Credit unions were absent in Canada at the start of the 20th century. Yet, membership of credit unions became commonplace and, in Quebec, grew to encompass the vast majority of the population by the end of the century. These institutions found a better way to serve a gap in the market for credit that had previously only been filled by private lenders who charged very high interest. Their success owes a lot to one person, arguably among the most important people in the creation of cooperative credit organizations globally, Alphonse Desjardins.
Quebec
In the mid-19th century, Quebec’s agrarian economy was to a large extent oriented around subsistence farming, though it also supplied New England with agricultural produce. Unfortunately, diverging trade policies between the U.S. and Canada, each pursuing protective tariffs, cut off Quebec farms from buyers in the United States. Around the same time, land quality deteriorated as a result of antiquated farming techniques that depleted the land. Quebec’s rural economy struggled through the late-19th century.
In the cities, the industrial revolution was transforming the economy but not fast enough to replace one mode of work for another. While manufacturing did grow, it did not offset struggles in rural areas. Montreal had growing light industries making shoes and textiles but heavy industry came slowly to Quebec, mostly staying in the Northern United States or Southern Ontario. The result was high unemployment and emigration to other parts of Canada and the United States. This emigration of workers and farmers in turn threatened the middle classes in rural Quebec, the merchants, notaries, lawyers and others who facilitated local economic activities.
Inadequate Credit
Solutions to the economic challenges brought by industrialization, and seizing the associated opportunities, required credit. As just one example, rather than grow wheat, some farmers switched to dairy farming but this required new machinery. There were plenty of firms making and selling this equipment but could farmers afford it without credit?
At around the same time, another need for credit arose. Mail-order catalogs were distributed in rural Quebec in the late-19th century. They introduced communities that previously lived off the land – perhaps not off the land alone but certainly to a large extent – to new products made elsewhere. Local merchants had to compete with these catalogs, expanding the breadth and volume of their merchandize. This increased merchants’ credit needs. Also, as consumerism was coming to rural Quebec, purchases by end-customers would also require credit. Yet, there was a shortage of credit in the province.
It was not because of an absence of banks that the Québécois lacked credit. Chartered banks there developed in the Canadian manner of branch banking, which produced a concentrated industry with a few large national banks with sprawling branch networks, in contrast to the American tradition of numerous small banks serving limited geographies, never or rarely crossing state-lines. In Quebec, the largest of these chartered banks at the turn of the century was the Banque Nationale du Canada with 251 branches in Quebec of the total banking industry’s 716 branches.
However, these banks largely served an urban market; bank branches were concentrated in cities like Montreal and Quebec City. Also, the chartered banks lent largely to businesses and not individuals. Even by the 1930s, just 13% of the loan portfolios of chartered banks were tied up in loans to individuals as opposed to loans to firms or securities holdings. Because of ceilings on interest rates, chartered banks saw little reason to make loans they perceived as riskier. So, the banks were not important sources of credit to small borrowers.
However, the chartered banks were complemented by private lenders who did make loans to individuals but these charged high interest rates, often 100% per annum or more, on their small loans. For the most part, banks did not compete with non-bank lenders for customers. In Quebec especially, the two rarely overlapped. Indeed, back in 1891, English-Canadian banks had just thirty branches in Quebec but they were quickly expanding in the province; reaching around 300 branches by 1920. These English-Canadian banks were also especially oriented around serving large and medium-sized businesses rather than small borrowers. More attuned to the circumstances of Quebec, the Banque Nationale du Canada, which was a French-Canadian bank, did compete with private lenders a bit more, but still, the two forms of credit-provider were largely disinterested in each other.
Alphonse Desjardins
The advent of a third type of credit institution in Quebec, in Canada, and indeed in North America altogether, owes a lot to Alphonse Desjardins, a French-Canadian journalist born in 1854. Desjardins worked for several newspapers starting from the 1870s and also published the debates of Quebec’s Legislative Assembly and Canada’s House of Commons. Following these proceedings made him familiar with ongoing issues in finance and credit. An 1897 speech on the topic of usury by Michael Quinn, a member of parliament from Montreal, supposedly had particular effect on Desjardins and convinced him that private lenders were abusive sources of credit in Canada.
Desjardins believed that the economic struggles of rural Quebec threatened the stability of French-Canadian society altogether by encouraging everything from socialism to assimilation with English Canada. He also found, rather than invented, a solution. Desjardins became familiar with cooperative credit institutions in Europe. There, several cooperative banks had already been formed, often modelled on institutions pioneered by Friedrich Wilhelm Raiffeisen, the German promoter of cooperative financial institutions.
Like Raiffeisen, Desjardins sought to unlock the savings of small savers, particularly in rural areas. This meant encouraging people to save money with banks rather than keep a box full of coins and banknotes at home, which in turn required overcoming distrust. There was also the goal of unlocking credit; here, Desjardins believed that the peers of ordinary people could determine whether prospective borrowers were creditworthy. Perhaps a local merchant could attest to the creditworthiness of a farmer, for instance. By harvesting savings and providing credit, the credit cooperatives could make life in rural Quebec easier, and thus Desjardins and his peers thought credit could save the livelihoods of the province’s middle classes too.
The hopes were put to the test on December 6, 1900 when Alphonse Desjardins founded a cooperative bank in Levis, Quebec, then a small city across the St. Lawrence River from Quebec City. This bank, La Caisse Populaire, opened on January 23, 1901 with ninety founding members. The membership was required to buy one $5 share each, paid for by weekly installments of ten cents. The share could always be sold back to La Caisse Populaire by a member wanting to step away from the cooperative.
Caisses Populaires
Besides serving as president and manager of the Levis cooperative, Desjardins worked to establish similar ‘caisses populaire’ in other towns. There were 171 caisses populaire formed between 1900 and 1920. Almost all of these were formed after 1906 when activity picked up; three were formed in 1907, eleven in 1908, and fifteen in 1909. These cooperatives were organized under a provincial law supported by Desjardins, the “Loi des syndicats cooperatifs” of 1906, rather than the Federal Law of Banks which regulated the chartered banks in Canada.
The caisses populaire were established to serve the French-Canadian working and middle classes. They made loans almost exclusively to these customers since they could not make commercial and industrial loans under the law. They were often established in small communities as caisses could be formed by as few as ten members and a regional federation of these credit unions was only a loose body rather than a centralized corporation. The credit unions were also distinguished by being non-profit entities.
The caisses populaire were supported by the Catholic Church in Quebec. At least 135 clergymen became chairmen, managers, or secretaries in caisses formed before 1920. In 1932, when a regional association of caisses was at risk of failing, the Archbishop of Quebec guaranteed a loan from chartered banks that bailed out the credit unions.
Also supporting the caisses was a lack of interest taken in them by larger banks which could have opposed them if they circumvented the banks’ own financial intermediation. Instead, the large banks, particularly the English-Canadian ones, did not see the caisses as competitors and even welcomed them. They thought the credit unions could accumulate the savings of small customers and deposit these savings in the larger banks. The French-Canadian Banque Nationale du Canada, however, was opposed to the caisses since, being a bit different from other chartered banks, they did target some of the same customers.
Success and Growth
Credit unions also saw growth in Ontario as soon as they got off the ground in Quebec. Alphonse Desjardins was also involved in the creation of the first credit union in the United States, La Caisse Populaire Ste. Marie in Manchester New Hampshire, formed by French-Canadian immigrants there. Similar credit unions were formed in Boston by 1910, incorporated under a law in Massachusetts inspired by that of Quebec.
Within a few decades there were hundreds of caisses just in Quebec. Individually, these cooperatives were usually small; many operated in towns where they were the only active financial institution. The vast majority had fewer than 250 depositors in the late 1910s; all but a small handful at that time had fewer than 500 depositors. The typical Quebec caisse in the late 1910s had less than $50,000 in assets and in deposits and less than $500 in annual operating expenses. Perhaps reflecting the nature of their clients, deposits turned over quickly. In 1920 for example, there were about $4.56 million in deposits at Quebec caisses by year end, but this compares to $10.53 million in deposits and $9.67 million in withdrawals during the year.
The money that stayed in the caisses to accumulate was encouraged to stay there by the higher interest rates on deposits offered by caisses compared to other financial institutions. The caisses offered interest on deposits that was usually set to 3%, but was sometimes 3.5% or 4%, in the late-1910s. The growth in deposits at caisses across Quebec was remarkable; deposits grew 47% in 1919 and 28% in 1920. Membership also grew quickly in the early years. Caisses in the province had 25,000 members in 1916, nearly 30,000 in 1919, and nearly 45,000 members by 1929. Still, membership amounted to 2.5% of Quebec’s population in 1931, a small fraction of future adoption. In the meantime though, caisses shrank during the Great Depression when withdrawals outpaced deposits. However, this turned around and the number and size of caisses grew as the chartered banks retrenched and closed branches.
In their first few decades, the caisses populaire attracted only small savers. In 1929, the average member of a caisse had savings there of just around $256. In 1939, 40% of loans made by caisses were for amounts under $50; though they did make larger mortgage loans too. Eventually, the caisses achieved such broad adoption that nearly all social classes banked with them.
Between 1939 and 1970, the membership of Quebec caisses grew 52-fold and membership came to comprise perhaps around 68.5% of the province’s French-speaking population by 1971. Another source, which puts the proportion at 51% in 1970 for the province’s total population, provides a comparison to other provinces. The numbers show how exceptional Quebec was; credit union membership covered only 15% of the population in Ontario and, besides Quebec, only in Saskatchewan (at 33%) was credit union membership more than 20% of the population.
In the 1960s and early 1970s, a strong economy and rising demand for more expensive consumer goods kept caisses busy making small loans, though some began to make commercial loans too. Still, they all focused on small savers. Though adoption was much higher by share of population, across Canada, the assets of caisses and credit unions still comprised only 4.6% of financial institution assets in 1967, though this was up from 0.2% in 1935.
To keep up with the growing demand and especially because they increasingly competed with chartered banks, caisses modernized and centralized. By now, many services like cheque cashing and printing were centralized. In Quebec, the caisses were organized into the Desjardins Group which among other things handled larger loan requests directly. The number of unique caisses declined as the sector consolidated. In Quebec alone, there were 200 fewer in 1985 as compared to 1975, for example.
In Quebec, membership in a credit union came to reach 78% by 1980 by which point membership in other provinces had also risen considerably. Now, in virtually the entire country credit union penetration was above 20%. By the early 1990s, the Desjardins Group had expanded beyond just making occasional large commercial loans; it also possessed a life insurance arm, a brokerage unit, and activities in leasing and trust services.
Lesson
There are two remarkable aspects to the success of credit unions in Quebec and Canada. The first is that though their development was a response to 19th century problems, namely an industrializing economy and its resulting dislocations, particularly in rural areas, they seemed well suited to the 20th century. This was a period of tremendous consumer credit growth and a period when rising living standards created new savers.
Second, this market, which grew so rapidly in the 20th century, was surprisingly neglected by banks. If the credit unions proved more tailored to the unique circumstances of a rural economy at the end of the 19th century alone and had the larger banks been more eager to serve small savers and borrowers, the credit union movement in Canada would have encountered far less success or only fleeting success, as was the case in other parts of the world.
More from the Tontine Coffee-House
Read about Friedrich Wilhelm Raiffeisen, whose credit unions in Europe inspired Desjardins, and the development of online banking in the 1990s and 2000s. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
1. Bernard, Francine. “The Birth and Growth of a Cooperative Banking Organization in Quebec.” Sociological Focus, vol. 9, no. 2, Apr. 1976, pp. 175–84.
2. Rudin, Ronald. In Whose Interest? Quebec’s Caisses Populaires 1900-1945. McGill-Queen’s University Press, 1990.
3. Whitney, Edson Leone. Cooperative Credit Societies (Credit Unions) in America and in Foreign Countries. United States Department of Labor, Bureau of Labor Statistics, 1922.
4. Zinger, J. Terence, and University of Saskatchewan. Centre for the Study of Co-Operatives. Credit Unions and Caisses Populaires: Background, Market Characteristics and Future Development. Saskatoon: Centre for the Study of Co-operatives, University of Saskatchewan, 1994.
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