprised 42% of all exported American goods, by nearly two-thirds to $765 million from an estimated $2 billion annually.

As a result of all this, the nation's banks began collapsing in record numbers. During the Depression's early stages, banks failed at a rate of 70 per year, or one in every 300, wiping out the life savings of hundreds of thousands of depositors in a day when there was no deposit insurance. As the agricultural crisis deepened, that failure rate grew nearly tenfold to 600 banks per year, or one in every 50. Hardest hits were the workers and small farmers, many of whom lost everything and were left with little recourse.

The Need for National CU Expansion

In the face of this mounting national financial crisis, America's credit unions stood firm. Spread across 37 of the nation's 48 states, credit unions pooled member funds so that all might survive. Although small by comparison, credit unions did prosper, with new ones established as neighboring banks closed their doors. In a decade that saw the eventual failure of more than 9,000 banks nationwide, credit unions grew to more than 2,000 in number, as well as in their influence and, eventually, in the economic destiny of the United States.

Credit union growth flourished in communities across the country, according to reports in The Bridge, published by the Credit Union National Extension Bureau, precursor to the Credit Union National Association, now CUNA & Affiliates. As banks failed, credit unions took root and grew, according to Bridge editor and Extension Bureau executive secretary Roy F. Bergengren.

"The record shows 186 new credit unions from April 5 to October 5, an organization program which has been steady through the long hot months of summer and the terrible long months of depression," Bergengren wrote in the publication's October, 1932 issue. "Is that stunning fact-our capacity to progress under conditions of supreme difficulty-the most important thing? I think not.

"The most important thing developing from the depression," Bergengren continued, "is an increasing sense of responsibility."

That responsibility brought Bergengren and others to the realization that credit unions were the best and may have been the only way to help pull the country through the Depression in ways that benefited individuals who, in turn, would have better luck contributing to a stumbling economy. But the movement needed license to operate throughout the U.S. if it was going to meet that responsibility and, ultimately, fulfill its destiny.

Bergengren already had had some success in moving toward his goal of increased service through development of a more far-reaching credit union development effort. During the 1920s, he had developed the Uniform Credit Union Law, used as a prototype for helping develop and have passed various state credit union laws. Bergengren used as models earlier laws enacted in Massachusetts (1909) and North Carolina (1915) in drafting his model legislation which, in turn, was used by numerous states in developing their laws.

By the early 1930s, some 37 states had credit union laws in place, but there was no uniform federal law to serve as an umbrella for what quickly was becoming a burgeoning movement and, in the minds of many, one critical to the country's financial survival. Movement leaders and legislators argued for the passage of a federal act, noting credit unions' continued success in bucking the financial devastation that was destroying much larger financial institutions.

"While these credit unions are managed by the working people and the farmers who comprise them, they have come through three years of extreme depression with practically no failures, establishing the finest record ever established by any form of banking in times of similar stress," said Sen. Morris Sheppard (D-Texas), to the United States Congress on May 11, 1933. Sheppard's report was part of his attempt to introduce S. 1639, a bill that would authorize establishment of federal credit unions and federal central credit unions in all 48 states. He didn't realize at the time that it would take another full year and a great deal more effort to see that bill passed.

A New Credit Union Deal

Sheppard laid the groundwork for the federal act as early as 1933 in a hearing before the Senate subcommittee of the Committee on Banking and Currency, where bill S.1639, and companion bills S.1640, to authorize federal reserve banks to receive credit union deposits, and S.1641 involving the U.S. Postal Service, were approved. However, not all those queried agreed the bill was necessary or even desirable.

"Credit unions have been established in many states under the provision of state law and are in their very nature small, local associations which should be supervised and regulated by state law," wrote Dean Acheson, acting secretary of the Treasury in a letter dated June 16, 1933. "For this reason (the Treasury) would be opposed to the enactment of this bill into law."

Despite such opposition, Sheppard persevered in his support. But another related effort occurring a year earlier also was critical to paving the way for the eventual federal action.

A year earlier, in October 1932, then President Herbert Hoover signed into federal law a Senate bill providing for incorporation of credit unions in the District of Columbia. The law's passage tested the federal waters, a key goal of Bergengren as he moved closer to establishing what he described as "a sort of blanket insurance policy for all state laws" in the passage of federal legislation.

Based on that success, and with Sheppard's ongoing support through the subsequent year, Bergengren and other credit union leaders moved into 1934 with renewed optimism, confident that, as the Depression continued grinding America's economic fortunes to dust, passage of the Federal Credit Union Act would be seen as a defensive measure taken not only for the sake of the movement, but for the economic betterment of the nation.

Another stumbling block proved to be the selection of a supervisory agency. Neither the Comptroller of Currency nor the Federal Reserve Board, both of which had been suggested, wanted to oversee federal credit unions. Eventually, the Farm Credit Administration offered to take the responsibility, perhaps in response to Sheppard's longstanding support of rural credit programs both nationally and in his native Texas. A new division was set up within FCA and approved by the administration of recently elected President Franklin D. Roosevelt.

Sheppard persevered, introducing S. 1639 to the U.S. Senate on May 10, 1934. Sheppard had noted earlier that the act sought to lighten the nation's financial burden, not add the costs of additional bureaucracy to the struggling country.

"The bill involves no government loans, no subsidy, no appropriations of money," Sheppard had told senate members during an earlier hearing April 25 of that year. "Credit unions pay their own way. In fact, some revenue will be brought to the government through permit fees."

Proving Their Durability

The fact that, to that point, credit unions had suffered no involuntary liquidations and generally were considered to be managed at the highest ethical levels put them as shining competitors to the rapidly crumbling banking industry, according to a report from the federal Committee on Banking and Currency issued that same spring.

"(Credit unions) have proved their durability and served their members uninterruptedly during the worst depression in our history," the report said.

Despite such shining accolades, consideration of Sen. Sheppard's bill was not guaranteed during those final sessions of the 73rd Congress in the sweltering June of 1934. Bergengren and Earl Rentfro, managing director of the Missouri Credit Union League, lobbied aggressively during those last days. "The session was slipping away and at the end of each day the lines got a little tighter and things were getting a little bit grim," Bergengren wrote in the July 1934 issue of The Bridge.

But the two credit union pioneers were not alone in their efforts and it was the assistance they received that ultimately swayed lawmakers on the law's behalf.

"In the effort on behalf of S.1639, credit unions for the first time mobilized for a united national effort," Bergengren wrote. "One committee member showed me a thousand letters he received from credit unions in Illinois, and what Illinois did, credit unions did in like measure everywhere."

Years Of Efforts

Years of efforts, bolstered by tens of thousands of letters of support from credit union members across the country, came together Thursday, June 14, Bergengren's birthday, when the bill got its first committee hearing. A tough period of preparation had served presenters well.

The committee voted to report the bill to the Congress and it was added to the calendar for hearing the next day.

Friday, June 15, came and went with no action on S.1639. The issue now was not whether the bill would get favorable reception, but whether lawmakers would reach that part of the docket prior to recess.

Failure to pass the bill then would have forced supporters to begin all over again when the 74th Congress convened that fall.

On Saturday, June 16, the press reported Congress would adjoun at the end of the day regardless of actions taken. "I began to lose courage," Bergengren wrote. "Earl (Rentfro) never did."

Finally, at 7:15 p.m., the matter of S.1639, the passage of the Federal Credit Union Act, was brought before Congress.

Debate was limited to 30 minutes. Several legislators, including Rep. Wright Patman of Texas spoke in favor of the bill. None spoke against it.

At the end of the debate, the bill passed 180 to 2 with no abstentions.

From there the bill went to the enrollment office and Sen. Sheppard helped usher it through. At 10 p.m., Sheppard interrupted Senate debate on air mail contracts and, invoking personal privilege, called for a vote on S.1639.

"(The vote) had to be unanimous and it was," wrote Bergengren.

Just Before Midnight...

The bill then had to be hustled to the Senate enrolling clerk to be recorded and then back to the House side for the speaker's signature. This was accomplished at just about midnight, when lawmakers concluded they could not accomplish the rest of their business that day and adjourned.

But by that time the credit union movement had gotten what it had sought for so long, federal license to open credit unions across the United States regardless of state laws.

A tired Bergengren and Rentfro, confident their task had been completed, hustled at last to Union Station, slumping into seats on the 12:25 a.m. train to New York in victory.

President Roosevelt signed the new bill into law June 26, 1934.

Today, June 26 is considered the birthday of the Credit Union Movement, which celebrated its 70th just last year.

The principles that drove the creation of credit unions and passage of the federal act are no less critical today than they were then, according to Dan Mica, CEO of CUNA & Affiliates.

"Credit unions today carry on this legacy, offering their consumer members the best deals possible on loans and savings," Mica wrote in the July 2004 issue of Credit Union Magazine, successor to The Bridge.

"After 70 years of service-even more, as the first U.S. credit union opened its door 100 years ago-credit unions see their reason for existence every day as they enhance members' lives with affordable financial products."

One can't help but think, were they around today, that Roy Bergengren, Earl Rentfro, Sen. Morris Sheppard, Rep. Wright Patman and the tens of thousands of credit union members who lobbied for passage of the federal act might take more than a little pride in the credit union movement their efforts helped create.

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