What Would Ed Say?

Ed wouldn't accept the argument that 100 years of CU vitality automatically qualifies us for 100 more.

October 1, 2012
Edward Filene

Edward A. Filene didn’t mind making money. The namesake of the Filene Research Institute, Madison, Wis., was fantastically rich at a time when many Americans were conspicuously poor—a millionaire when $1 million could buy more than a modest Manhattan, N.Y., loft.

Unlike other plutocrats of his day, though, he didn’t see charity or handouts as the response to Americans’ woes. Instead he detected an epochal shift, a chance for a bottom-up change in how capital is deployed.

And what he preached during an era of structural economic change is remarkably pertinent for credit unions today.

Ed’s past
Edward A. Filene—at the Filene Research Institute, we call him “Ed” and hope he doesn’t mind—wasn’t a financier or banker by trade. He was a merchant. He made his millions selling slacks, shirts, shawls, and underwear to New Englanders from a successful chain of Filene Department Stores.

Ed never missed a chance to point out a business insight widely credited to Henry Ford: the living wage. By paying his workers more than he had to, Ford not only created loyal workers but a broad consumer base for his Tin Lizzies.

For Filene, who made those millions selling consumer goods, the living wage was gospel. If the common citizen can’t buy, the common business can’t flourish.

Ed’s professional life saw the unfolding of the Industrial Revolution in America, the Panic of 1893, the financial excesses of the 1920s, and the privations first of World War I and—most important—the Great Depression. Alive today and confronting this new year of recession and worry, he might have agreed with author Norman Cousins’ dictum: “History is a vast early warning system.”

Ed was schooled in one of the most competitive industries of his day and ours: retail. His father, William Filene, built an impressive network of clothing stores in New England and New York during his first 20 years in America after arriving from Germany. Then the financial collapse of 1869 overwhelmed his ability to pay his debts, and he sold everything to start anew in Boston.

Ed and his brother, Lincoln, skirted bankruptcy in 1913 after heavy debts and an operating loss of $261,000—$5.8 million in 2009 dollars—threatened to overwhelm them. Only a last-ditch line of credit from the First National Bank of Boston saved them from ruin.

From the late 19th century, the rising American middle class produced more and consumed more, but maintained an uneasy relationship with credit. Through the Great Depression, the only mortgage available to most Americans was a five-year balloon loan requiring a 50% down payment.

And as consumer lending (largely for secured durable goods) crashed at the end of the Roaring ’20s, manufacturers and financiers alike drowned in delinquencies, charge-offs, and a populace too weakened to spend. The times called for cooperative consumer finance in credit unions.

Ed’s philosophy
“In the very nature of modern machinery, we have become universally interdependent, and in the very nature of this new society, the masses must have adequate buying power—that is, such money power as will enable them to buy enough to keep themselves employed.… Our problems, therefore, have all ceased to be problems of conflicting interests and have become problems of how to achieve cooperation.”

But what was a revolutionary insight from Ed’s time is common knowledge today. From The New York Times to The Wall Street Journal, experts, economists, and commentators agree consumer spending is key to an economic recovery. But they also widely agree that increased household savings and the paydown of family debts are necessary for a healthy recovery.

Credit unions must survive in the meantime. Surveying the facts of the moment, Ed might say, as he did to a gathering of California credit unions in 1936, that cooperation among individual members no longer is novel, but that cooperation among cooperatives is the new imperative.

“One hundred individuals, saving their money individually, could not provide themselves with much protection; but let them organize a credit union and their opportunity to help themselves was multiplied. Similarly, the credit unions in California, each acting individually, could not possibly accomplish what they can now accomplish acting together.”

In light of today’s challenges, Ed likely would call for a new cooperative twist.

“Just where shall we draw the line, however, between local, state, and national action? That’s a problem.… But we know our object. It is democratic finance. It is the use of the power of money and credit by the people in their own cooperative organizations in such a way as will serve the interests of all the people best.”

If the object is democratic finance that serves the interests of all the people best, credit unions have two options: go it alone, building and defending their franchises as in the past; or band together at a time when publicly traded banks are licking deeper wounds than ours. Credit unions together can find ways to “serve the interests of all the people best.”

In 1936, Ed asked a group of sales executives a question eerily prescient for today’s credit unions: “Are we trying to perpetuate the system which has made it possible for us to thrive? Or may we not be seeking only to perpetuate our position in that system—our individual business, our established ways of doing business—even appealing to government, perhaps, to defend our present holdings against the normal hazards of capitalism itself? We can’t do both of these things.”

Ed’s innovations
“Is capitalism working?” asks an opinion piece from the Wharton School of the University of Pennsylvania. From the halls of prestigious business schools to the nervous production floors of auto makers, the question is common, understandable, and—as Ed would say—incredibly easy to answer: Yes.

“If I had a son in college and he did not become a socialist before he was 21, I would disinherit him. But if he remained a socialist after having an opportunity to study the real nature of our economic and social development, I would likewise disinherit him.”

George Taber, the Wharton article’s author, wrote a similar essay for Time in the dark days of 1980. He builds on 20th-century economist Joseph Schumpeter to insist that capitalism is at root “creative destruction.”

Says Taber: “Creative destruction means old established companies under capitalism tend to lose their dynamism with time and atrophy under...corporate bureaucracy and complacency. Then entrepreneurs, who usually have few links to the past, introduce bold and fresh ideas for new products, manufacturing techniques, or distribution, and displace the old order.

“The process is often destructive but also creative. This corporate life cycle has repeated itself again and again in numerous fields: Ford Motor Co. was innovative in the early 20th century, but Japanese auto companies passed Ford and other American auto makers in the 1970s.... IBM in the 1960s reigned supreme over mainframe computers, yet Apple and Dell ushered in personal computers in the 1980s.”

Ed was familiar with both creation and destruction, and realized you can’t get the good one without the bad. America’s credit union system today shows uncomfortable similarity to Ford and Sears, not because the system is insolvent—quite the contrary— but because with some exceptions it’s not the source of positive consumer finance innovations.

Cooperative banking was novel at St. Mary’s Bank in 1909 and desperately needed with the passage of the Federal Credit Union Act in 1934. On-site branching, payroll deduction, and peer-run credit committees all pushed millions of Americans into the financial mainstream. But many things that made credit unions unique before World War II have become either commonplace or irrelevant in the face of expanded consumer credit and aggressive competition.

Even in an established industry like retail, Filene innovations were legendary. For example, Ed’s department store was one of the first businesses anywhere to set up an arbitration panel to handle employee complaints and appeals.

In 1898 employees could, for five cents per week, buy a primitive form of health insurance. The Filene Cooperative Association, a pseudo-union, was encouraged by the brothers as a venue for employee betterment and an in-house organization to represent workers’ concerns to management.

The firm’s most famous innovation, the “Automatic Bargain Basement,” operated separately from the main store. The Basement’s buyers acquired discounted and overstocked goods from wholesalers, plied them at an attractive price, and discounted those that didn’t sell by 25 percentage points each week. If they didn’t sell within a month, they were given to charity.

Originally called Filene’s Folly by competitors, the Basement eventually became the store’s most lucrative department. But it took 10 years to earn a profit.

But what do Ed’s intrawar retail innovations have to do with 21st-century credit unions? Everything.

Both Ed and modern credit unions had to walk the erratic line between creation and destruction. Both had to compete in commoditized industries. Both faced competitive pressure from all sides.

Both depended on the goodwill of local customers. And both risked obsolescence if they couldn’t identify and serve the changing needs of American consumers.

Even Filene’s Basement, Ed’s signature contribution to retailing, isn’t safe from creative destruction. The firm, long since sold to investors, filed for bankruptcy protection in May. Both Ed and credit unions navigated dramatic economic upheavals that made innovation not just interesting but essential.

Into the future
Nearly a century ago, Ed announced that American finance must be democratized, but few understood what he meant. At a personal cost of $1 million, he brought the credit union movement to the U.S. And in credit unions, people who had nearly nothing and needed loans desperately began to save small sums collectively and to borrow small sums from each other.

In many of the years since, credit unions have been largely defined by their structure, regulatory treatment, and tax exemption. That treatment and the exemption certainly are worth fighting to maintain.

But they may disappear in the coming years’ rush to re-engineer the government’s oversight and tax structure. If they do, and if credit unions suddenly share all the freedoms and all the restraints of commercial banks, how should cooperatives differentiate themselves?

Certainly not by dwelling on the ruin wrought by Madoff, Mozilo, Raines, and their ilk. The current crisis has its list of rogues, but when the dust settles, the roll call of actual scoundrels may be short. The rest—lenders and borrowers alike—were dancing to the music of the day. Homeowners and shareholders got what they thought they wanted.

But as Ed knew and good credit unions prove, when the borrowers and the lenders are shareholders under the same board of directors, an almost magical responsibility ensues. Few people get rich and some losses are unavoidable, but the cooperative hull is incredibly sound.

However, a sound hull serves little purpose without a direction to sail. “The most important element of a strategy is a coherent viewpoint about the forces at work, not a plan,” says UCLA business professor Richard Rumelt.

American credit unions are living through a structural break. “The first order of the day is to survive any downturns in the real economy, but the second is to benefit from these new patterns. A structural break is the very best time to be a strategist, for at the moment of change old sources of competitive advantage weaken and new sources appear.... The wrong way forward in a structural break during hard times is to try more of the same. The break and the hard times are sure indications an old pattern has been pushed to its limits and is destroying value.”

If Ed were with us today, he would tell us this is not a mulligan year. He would recognize the structural break of 2009 as on par with the upheaval that began 80 years ago. He would speak to us of changes in progress and the unveiling of a better, inevitable new order. He would goad us to confront a rapidly changing economy, warning us of the necessity of the “next step forward.”

“A new world has come into existence,” he wrote in 1932. “We did not plan it, but we must plan how to live in it.”

In that spirit, Ed would urge credit unions to focus on the hurting American. He would call upon us to embrace social responsibilities in business—responsibilities that for-profit firms too often forget.

A new age of prosperity will depend on the prosperity of all. He would demand that we embrace the drench of new information technology and, counterintuitively, use it to make our business model even simpler.

He also would foretell a better world, finer than anyone has yet dreamed of living in. He would marvel at the opportunity of credit unions as stable community anchors in a marketplace filled with cold and increasingly tired international brands.

Ed would not accept the argument that 100 years of credit union vitality automatically qualifies us for 100 more. In a time with few communication channels, Ed and Roy Bergengren changed laws in 38 states, the District of Columbia, and the U.S. Code.

Ed would be at least bemused and probably offended by any credit union that didn’t seek out and embrace change. He would tell us to build our future now while opportunities abound. He would be an unwelcome prophet in his own country, exhausting us all.

And, last of all, he would say again and again until we heard it: “Progress is the constant replacing of the best there is with something still better.”

MARK MEYER is CEO of the Filene Research Institute, Madison, Wis.

Editor's note: This article originally appeared in the June 2009 edition of Credit Union Magazine.