By the time the Great Depression came along, credit unions had already started to gain significant ground in the United States. Many states had passed credit union laws, and roughly 2,200 credit unions had already formed. Credit unions were gaining ground because bankers would not provide credit to average people, who had to resort to loan sharks and pawn shops.

In 1960, the ABA unleashed speakers to travel the country, whipping local bankers into a frenzy over credit unions. One of these was Carl E. Bahmeier Jr., who in 1960 was with the South Dakota Bankers Association. Bahmeier spoke at the Montana Bankers Association convention in June 1960, saying,

Now, remember the days in which your great-grandfathers were running banks and would no more make a loan on a personal basis than the man in the moon. If a person came in to ask for a personal loan, they would throw him literally and bodily out of the institution. This was the day and the era in which people borrowed money who were poor, who were workers, who were clerks, who were in the factories, and for their entire lives stayed in debt to the loan sharks.

Banks did not lend to the average consumer. According to the First Security Corporation (a bank), “Retail Credit, such as is now associated with the broad pattern of consumer needs, was shunned as a synonym for Original Sin.”[1]

“The more business the banks refused. . .the more other agencies, including the government, would capture in the credit field.”[2] (Emphasis added.) With these words, Marriner Eccles described the banking mentality and, as a result, the frustration of the government during the Depression years. As a result, the 1930’s, with FDR at the helm, changed the way government was involved with the economy and the welfare of its citizens.

John O. Elmer, chair of the ABA’s installment credit committee, spoke at the 89th annual ABA convention on October 8, 1963. He said, “The transition of banking from an institution serving primarily commercial enterprise to one serving the general public is radical and far-reaching.” (Emphasis added.)

He then mentioned four competitors in this arena: credit unions, captive finance and leasing companies in the automobile field, revolving credit card accounts in retail stores, and the entry of S&Ls into consumer installment credit.

Returning to the 1930s, the Great Depression exacerbated the problem of banks not lending to the average person, and gave credit unions the chance to shine. Ultimately, it was not the Great Depression that caused banking deserts, but the cumulative actions of banks over the years.

Bankers’ reluctance to make risky loans was often criticized privately at board meetings of the New York Federal Reserve Bank in the early 1930s. RFC Chairman Jesse Jones publicly denounced bankers’ conservatism on many occasions, urging them to accommodate all deserving borrowers. As long as banks were not meeting all legitimate demands for credit, government would be forced to lend, he warned.

In 1933 fewer than 1 percent of banks were lending to persons on the basis of character and income. Many banks acquired their first experience with consumer loans in extending home repair and modernization financing under the National Housing Act of 1934.[3]

Immediately before the Depression, farmers and other sectors of the economy were hurting. How did banks deal with those that were hurting? The following gives a glimpse of what was happening in some Utah banks:

As his [Orval W. Adams’] later extended career in banking showed, his talents were more those of a loan collector than a loan officer. He studied all loans due to the Ogden First National Bank, and instead of granting the usual extensions, pressured borrowers to repay the loans on their due date. The requests [for payment] were icily put, and they had the grinding force of a glacier. The object was to increase the liquidity of the Ogden First National Bank, and this was done though in the process some borrowers were wounded beyond recovery.[4] (Emphasis added.)

In 1932, when the Federal government created the Reconstruction Finance Corporation (RFC), with the purpose of making advances to banks, banks refused to make loans to people and businesses. Instead, they took the government money, and then bought U.S. Securities. No risk, nice profit, increased liquidity, and no public purpose being served. A history of the FDIC describes efforts made on several occasions to get banks no loan money—to no avail.[5]

In 1934, frustrated by banker refusal to make mortgage loans, the Federal government created the Federal Housing Authority (FHA), but banks, having “no interest in bringing to the door of creditor institutions the sort of individuals who would ask for loans to build new homes” practically killed the FHA through inertia because of the belief when the depression ended without government action, “they could return to the halcyon days of the high mortgage rates and terms to which they were accustomed. [6]

In short, banks, seeking profit without risk, were not serving consumers or the country. Generally, the average person wanting credit resorted to pawn shops and loan sharks. Banks, in the interest of profits, were playing a game of protectionism, making as much safe money as they could off the government’s efforts to get the economy back up and rolling.

In his first inaugural speech on March 4, 1933, Franklin Delano Roosevelt stated:

Our distress comes from no failure of substance. We are stricken by no plague of locusts. Compared with the perils which our forefathers conquered because they believed and were not afraid, we have still much to be thankful for. Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.

True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision, the people perish.

The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.

In short, the entire country was a banking desert for the average person—and had been for years—because of how banks operated.

To help restore American confidence in banking, the Glass-Steagall Act was passed in June 1933, but that didn’t go far enough. The same Rep. Steagall supported the credit union bill proposed in 1934, and said in its support, “The measure represents an effort to build from the bottom. It represents an effort to help citizens solve their own economic problems and meet their own conditions of distress out of their own resources and by their own efforts.”

Credit unions came into being as the anti-bank, before the Great Depression. Banks would not make loans to the average person, so the average person organized into credit unions so they could make loans. As a matter of good public policy, legislative bodies created laws that gave credit unions legal standing.

Credit unions, not-for-profit financial cooperatives, were formed as opposition to the for-profit banks—an institution to lend not only to the average person, but anyone that sought fair credit on reasonable terms.