three
Credit History
You've heard how microcredit was born. In a nation long shackled by British rule and wracked by famine, a brilliant man was seized with a desire to strike a blow against the poverty all about him. Defying common sense and the skepticism of his colleagues, he began lending tiny sums out of his own pocket to poor people, which they were to invest in tiny businesses. He demanded no collateral, only the vouchsafe of the borrowers' peers. The borrowers rewarded his faith with punctual repayment. In time, his experiment spawned a national movement that delivered millions of loans to poor men and women and broke the power of moneylenders.
The hero of this story is none other than Jonathan Swift, author of Gulliver's Travels. By the 1720s, Swift was an established man: a writer, a celebrated Irish patriot, and dean of St. Patrick's Cathedral in Dublin. About when he penned his satiric Modest Proposal that the poor sell their children to the rich as food, Swift began to aid Dubliners by lending them five or ten pounds at a time without interest. Each borrower needed two cosigners who would become liable for the debt if the borrower missed the required weekly repayments. Swift's godson and biographer, Thomas Sheridan, penned our primary account:
As the sums thus weekly paid in, were lent out again to others at a particular day in each month, this quick circulation doubled the benefit arising from the original sum. In order to insure this sum from diminution, he laid it down as a rule that none could be partakers of it, who could not give good security for the regular repayment of it in the manner proposed: for it was a maxim with him, that any one known by his neighbours to be an honest, sober, and industrious man, would readily find such security; while the idle and dissolute would by this means be excluded. Nor did they who entered into such securities run any great risque; for if the borrower was not punctual in his weekly payments, immediate notice of it was sent to them, who obliged him to be more punctual for the future. Thus did this fund continue undiminished to the last; and small as the spring was, yet, by continual flowing, it watered and enriched the humble vale through which it ran, still extending and widening its course. I have been well assured from different quarters, that many families in Dublin, now living in great credit, owed the foundation of their fortunes, to the sums first borrowed from this fund.1
Swift never expanded his lending beyond a side activity. But in the ensuing decades, charitable societies sprang up in Dublin to pool capital that could be lent to “industrious tradesmen” via the Swift system.2 Among them was the Dublin Musical Society, which in 1747 began to donate proceeds from its performances to a loan fund. (The English rock band the Police would do the same during their 2008 reunion world tour, contributing to the microfinance group Unitus.) Originally just one of the Dublin society's good works, the credit project came to dominate. By 1768, the society had lent £2–4 at a time to each of 5,290 borrowers. The big break for the Swift system came in 1823, when the Irish Parliament approved an act to formalize, regulate, and encourage such loan funds, allowing them to charge interest and accept savings deposits.3 The legislation gained favor partly because a famine had wreaked havoc on the economy the previous year and partly because credit was seen as cheaper than welfare. Freed to operate more commercially, the funds exploded in reach. By 1843, they disbursed half a million small credits a year, reaching a fifth of families on the island nation. Nearly all the borrowers were illiterate and a fifth were women, most unmarried.4
For anyone familiar with modern microcredit, the historical parallels in the Irish loan funds, in theory, practice, clientele, and organizational trajectory, are clear. Then, as now, the hope was that small amounts of capital would help self-employed people lift themselves by their own bootstraps. Desperation for a response to the twin evils of famine and usury drove the initial experiments. Creditors exploited “joint liability”—the backing of peers—to efficiently filter out unreliable people and press for repayment. Weekly payments, a short loan term, and aggressive pursuit of non-payers kept the system running smoothly. And then, as now, credit had a life of its own: it took over organizations and spread like wildfire, and critics compared it to the usury it sought to supplant. Of Swift, Samuel Johnson, the master of English letters, wrote, “A severe and punctilious temper is ill qualified for transactions with the poor…. A severe creditor has no popular character; what then was likely to be said of him who employs the catchpoll under the appearance of charity?”5
Nor are the Irish loan funds the only antecedents of today's microfinance. In books, manuscripts, and even stone tablets that have survived the ages are traces of a rich mosaic of arrangements that people have fashioned to help each other borrow, save, and insure. Yet so spectacular has been the growth and elaboration of microfinance since the 1970s that the movement has little sense of its own roots. In fact, modern microfinance did not arise de novo thirty-five years ago. The ideas within it are ancient, and their modern embodiments descend directly from older successes. Microfinance, you could say, comes from old money.
Whenever history is lost, wisdom may be lost. Priscilla Wakefield, an Englishwoman who founded historically important financial institutions for women and children circa 1800, professed herself willing to be forgotten. “The undertaking which affords most pleasure in the retrospection,” she diarized, “is the successful establishment of a Female Benefit Club, a work that has engrossed a considerable portion of my time, which I do not lament as I trust that many will reap the benefit of it when I am no longer remembered.”6 But it would be better if she were not forgotten, nor the historical fabric of which she is part. Reviewing the history, we can answer questions relevant for today. What are the constants and variables in delivering financial services for the masses? What do they suggest about how best to do microfinance? Do some past successes point to current, overlooked opportunities?
And what does the past teach about the benefits of modern microfinance? In Swift's time, economists did not perform randomized studies of the impact of loans on industrious tradesmen, so we don't know exactly how much good he did. Still, there are some instructive patterns in the history. Repeatedly in the pages that follow, you will see that someone strikes a spark, an institutional form for helping people manage their money. Success has come less from inventing new methods than from combining old ones, then tinkering, testing, publicizing, and propagating. The successful forms extend the financial system down the income scale, improving on the traditional arrangements, which are informal and often unreliable, available to poor people.
The history related here, if not written by the winners, dwells on them, the ones whose sparks lit lasting fires. Their successes proved the widespread desire among poor people for better ways to save, borrow, and insure. They demonstrated that many poor people are willing to pay for better services, which thus can be delivered on a commercial or near-commercial basis. And some of these providers, by selling simple savings services and insurance policies to millions, showed us ways to move beyond today's popular emphasis on credit.
Interestingly, while the demand from customers is a constant in history, the rationales in the minds of providers have varied: inculcation of thrift, liberation from usury, financing of small enterprises, reducing the burden of burial expenses, Christian fellowship, and even anti-Semitism. What these past successes do not establish is that financial services can be a reliable path out of poverty. Overall, history suggests that the real strength of microfinance, as of its forebears, is in bringing formal financial services to millions of people in minimally subsidized, businesslike ways.
A Preliminary: ROSCAs and ASCAs
Financial services need to ensure that when money or risk is transferred from one party to another, some basis for trust flows the opposite way. The bank that persuades you it is safe wins your deposits. The neighbor who is convinced that you are reliable may lend you money or cosign a loan from another.
The arrangements that humans have devised to conduct financial dealings on a foundation of trust can be roughly divided into two kinds, which differ in the stance of the provider with respect to the client. In communal or group-oriented provision, people join together for mutual support—lending to, saving with, and insuring each other. Typically they know one another and come from similar stations in life, and this social fabric of trust, interdependence, and peer pressure undergirds the financial linkages. All members are clients, and all members are providers.
In individual provision, one party delivers a service to another (or a group of others) often of lower standing or lesser economic power. Individual provision can take place commercially or charitably. In general, the parties forge trust from some combination of reputation, knowledge of the client, collateral, cosigners, and enforceable contracts.
The distinction between these two types of arrangements is not sharp; in fact, several examples we will encounter in the history have elements of both. Still, it helps frame the history.
Today, the most universal communal arrangement is what academics have labeled the Rotating Savings and Credit Association (ROSCA).7 ROSCAs are found in slums and villages on every continent and go by many names. In India, they are commonly called chit funds, but also kuri, which harkens back to the use of cowry shells for money.8 In a standard ROSCA, every member pays into a pot on a regular basis—for example, fifteen people could contribute weekly. Members take turns claiming the pot. For a woman who claims the pot early in this fifteen-week cycle, a ROSCA resembles a loan, since she receives a large payout and then must steadily pay back in. For those who come last, a ROSCA is more like a savings account. But if the cycle repeats enough, even this distinction may blur into an even rhythm of small pay-ins and occasional large payouts. ROSCAs have the virtue of simplicity: they are easy to understand; their operations are transparent; and no shared funds accumulate under someone's care, limiting the temptation to embezzle.9 Perhaps precisely because ROSCAs require so little record-keeping, they hardly appear in the historical record.
If the advantage of ROSCAs is simplicity, the disadvantage is rigidity. It is the rare group of fifteen in which all members need to save or borrow exactly the same amount, and on such an inflexible, synchronized schedule. Because of this shortcoming, people have devised more complicated arrangements. Burial clubs, for example, accumulate contributions to cover funeral costs of members. Scholars today call all arrangements in which some funds collected are not immediately disbursed Accumulating Savings and Credit Associations (ASCAs). Unlike in ROSCAs, some funds are entrusted to the group's officers, producing an informal bank. This simple change unleashes a dizzying variety. The accumulated funds can be lent out to members or nonmembers on various terms, under various rules. Funds can be put in a bank. They can go into a pool for life insurance, as in burial societies. Different members can be allowed to contribute different amounts, earning proportionate dividends or interest. The rights to a given week's payout can be auctioned, the proceeds going into the general fund. ASCAs are more complex and burdensome to manage, and they create more opportunities for fraud. But many people have joined them through the ages for the added flexibility.
Before the Industrial Revolution
Microfinance is conceived today as large-scale, businesslike provision of financial services to poor people. Defined this way, microfinance could not have developed in pre-modern times. It only works where even poor people are monetized—that is, where they have moved beyond barter or media of exchange other than money, such as wampum and rice. And it only works where large institutions, such as corporations and nonprofits, can be constructed and given legal identities that transcend the individuals within them. Thus microfinance by today's standard did not take off until the Industrial Revolution. Yet almost all the seeds were present beforehand, some for a very long time. In the story of Jonathan Swift, for example, we saw the devices of joint liability and weekly repayments as well as the impulses of philanthropy and self-help.
The world's oldest financial profession must be moneylending: in the mists of time, someone with a surplus of wealth lent it to someone with a deficit in exchange for the promise of repayment and a fee. Mathematically, the shuttling of money back and forth is reasonably symmetric. But the power relationship can be asymmetric: the borrower's difficulties put her in the weaker negotiating position. Often the relationship is so lopsided as to be exploitative, which is why moneylenders have been despised and even outlawed in religious teachings. Yet moneylenders have persisted because they meet a need. Some of the calumny heaped upon them has been a kind of scapegoating; sometimes it has been racist. Resentment of moneylending Jews is the obvious example but is not unique. Here is someone in colonial Burma blaming the country's economic woes on a class of moneylenders that originated in Chettinad, in what is now India's Tamil Nadu state:
Chettiar banks are fiery dragons that parch every land that has the misfortune of coming under their wicked creeping. They are a hard-hearted lot what will ring out every drop of blood from the victims without compunction for the sake of their own interest…. [T]he swindling, cheating, deception and oppression of the Chettiars in the country, particularly among the ignorant folks, are well known and these are, to a large extent responsible for the present impoverishment in the land.10
Such sentiments stoked anti-Indian riots in the 1930s. After Japan invaded Burma in 1942, the Chettiars were forcibly expelled from the country.
No doubt the distastefulness of going to a moneylender is one reason people have long fashioned communal finance institutions. Homer told of the eranos, a communal meal in which all participants contributed a share of the food; that sense of mutual obligation carried over to a later meaning of eranos, a custom in which a person in need could ask each of his friends to lend him small sums. The borrower understood that his friends could one day reciprocate the imposition. From there, eranos loans seem to have taken more institutional forms in Athens. While the evidence is fragmentary enough to leave room for scholarly dispute, it hints that a single individual would borrow from a group—perhaps a businessman from his creditors and customers. Such debts had formal legal status, meaning that they could be pursued in court. An entry in the dictionary-thesaurus of the second-century Greek Julius Pollux implies that repayments were made in regular installments, rather than in a lump sum at the end of the term.11
Signs abound of communal financial arrangements since then. Ancient Greeks and Romans organized burial clubs, whose members shared a trade or deity of worship. In addition to relieving worries that funeral costs would compound the distress of bereaving families, the societies served as social bodies that would gather to dine, say, once a month.12 “These meetings not only provided relief from the daily round of work,” explains historian Robert Wilken, “they also provided friends and associates [with] mutual support, an opportunity for recognition and honor, a vehicle by which ordinary men could feel a sense of worth.”13 So common were they that some Greeks and Romans mistook early Christian groups for burial societies.14 In Medieval Europe, guilds took on some of the functions of burial clubs. In England in the early 1600s, after the guilds disappeared, “friendly societies” began to form. The first were probably burial societies, although they diversified as they multiplied over the ensuing 300 years. Writings from nineteenth-century China contain references to “long-life loan companies” there. Similar institutions no doubt formed around the world.15
Another long-standing response to moneylenders has been to undercut them on a charitable basis, lending individually at low or no interest. The first recorded examples of such individual financial service with social purpose date from about 1500. In 1462, the Franciscan friar Michele Carcano, having returned from the Holy Land to the town of Perugia on the Italian peninsula, made a fiery public speech against Jewish moneylenders and bankers. Those lenders interpreted their religious law as allowing them to charge interest to those outside their faith. Responding to Carcano, the town's Christian elite established a monte di pietà, a “mount of piety,” to displace the Jewish financiers: a pawnshop financed with charitable capital. In time, monti sprouted up throughout Italy and much of Western Europe. Fortunately, their anti-Semitic bark proved worse than their bite: the Pope turned out to be an important patron of Jewish bankers in more than one sense, absolving of sin any town government that allowed Jewish banking to continue after the arrival of a monte.16 Meanwhile, in England, bequests for charitable loan funds began appearing in the wills of the wealthy around 1500. The majority of the funds were dedicated to supporting young entrants into the benefactor's trade—weaving, haberdashery, and so on. But a significant minority were dedicated to the indigent, to “easse ther nede and payne,” as instructed in the will of one John Terry, a former mayor of Norfolk.17 Thus by the time of Jonathan Swift, lending was well established in English charity. Since Swift spent years in England, it seems unlikely that he formed the idea on his own.
A separate strand of evidence suggests that another ingredient in Swift's system, the use of cosigners for small loans, was also common in his milieu: as he began lending in the Irish capital to tradesmen with two cosigners, so did the Royal Bank of Scotland in the Scottish capital. In extending its credit, the two-year-old Edinburgh bank accepted as security the signatures of two or more “sureties” or “co-makers.”18 From today's perspective, the use of cosigners is interesting because joint liability formally undergirds most microloans. As Swift's biographer Sheridan explained, the arrangement put the cosigners to work on behalf of the lender. They had to judge whether the borrower was reliable, and they would go after him if he disappointed their trust.
Notably, while the Royal Bank of Scotland's lending practices appear in the history books as a novelty, the most innovative aspect was not that it used sureties. Indeed, the notion of surety itself is ancient. A passage of the Book of Proverbs that was probably written before the exodus warns, presumably out of bitter experience, “A man is without sense who gives a guarantee and surrenders himself to another as surety.”19 Rather, the loans were novel because they offered a flexible line of credit the client could tap and repay at times of his choosing. According to an account written a century later, “cash credit” began this way in 1729:
A metropolitan shopkeeper…found himself at times in the possession of more than a sufficient supply of ready money to carry on his trade, the overplus of which he consigned to the care of the neighbouring bank. But on other occasions, by reason of the length of the credits given to his customers, his money became so scarce that after exhausting his bank deposits, he still felt himself in difficulties. Several dilemmas of this kind having occurred…he was prompted to make a proposal of a novel nature to the bank; to the effect that, if it would accommodate him in straits with small loans, he would always shortly afterwards make up such debits, and that the parties should come to a balancing of accounts at periodical intervals. It seems this novel plan was acceded to. A cash credit, or liberty to draw to a certain extent, was instituted…and thus originated a system which has been of immense benefit to bankers and traders, and is now followed over the whole of Scotland.20
Cash credit became another financial innovation that took and spread—in this case, across Scotland and then into England.21 Just like flagship microcredit programs today, the joint-liability system boasted extraordinarily low loss rates. One expert told a British parliamentary commission in 1826, “The Bank of Scotland, I am sure, lost hardly anything in an amount of receipts and payments of hundreds of millions: they may have lost a few hundred pounds in a century.”22 And some observers saw the system as central to the economic success of the people: Henry Wolff, a leading writer on cooperative credit, recounted the following in 1896:
A friend of mine was travelling in one of the northern counties of Scotland, and there was pointed out to him a valley covered with beautiful farms. My friend was an Englishman, and his companion, who was a Scotchman, pointed down the valley and said, “That has all been done by the banks,” intimating his strong opinion that but for the banking system of Scotland (the cash credit) the development of agriculture would be in its infancy compared to what it is now.23
Thus, Swift clearly drew on ambient ideas in arriving at his system for lending to the poor. His effort, though, appears to be the first on record that combined particular elements that are central to much of modern microcredit: a charitable motive; the requirement of a regular repayment schedule to make thrift habitual; and an approach that was individual in that the banker was clearly of higher standing than the banked, and yet was communal in leveraging bonds between signers and cosigners to assure repayment.
Swift's lending system and cash credit were not the only historically significant innovations that would take hold in the British Isles, soon to be the first territory convulsed by the Industrial Revolution. Mass production would begin to change the world and, along the way, the provision of financial services to poor people.
Takeoff in the British Isles
The economic transformation of Europe in the eighteenth and nineteenth centuries revolutionized every aspect of daily life, including financial services. At once, the transformation put new pressures on the poorest classes and created scope for innovations to relieve them. As for the pressures, mass production of such goods as cloth and flour threw traditional artisans out of work. Enclosure of once-common lands sent farmers into towns and cities, there to work in dangerous mines and factories in exchange for wages that were pittances against the swelling fortunes of the capitalist employers.
Then, in the early nineteenth century, advances in sanitation and hygiene lowered the death rate and unleashed the population explosion that so worried philosopher Thomas Malthus. The billowing ranks of the indigent led the British government to expand an Elizabethan welfare program called the Poor Laws. Rising costs of that policy and fear of unrest among the “lower orders” added urgency to the search for more constructive and long-lasting responses to poverty. The general thrust of the innovations developed over the nineteenth century was to supplant traditional, informal, communal systems with formal institutions providing individual services. And the innovations went well beyond credit, bringing modern savings and insurance to poor Brits for the first time. Today's microfinance movement has yet to match that achievement.
One sign of the times: in 1797 a group of lords, bishops, members of parliament, and other respectable persons formed the Society for Bettering the Condition and Increasing the Comforts of the Poor, a rough equivalent for its day of the Center for Global Development (where I work). Funded by charity, the society collected data on what worked in the fight against poverty—“information respecting the circumstances and situation of the poor, and the most effectual means of meliorating their condition”—and spread ideas through “the circulation of useful and practical information, derived from experience, and stated briefly and plainly.”24 Its chief strategy was to set up a feed, a stream of content to which people subscribed, in the era's most powerful medium of dissemination, the printed book. Rather like a group blog, the articles in the society's periodical Reports hopped about randomly within a defined area. Topics in the first volume ranged from girls' education (“a school of industry for 60 girls”) to diversification of rural livelihoods (“the advantage of a cottager keeping a pig”).25
Evident in the pages of the Reports, which today can be browsed on Google Books, is that financial services were a concern, too. And the main vehicle for delivering them was the friendly society. In fact, the first article in the journal's first issue is “an account of a friendly society at Castle-Eden, in the country of Durham,” which among other things made loans for buying cows. Explained the author, Rowland Burdon, esquire: “The great desideratum, with respect to the maintenance of the poor, has always appeared to me to be the encouragement of habits of economy, and of a system of periodical subscription towards their own subsistence.”26 Friendly societies, recall, were informal groups that provided burial and disability insurance, loans, and other such services to members. Members would typically contribute weekly or monthly. The societies varied in the often-complex formulas for dues and payouts as well as the services provided. Some societies made loans while others did not. Some were “collecting societies” that helped people save. These would “send volunteer officers about to collect, as a labour of love, the pence and twopences which workmen receive, and which, without collectors to carry them into safety, they so often manage to fritter away.”27 In 1905, a census of friendly societies would find 30,000, with 14 million members and £50 million on hand.28 But friendly societies were also a constant source of trouble. At the time of that report from Durham, actuarial science hardly had been invented, so dues were set by little more than sticking a finger in the wind. If dues were too low, collapse was inevitable as payouts exceeded payins; people who had contributed for years could see all their thrift wasted. But especially if dues were too high (and even if not), the enticement to theft on the part of managers could be irresistible. Industrialization would bring another problem: migration. Farmers might contribute to a friendly society, then move to the city before they could benefit, again wasting years of thrift.29 These vexations drew the British parliament into a century-long struggle to regulate friendly societies in the public interest, starting in 1793.30 They also drew philanthropists, lawmakers, and businessmen into efforts to do better. One approach was for well-off people—such as Burdon—to sponsor friendly societies and thereby reassure common folk about their propriety and solvency.
Swift's charitable loan system was effectively an early project to improve on friendly societies. As recounted, though loan funds originated in the 1720s, before industrialization, they gained national significance in Ireland after the passage of a law in 1823 giving them legal standing. Within twenty years, they had reached a fifth of Irish families. But then twin disasters sent the Irish loan funds into a long decline. The great potato famine struck in 1846–48, killing a million people and sending an equal number overseas. And perhaps because conventional banks were threatened by the high rates the funds paid on deposits, new legislation lowered the cap on funds' lending rates from 13.6 to 8.8 percent a year, which squeezed their earnings.31
Another type of organization, legally classified as a friendly society, was the building society. Also called a cooperative savings and loan association, it helped members buy land and houses. Members' regular contributions built up a fund from which loans were made with interest; the profits were then divided among members. As mortgages, the loans were secured by collateral, the property whose purchase they financed. This aspect set building societies apart from most friendly societies, whose loans tended to rely on peer pressure and trust for security. By the same token, building societies probably formed among somewhat better-off people, those ready to join the propertied class. The earliest reference to a building society occurs in 1795, in the city of Birmingham.32
The two most pivotal British innovations married the retail techniques of friendly societies with the strength of formal institutions. One of those was the savings bank. Some have traced the idea to writer Daniel Defoe. In addition to Robinson Crusoe, he wrote an Essay upon Projects, which in 1697 set forth many ideas for bettering society, including a “pension office” that would offer a similar form of insurance as a burial society would for old age and disability.33 The earliest institution on this model may have been formed in the German city of Brunswick in 1765 to serve craftsmen and servants; it was more certainly followed by others in Hamburg, Berne, and Geneva.34 These banks resembled savings banks to the extent that they took in money rather than lending it out, and did so on an individual rather than communal basis.35
Proper savings banks for ordinary folks, which allowed deposits to be taken in or out at any time, appeared in England around 1800. In 1797, philosopher Jeremy Bentham called for the formation of “frugality banks” to cultivate thrift among the poor. He criticized friendly societies on many grounds. They were liable to overestimate or underestimate the necessary contributions, as I explained earlier. They were prone to disagreement, dissolution, and embezzlement. They gathered at public houses, which often required members to spend and imbibe in exchange for meeting on the premises. “Choosing a tippling-house for a school of frugality, would be like choosing a brothel for a school of continence,” Bentham observed.36
Within ten years, the equally influential Malthus concurred in an edition of his Essay on the Principle of Population. He pointed to savings banks as a way to encourage thrift and self-sacrifice among poor people, which would induce them to better their material lot, delay marriage, and have fewer children. Essential to success, he wrote, “the laborer should be able to draw out his money whenever he wanted it, and have the most perfect liberty of disposing of it in every respect as he pleased.”37 Sure that she could get her money out, he argued, she would more readily put it in.
As intellectuals inked ideas, others acted. In 1798, Priscilla Wakefield—a reader of Bentham, a granddaughter of the Barclay of Barclays bank, and the one heroine in this history—started a benefit club in Tottenham, north of London. It accepted tiny increments of savings from poor children.38 She reported on it in the journal of the Society for Bettering the Condition and Increasing the Comforts of the Poor. Anticipating the previous chapter of this book by 210 years, she wrote, “It is well known to those who are conversant with the affairs of the labouring classes, that it is much easier for them to spare a small sum at stated periods, than to lay down what is sufficient…at once.”39 She expanded her banking to adults in 1801, with several wealthy individuals guaranteeing the safety of deposits. The benefit club took deposits as small as a shilling and paid 5 percent on complete pounds accumulated.40 The first depositor in this, arguably the first savings bank, was “an orphan girl of fourteen, who placed two pounds in it, which she had earned in very small sums, and saved in the Benefit Club.”41 Wakefield's diaries reveal sentiments that would be familiar to later pioneers of financial services for poor people: the frustration of persuading others of a vision and the pride of proving it through practical success.42
Wakefield's idea took off in Scotland by 1815, thanks to parallel efforts of a minister, Henry Duncan, and the son of a banker in Edinburgh, a Mr. J. H. Forbes. Banks on Duncan's plan had elaborate rules for memberships, savings amounts, and interest rates, all contortions intended to make the banks qualify as friendly societies under the 1793 law. The Edinburgh model was more streamlined and eventually prevailed over Duncan's system, ironically thanks in part to Duncan's fervent advocacy for a new Scottish law to put savings banks on firm legal ground.43 The Scottish savings banks paid interest, which they earned by putting their deposits in conventional banks. After spreading across Scotland, savings banks, like cash credit, moved south. The Edinburgh Review wrote in 1815:
We are happy to understand that Savings Banks are spreading rapidly through Scotland; and we expect soon to hear the like good tidings from England, where such an institution is of still greater importance. It would be difficult, we fear, to convince either the people or their rulers, that such an event is of far more importance, and far more likely to increase the happiness and even the greatness of the nation, than the most brilliant sum of its arms, or the most stupendous improvements of its trade or its agriculture.—And yet we are persuaded that it is so.44
That was an impressive claim coming shortly after the British defeat of Napoleon at Waterloo.
Within the United Kingdom (including Northern Ireland), the number of savings banks climbed steadily, peaking at 645 in 1861, at which time they held 1.6 million accounts.45 And savings banks went global almost as fast as microfinance today: by 1820, seeds had propagated and bloomed in Australia, France, Germany, the Netherlands, Switzerland, and the United States.46 In Germany, municipal governments became particularly active as guarantors for savings banks (sparkassen); by 1900, they backed most of the 2,685 in operation.47
For the servants and laborers who used these banks, the prospect of saving to pay for a wedding, say, rather than borrowing for it must have been attractive because it eliminated the stress of debt. But if savings banks reduced the danger of debt entrapment, they put a new risk in its place: what if through fraud or incompetence, the bank made off with the hard-earned sums? Private savings banks therefore had their critics, too. One constructive remedy, first proposed in 1807 by a member of the British parliament and finally pushed through in 1861 by Chancellor of the Exchequer William Gladstone, was that the post office go into the savings business. By 1861, the post office did money transfers, handling millions of small orders a year. Its 2,000 branches gave it vast reach. And its official status would earn the trust of depositors.
The British postal savings system succeeded as envisioned. It reached 1 million accounts in 1869, 2 million in 1880, and 10 million in 1906. Many private savings banks shut down, though the survivors grew enough to stabilize the tally of accounts at such institutions. Gladstone, whose career included four stints as prime minister, would list the postal savings bank as one of his greatest achievements.48 Today, savings banks are a global phenomenon, with roughly 250 million accounts in developing-country postal savings banks and more than 800 million in non–postal savings banks (see chapter 4). All those accounts descend from the work of Priscilla Wakefield—quite a legacy for a forgotten heroine.
Britain's second great achievement in financial services for the masses was establishing “industrial life assurance.” While savings banks arose from a charitable impulse, the sellers of life insurance to working-class people were motivated by profit, if also a sense of mission. The Joint Stock Companies Act of 1844 made it much easier to create new companies and sell shares to the public—perhaps too easy. The financial industry saw dozens of start-ups in the 1840s, many short-lived and no more deserving of public trust than the worst friendly societies. Historian Laurie Dennett describes the scene:
In the field of life assurance [unsound companies] seemed to succeed one another with exceptional rapidity. The Post Magazine and Insurance Monitor…, a weekly paper founded in 1840 to act as a reporter on the assurance industry and exposer of its abuses, certainly found numerous subjects for dissection…. The editor on one occasion referred to an entity “brought into existence under the facilities for forming such companies by the [Act]…whose robberies amounted to £60,000,” another “composed of a low set of vagabonds, whose signatures as shareholders were procured at a pot-house for pints of beer,” and finally, one which “at the end of three years, had only £14,512 left in every shape and form out of £45,081 received in solid cash….” Charles Dickens' “Anglo-Bengalee Disinterested Loan and Life Insurance Company” had plenty of prototypes in life, as did its dissolute President, Tigg Montague, alias Montague Tigg.49
Yet from this pond scum, higher life evolved. In 1852 the British Industry Life Assurance Company and Family Friendly Society was founded. Its object was to combine for the first time the retail techniques of friendly societies, especially the practice of taking weekly payments, with the scientific rigor of modern life insurance, calibrating premiums to estimated probabilities of death at various ages. (Many friendly societies, in contrast, charged a person the same whether he was 20 or 40.) British Industry reported issuing an impressive 12,837 policies in its first half year, worth an average of less than £14 each.50
Little information has been preserved about how British Industry marketed so effectively to the masses; perhaps it sold through existing friendly societies. More is known about the company that would soon overtake it and then dominate. The Prudential Mutual Assurance, Investment, and Loan Association was founded in the same burst of corporate creativity, in 1848. Initially its goals were to sell “ordinary assurance”—life insurance for the upper classes—and make loans to the same. (As a mutual association, all clients were required to buy shares.) But then a parliamentary study committee praised the success of British Industry in 1853 and intrigued Prudential. In 1856, the company's new director, the young Henry Harben, went after the industrial assurance market with all his ambition. Spending three days a week travelling the country on its rail network, talking to agents, and studying successes and failures, Harben refined and streamlined his business model.
Here, too, the history will feel familiar to modern microfinance managers. One key was selling policies and collecting payments door-to-door. Because poor people were illiterate, they could not be expected to read advertisements; because they were busy and lower class, perhaps ashamed of their ragged clothes, they could not be expected to find the time and courage to visit branch offices. Agents would be paid on commission. Selecting agents was critical: they needed energy, intelligence without condescension, and willingness to spend their days walking through crowded slums. Careful recordkeeping was essential to prevent fraud among agents, as was aggressive prosecution to deter it. Prudential prided itself on rapid payment in the event of death but avoided the more transaction-intensive and fraud-prone disability insurance business. A final practice was covering whole families. Prudential at first resisted insuring children less than ten years old for fear it would reward infanticide, or be accused of such. But Harben changed his mind after he discovered that one of his most successful agents was breaking this rule. At a time when one in five infants died in the first year of life, Harben came to understand that parents were “anxious to insure their children, as in the event of death they found the funeral expenses press very hard upon them, and gladly welcomed the aid which a Society afforded.” And parents who insured their children with Prudential were more likely to insure themselves as well.51
This system of operation turned Prudential into a juggernaut. By 1881 it had insured an eighth of the population of the United Kingdom; by 1886 a fifth; by 1891 a quarter; and by 1900 a third, or about 13 million people of all ages.52
Credit, savings, and insurance—probably never again will one small part of the world incubate so many innovations in financial services for the masses as the British Isles did in the nineteenth century. Oddly, the service types for which the contribution was greatest, savings banks and life insurance, have been overshadowed by credit in the modern microfinance movement. That points to underexploited opportunities today in microsavings and microinsurance.
Cooperation on the Continent
France, Germany, and other continental nations had analogs to friendly societies in the nineteenth century. They imported the building society and the savings bank from the British Isles. Industrial life insurance, too, crossed the English Channel. But the region also made an important contribution to the history of ideas in financial services: the credit cooperative. In the first half of the nineteenth century—the milieu that incubated the egalitarian revolutions of 1848 and the radical ideas of Karl Marx—a great deal of thinking and experimentation went into putting bits of capital in the hands of the laboring classes. Although the credit cooperative, too, had British roots, its manifestation in continental Europe was more intensely communal than anything that flourished in the British Isles, perhaps because farming villages in what is now Germany were themselves more tight-knit.
The intellectual father of the credit cooperative movement was a religious and prolific German writer named Victor Aimé Huber. Born in 1800, Huber attended a Swiss school from ages six to sixteen, during which time the Welsh industrialist Robert Owen once visited to talk about his experiments in cooperation. As manager and part owner of a factory in New Lanark, Scotland, Owen and his fellow investors, including Jeremy Bentham, had reduced the profit they extracted from the enterprise to leave funds for the company to spend “on the education of the children and the improvement of the workpeople at New Lanark and for the general improvement of the conditions of the persons employed in manufactures.”53 This emphasis on the moral responsibility of the capitalist made Owen a founder of socialism and foreshadowed Muhammad Yunus of Grameen Bank on the value of cause-driven “social businesses.”54 Others would extend Owen's ideas to starting cooperative stores, most famously in the English town of Rochdale in 1844. These made workers not just deserving beneficiaries of capitalist charity but capitalists themselves. Members of the Rochdale cooperative store contributed small amounts of their own money to build up the equity base. The store bought goods in bulk to lower the price, retailed them, then distributed any profits to members.55
Influenced by his early encounter with Owen and later travels in England, Huber came to the idea of a cooperative that would pool capital not to purchase goods, but to lend back to members. He began advocating it in writing by the late 1840s. The first practical realization came in Belgium in 1848, but it was in Germany that the idea really took. Donald Tucker, a perceptive historian of the cooperative movement, wrote in 1922 that it was perhaps “inevitable that Germany should become the cradle of the cooperative banking movement.”56 The population was large and dense; class lines were sharply drawn; people lived concentrated in villages of a hundred or more inhabitants. “Not only did Germans know to what social class they belonged, but outside of the great cities each German had also a definite place within a local group,” Tucker wrote.57 These dense and strong social structures were perhaps the dominant source of individual identity and status—in contrast to the individualist values of advanced consumer societies—and they provided a foundation for credit provision through groups of interdependent borrowers. Much the same might be said of Asian societies built on irrigated rice, including today's Bangladesh.
However inevitable, the rise of credit cooperatives in Germany had its visionary heroes. As usual in this history, they came from affluent backgrounds and sought energetically for practical remedies to the suffering they saw around them. The first was Franz Hermann Schulze-Delitzsch. In 1850, with memories fresh from the famine winter of 1846–47, he founded his first credit cooperative, in the town of his birth, Delitzsch. He copied the two-tiered English structure he apparently learned about through Huber, not unlike that friendly society in Durham: wealthy, honorary members contributed to a loan fund that lent to poorer members. But the thing fell apart: the loans were not repaid, and the rich members lost their money.58
As it happened, two friends of Schulze-Delitzsch founded a credit cooperative at the same time in nearby Eilenburg, which differed in excluding the benefactors from being shareholding members. They could lend to the cooperative, but they could not borrow from it, nor be held responsible for the debts of others, nor share in the profits. This arrangement gave the lower-class members maximum incentives to manage the funds for the long term. Overall, funds came from two sources: the poor members' own regular, modest contributions, which entitled them to democratic ownership and control of the cooperative, and the loans from benefactors, for which all members accepted full liability. In theory, even if 90 percent of borrowers defaulted and disappeared and the remaining 10 percent never borrowed from the cooperative and owned tiny shares of it, the benefactors could go after that 10 percent for the full amounts of the original loans. Schulze-Delitzsch would later advocate this strong liability as necessary to attract outside capital, and many Germans accepted it. Out of the capital so obtained, the Eilenburg cooperative lent to individual members in the same way as Jonathan Swift and the Royal Bank of Scotland. Two neighbors typically cosigned with a borrower.59
By 1852, the Eilenburg cooperative had 586 members and had made 717 small loans. Two years later, it had borrowed from external supporters twenty-six times its own share capital. That degree of leverage Schulze-Delitzsch later judged too high, but it demonstrated the credibility the cooperative had quickly earned among benefactors.
Schulze-Delitzsch copied and promoted this model. The core innovation—drawing in benefactors only as creditors via the power of joint liability—became the germ of the global cooperative movement. “Your own selves and characters must create your credit,” Schulze-Delitzsch wrote, “and your collective liability will require you to choose your associates carefully, and to insist that they maintain regular, sober and industrious habits, making them worthy of credit.”60
In the mature Schulze-Delitzsch “people's bank,” loans were usually made for three to six months—in theory only for investment in members' businesses. “Never borrow for consumption, as is frequently the case with wage-earners who render themselves liable to default,” Schulze-Delitzsch admonished; no doubt some members did just that anyway (recall the discussion of fungibility in chapter 2).61 At any rate, once fired by his initial success, Schulze-Delitzsch became an “economic missionary,” the Muhammad Yunus of his era. “His striking personality, his convincing eloquence, his invincible faith in his own cause, and his truly contagious enthusiasm made him an almost ideal propagandist,” according to Wolff, who himself was no slouch as an economic missionary.62 People's banks proliferated across Germany and into other countries over the next several decades. Russia had 3,300 people's banks by 1913.63
Another German, Friedrich Wilhelm Raiffeisen, also left a strong imprint on credit cooperation. He, too, began experimenting in the 1850s but did not settle on a model until 1864, giving him ample time to learn from Schulze-Delitzsch. While Schulze-Delitzsch geared his cooperative to urban workers and shopkeepers, Raiffeisen worked with poorer farmers. From his point of view, the Schulze-Delitzsch requirement that members buy shares excluded truly poor people; and while the three-to six-month loan periods may have suited shopkeepers whose inventory turned over quickly, they were illmatched to the rhythm of the harvest and the gestation of livestock. So Raiffeisen's cooperatives did not make people pay anything to join. All financing was borrowed from outsiders through the assurance of joint liability. Still, members were to deposit savings even as they repaid their loans, so that the cooperatives could eventually free themselves from outside credit. The terms of loans to members could extend to two years or more. A final difference, in conception: Raiffeisen founded his cooperatives on what he saw as fraternal love among Christians, with at least implied resentment of the typically Jewish moneylenders. An important purpose for him was moral uplift.64
Raiffeisen's “village banks,” as they were sometimes called in English, spread slowly at first, not taking off until 1880. But by 1913, there were 16,927 rural village banks, compared to Schulze-Delitzsch's 980 people's banks in 1915.65 Raiffeisen's variant also dominated in the spread of the cooperative movement to the rest of Europe, the Americas, and Asia.66
One hot controversy within the international credit cooperation movements was over the merits of the unlimited liability of members, with respect to the outside creditors, for the debts of other members. Several foreign adapters of the German systems rejected unlimited liability. For instance, in Italy, a Jewish banker named Luigi Luzatti started his Banca Popolare sitting at a table on a sidewalk in Milan in 1866. His people's banks were organized as cooperatively owned, limited-liability, joint-stock companies, meaning that members' responsibility for losses on lending operations were capped at whatever capital they paid in. In principle, this limitation on liability of shareholders made it easier to attract share capital but harder to attract creditors because in the event of default, the latter could only go after the bank, not its member-owners. In practice, Luzatti succeeded in not only launching his own bank but inspiring hundreds of others on the Italian peninsula. The change to limited liability also made his banks more like conventional ones, with the persisting, crucial difference that joint liability allowed his banks to take character as collateral.67
The approach that spread in North America in the early twentieth century was also limited liability.68 Meanwhile, cooperatives were introduced in Britain and Ireland but never took off.69 Perhaps cultural differences lay at the root of these mutations and failures. People in more individualistic cultures may hesitate more to accept full liability for the debts of others. Or perhaps by the end of the century, Britons were wealthy enough that they could access credit without joint liability.
Despite disinterest in the Isles, in 1904, the British government in India enacted a law to support credit cooperatives as a means to quell unrest, following a recommendation of the Indian Famine Commission. The enabling law led to an explosion of activity. One important figure in the story is William Gourlay, a top British official in the state of Bengal, whose territory included modern-day Bangladesh. To prepare for his duties as registrar of credit cooperatives in Bengal, Gourlay visited and studied cooperatives in Europe for a month.70 In 1906, he put the principles of cooperative credit in his own words, giving us a conceptual bridge from German innovations in the 1850s to the microcredit that would surface in the Bengal territory in the 1970s:
In Germany [a system for providing services] has been found in Cooperative Credit Societies, and in India an attempt is being made to create a similar organization. This system aims at capitalizing the honesty of the villages…. We want, therefore, to teach the people to amalgamate this village credit and jointly borrow a sum sufficient to meet the needs of the whole village. The capitalist does not know which cultivator is good for [5 rupees] and which for [100 rupees]. It is the villagers alone who have all the information….
A man is not tempted to spend…more than he can afford when he has to run the gauntlet of public opinion, and the village will not lend him more than he can repay when they realize their joint responsibility.71
By 1946, just before independence, Indian cooperatives had a reported 9 million members.72 But for all the apparent growth, the groups did not always work as intended. Wolff, who had done much to bring about the 1904 act, in 1927 bemoaned the “dry rot” of high default rates and corrupt local administration.73 In Burma, also part of British India, the system peaked at more than 4,000 cooperatives around 1925. But there, a government report worried that “societies were being registered too easily,…loans…were being made too easily [and] repayments have become slack.” Sure enough, the Burmese system collapsed into a mound of bad debts just before the Depression. A 1929 investigative report, as summarized recently by Australian economist Sean Turnell, concluded that “‘excessive leniency’ was the order of the day. Worse, ‘fictitious figures’, ‘paper adjustments’ and the granting of new loans so that defaulters could pretend to repay old ones, were measures commonly resorted to…. [S]uch practices ‘could not have persisted and reached the dimensions it did unless connived by everyone concerned.’”74 In retrospect, the weakness of the Indian cooperative program grew out of the moral corruption of the colonial arrangement. Partly out of fear of unrest, the government worked harder to push subsidized credit than to hold the conveyors accountable for businesslike performance. (It would not be the last Indian government to behave this way: see chapter 4.) Meanwhile, buried resentment fomented, and cultural distance obscured, the subversion of the program's intent. Nevertheless, the idea that one could help poor people with joint-liability loans remained.
Small Loans for Profit in the United States
Americans were quick to copy European innovations. In 1816, the Massachusetts legislature chartered the first American savings bank, in Boston.75 The first building society started up in Philadelphia in 1836.76 Friendly (or “fraternal”) societies formed over the nineteenth century under obscure names, such as “The Ancient Order of Hibernians” and “The Improved Order of Red Men.”77 Many were defined by the ethnicity of the immigrants they admitted.
In the mid-1870s, a man named John Dryden created the Prudential Insurance Company in Newark, New Jersey; the firm was entirely inspired by its British namesake. Dryden spent time with Henry Harben at the British Prudential studying the company's methods in detail.78 His rival across the Hudson in New York, Metropolitan Life, had built a business selling insurance through German fraternal societies, with the societies doing the weekly premium collection. Eventually, Metropolitan, too, decided to copy the British Prudential system for direct retail. It made up for its slower start by importing hundreds of British Prudential agents. Soon it became the market leader.79
Early in the twentieth century, serious efforts were made to introduce two more models, one based on the European credit cooperatives, the other on the more individual approaches of the British Isles. The former grew steadily, and the institutions it spawned thrive to this day; the latter soared spectacularly and then disappeared just as fast—a pair of trajectories that once again point to how evolving national characteristics shape the uptake of financial services for the masses.
Americans encountered the credit cooperative several times in the nineteenth century but did not embrace it. In 1864, German-immigrant followers of Schulze-Delitzsch started a cooperative in New York City that was meant to provide credit, among other services. In Massachusetts, state senator Josiah Quincy introduced a bill in 1870 to give credit cooperatives legal standing after learning about them from his uncle, who had translated writings of Schulze-Delitzsch into English. Quincy's motion failed after it was decided that such organizations could be set up under current law. But they weren't, not until the next century.
In 1907, Gourlay accompanied Edward Filene, the Bostonian entrepreneur who invented the bargain basement, on a long tour through Bengal, which allowed Gourlay to inspect the new cooperative banks and show them to Filene.80 Filene later visited President Theodore Roosevelt to advocate a similar system for the U.S.-controlled Philippines and followed up with copies of Gourlay's writings. But he did not yet propose it for the United States proper.81
Pivotal figures in the final, successful arrival of credit cooperative in North America were the Canadian Alphonse Desjardins and the American Pierre Jay, both of whom learned much about European cooperatives from the writings of Wolff. Desjardins was atypical of the visionary founders in this history in that he grew up poor; he was typical in that he devoted years of his life to an obsession that many of his associates must have thought benighted. He founded his first joint-stock cooperative, a caisse populaire, outside of Quebec in 1901. Its first deposit was 10 cents. Within six years, it had made $200,000 in loans without losing a penny. By 1914, 150 caisses populaires had been started in Canada.
Meanwhile, Pierre Jay, a Massachusetts banking regulator who descended from the first U.S. Supreme Court Chief Justice John Jay, became hooked on cooperation after he stumbled on a book by Wolff in a public library in 1906. He soon learned of Desjardins's work, then collaborated with him to finally push enabling legislation through the Massachusetts legislature. In time, Filene joined and even led the U.S. credit cooperative cause. He was motivated by his desire as a Jew to put the lie to anti-Semitic slurs about usury and his own progressive passion—he gave his employees paid holidays, free medical care, and a savings and loan association. U.S. credit unions—so named to emphasize the formal democratic governance that becomes necessary when membership expands from dozens to hundreds—boasted 2.8 million participants by 1940.82 Today in the United States, credit unions are found at many large employers, including the federal government, and have some 91 million members.83 But perhaps because of America's affluence and individualism, the communal approach to lending never became as prevalent in the United States as it did in Germany. Credit unions may be jointly governed by their members, but they serve the members individually.
Another effort that seems to embody a more individualistic American style harkened back to Scottish cash credit. In 1910 a lawyer in Norfolk, Virginia, named Arthur Morris founded an unusual kind of for-profit bank. Under the Morris Plan of Industrial Banking, a person producing two sureties (or “comakers”) could borrow a sum as small as $100 and repay it in weekly installments over the course of a year. The interest rate worked out to 17 percent per annum, making the Morris Plan an attractive alternative to loan sharks, who were seen as a social menace.84 After Morris's enterprise had obviously succeeded, a former associate named David Stein sued, claiming that Morris's Plan was in fact Stein's. Ironically, by forcing evidence into the courtroom, the paternity dispute exposed the European roots of the plan. The judge ruled against Stein, concluding that even if one could patent such financial services, the ideas predated Stein—here citing Wolff's writings submitted into the record.85 A pair of cosigners and weekly repayments were not new ideas.
The Morris Plan demonstrated again the explosive power that can be released by combining such established ingredients with management savvy. It also demonstrated the controversy inherent in for-profit lending to the poor. By 1931, Morris had built an empire: 109 banks in 142 cities making $220 million in loans per year. At one of the larger banks, comaker loans averaged $183 in 1925, rising to $271 in 1939. Dividing a representative figure of $200 per loan into $220 million in total lending suggests that Morris banks served a million borrowers.86 Industrial banks unaffiliated with but modeled on the Morris Plan also sprang up. The prefix “micro” not being in common use, people called it the “small loan business.” Yet across the northern border, Desjardins decried the Morris banks as nothing “but a huge money-making concern devised to insure to the promoters a good business proposition, at the expense of the public.”87 For Desjardins turning a profit for outside investors, as distinct from member-owners, extinguished the soul of the small loan business.88
But Morris plowed ahead. His banks worked with retailers to provide installment credit, becoming for a time the country's largest source of consumer credit.89 Morris's success helped provoke mainline commercial banks into direct competition. In 1928, after prodding from the Russell Sage Foundation, New York's attorney general succeeded in driving the loan sharks out of business. But people still needed credit, so the attorney general pleaded with leading banks to adopt the proven small loan business model. National City Bank of New York, the country's largest bank and the ancestor of Citigroup, heeded the call and started a midtown Manhattan office offering loans of $50–1,000 to salaried workers.90 The move created a sensation: “500 Workers Seek City Bank's Loans,” ran a New York Times headline after opening day.91
But in the years after World War II, Morris's Plan—if not the banks themselves—fell victim to the country's rising affluence. Today, most Americans no longer need to bind their peers into joint liability to obtain credit, so they don't.
Learning from History
Behind every paragraph of this history lie a thousand lost stories of individuals who pondered, experimented with, doubted, evangelized, or used particular financial services. Although much is forgotten, a handful of lessons can be learned from the stories that remain. What do they tell us about what to expect from financial services for the masses and how to support them?
First, rich and poor alike want good ways to save, borrow, and insure. They find ways to meet the need, however rudimentary, through cooperation, charity, or commerce.
Second, the demands of the poor often can be met on a large scale only with limited and low-quality services. German farmers probably wanted to borrow individually from cooperatives without being on the hook for their neighbors' debts, but that was not an option. British workers might have clamored to buy disability insurance to protect their incomes from all-too-common mining and factory accidents. But the insurers could not find a way to supply it in small denominations while breaking even.
Third, if the need for services is a constant, the ascribed purpose is not. Swift wanted his loans invested in productive uses. Wakefield wanted to teach savers thrift, so they would not dissipate their incomes in gin. Schultz-Delitzsch was galled by famine. Raiffeisen's vision was imbued with a dose of Christian fellowship. Gourlay saw the chief problem as helping people surmount major expenditures without falling into slavery to moneylending landowners. In medieval Italy, Carcano interpreted usury through anti-Semitism. Most of these figures saw some part of the truth and perhaps none saw all of it. In general, poor people shoulder many concerns and struggle creatively to manage with what they have. New financial services give them new options. The third lesson, then, is about the danger of ideology when it comes to understanding how those served use the services. If people across the ages have been that muddled about why they are supporting the poor, we should be skeptical of the storylines currently in fashion.
Fourth, it is far more common to copy ideas in finance than to invent them. Most techniques of today's microfinance, such as sureties and high-frequency repayments, go back millennia. It is natural to see the heroes of microfinance as inventors. It is more accurate to appreciate that microfinance success stories (like most invention successes, actually) involve observing, borrowing, thinking, creating, tinkering, testing, publicizing, and propagating—sometimes all by the same person, sometimes not. Perhaps the rarest heroes in the history of finance for the masses are those who actually brought it to the masses en masse, who found ways to operate on a large scale, thanks to vision, leadership, and management ability. Whether or not they sought profit, they were good business people, a perspective to which we will return in chapter 5.
A fifth lesson is about the role of government. Most of the historical success stories are of private initiatives. The British postal savings bank system and the German sparkassen are important exceptions, showing that sometimes government agencies can be made to operate in business-like ways while bringing to bear their strengths in scale and reliability.92 It appears that governments generally have done better by leaving room for private initiatives than by pursuing public ones. The Irish loan funds, British friendly societies, and Scottish savings banks thrived after laws formalized their status.93 Morris succeeded in part because he prevailed on U.S. state governments to grant his unusual banks legal charters by stretching existing rules or enacting new ones.94 Of course, sometimes the political winds blew against such financial institutions, leading the legislative hand to quash. Legal changes in Ireland brought down the movement there; in Germany, the “Iron Chancellor,” Otto von Bismarck, fought less successfully to contain the grassroots cooperative movement, which he saw as threateningly independent.95
A sixth lesson is that small-scale financial services for poor people tend to arise in countries in the early stages of modernization, such as the British Isles around 1800 and Germany a few decades later. Such countries are not too poor and not too rich. It is hard to start credit cooperatives or savings banks in places so poor that the economy is not monetized, where there are no pools of philanthropy, or where there is no tradition of formal legal institutions. On the other hand, economic success is the natural, happy enemy of financial services for the poor. Thus the generation of Americans who participated in the microfinance revolution beginning in the 1970s never crossed paths with “industrial banking.” Similarly did affluence bring the ultimate end to the Irish loan system in the 1960s and force the credit unions and insurance companies to turn conventional and move upstream.96 Today, Raiffeisen, Desjardins, Prudential, and Metropolitan Life are all household names in their respective countries—names, that is, of conventional institutions no longer delivering stripped-down services to the poor. This observation at once helps explain why so much of the history was forgotten and why developing countries have seen an upsurge in financial services for the masses. Roughly speaking, as developing countries emulate the economic history of today's rich nations, they are emulating its financial history, too. One might even say that the microfinance revolution was inevitable.
Finally, if history makes obvious that economic success affects the use of financial services, its verdict is muted on whether delivering financial services to the poor reduces their poverty. Thomas Dichter, a longtime evaluator of microfinance programs, has pointed out that no country that is today rich got that way through tiny loans for people with tiny incomes.97 The robustly developed Irish loan funds of the 1840s were helpless against the onslaught of the Great Famine. Only broad industrialization consigned famine in Ireland to the history books. This does not mean that today's microfinance does no good—we just concluded that the need for such services is universal—but it does suggest that microfinance is rarely transformational. Fundamentally, the kind of economic transformation that ends poverty involves combining labor and capital in ways that do not happen within poor households.
It would be overly dire in reviewing microfinance's past to conclude that those who do not learn from history are doomed to repeat it. The new microfinance practitioners may have largely forgotten the history, but they have taken inspiration from the past more than they realize (as we will see in chapter 4). And they have repeated the successes at least as much as any failures. A fairer caution is that the historical amnesia has fostered a simplistic popular understanding of modern microfinance as a novel solution to poverty that bypasses government. More accurately, it is ancient in lineage; it often involves the government as regulator or administrator; it is more likely to be eclipsed by affluence than to cause it; and it meets a universal need for ways to manage money.
1. Sheridan (1787), 233–34.
2. Piesse (1841), 9.
3. Additional legislation followed in 1836 and 1838.
4. Hollis and Sweetman (1997, 1998a, 1998b); Hollis (2002).
5. Johnson (1781), 428. Johnson's own dictionary defines a “catchpoll” as a “bumbailiff,” a sheriff's deputy who pursues debtors—which, as the etymology of “catchpoll” implies, is about as easy as catching chickens (Johnson 1755).
6. Diaries of Priscilla Wakefield, extract courtesy of Janine McVeagh, Rawene, Hokianga, New Zealand. See David Roodman, “Diary Entries from 1798 on First Savings Bank,” Microfinance Open Book Blog, November 7, 2009 (j.mp/3Aw4HB).
7. Bouman (1979) coined the term, adapting from Geertz's (1962) “rotating credit association.”
8. Seibel (2005), 6.
9. Rutherford (2009a), 53–66; Armendáriz and Morduch (2010), 69–79.
10. Turnell (2009), 13.
11. Cohen (1992), 207–10; Pollux, Onomasticon 8, 144.
12. Brabrook (1898), 43–44.
13. Wilken (2003), 39.
14. Wilken (2003), 31–47.
15. “Friendly Societies,” Encyclopaedia Britannica, 11th ed., vol. 11, 217–23; Brabrook (1898), 43–44.
16. Menning (1993); Toaff (2004).
17. Jordan (1959), 266–67; Jordan (1962), 142.
18. Lawson (1850), 421.
19. Proverbs 11:15, New English Bible, 686, 675.
20. Chambers (1830), 344.
21. Wolff (1896), 65–66.
22. Lawson (1850), 421.
23. Wolff (1896), 66, quoting one Mr. Fowler.
24. Bernard (1798), 265.
25. Glasse (1798), 140; Bouyer (1798), 204.
26. Burdon (1798), 10.
27. Wolff (1896), 31.
28. “Friendly Societies,” Encyclopaedia Britannica, 11th ed., vol. 11, 217–23.
29. Dennett (1998), 5–8.
30. “Friendly Societies,” Encyclopaedia Britannica, 11th ed., vol. 11, 220.
31. Hollis and Sweetman (1997, 1998a, 1998b); Hollis (2002).
32. “Building Societies,” Encyclopaedia Britannica, 11th ed., vol. 4, 766.
33. Defoe (1697).
34. “Savings Banks,” Encyclopaedia Britannica, 11th ed., vol. 24, 243.
35. Keyes (1876), 16.
36. Bentham (1843 [1797]), 410–23.
37. Malthus (1809 [1807]), 474–75.
38. Janine McVeagh, biographer of Wakefield, New Zealand, e-mail to author, November 10, 2009.
39. Wakefield (1802), 145.
40. Horne (1947), 26.
41. Wakefield (1805), 210.
42. Diaries of Priscilla Wakefield, extract courtesy of Janine McVeagh, Rawene, Hokianga, New Zealand. See David Roodman, “Diary Entries from 1798 on First Savings Bank,” Microfinance Open Book Blog, November 7, 2009 (j.mp/3Aw4HB).
43. Horne (1947), 39–70.
44. “Publications on Parish or Savings Banks,” Edinburgh Review, June–October 1815, 146.
45. Horne (1947), 388–89.
46. Horne (1947), 89–91; Keyes (1876); Tilly (1994), 305; Townsend (1878), 44.
47. Steinwand (2001), 54.
48. Horne (1947), 388–92.
49. Dennett (1998), 8–9.
50. Dennett (1998), 39.
51. Dennett (1998), 12, 48–50. Quote from Dennett (1998), 48. Proneness to fraud from Hoffman (1900), 95.
52. Dennett (1998), 107–08.
53. Tucker (1922), 12.
54. Yunus (2010).
55. Tucker (1922), 12–14, 20.
56. Tucker (1922), 17.
57. Tucker (1922), 18.
58. Tucker (1922), 45–48.
59. Tucker (1922), 45–48.
60. Quote appears in Herrick and Ingalls (1914), 272–74.
61. Quote appears in Herrick and Ingalls (1914), 272.
62. Wolff (1896), 75.
63. Tucker (1922), 231.
64. Wolff (1896), 115–18.
65. Moody and Fite (1971), 9–13.
66. Steinwand (2001), 57.
67. Tucker (1992), 211–21.
68. Tucker (1992), 234.
69. Guinnane (1994) discusses the failure of credit cooperatives in Ireland.
70. Wolff (1927), 68.
71. Gourlay (1906), 217–18.
72. Armendáriz and Morduch (2010), 80.
73. Wolff (1927), 83. See also Rutherford (2009b), 27–28.
74. Turnell (2005), 17–19.
75. Keyes (1876), 38–40.
76. Dexter (1900), 41–69.
77. “Friendly Societies,” Encyclopaedia Britannica, 11th ed., vol. 11, 217–23.
78. Hoffman (1900), 57, 132, 285.
79. MetLife, “MetLife Begins” (www.metlife.com/about/corporate-profile/metlife-history/metlife-begins/index.html).
80. Filene (1907), 20–31.
81. Moody and Fite (1971), 16–17, 26–30.
82. Moody and Fite (1971), 18–52, 359.
83. WOCCU (2010).
84. Interest rate from Fisher (1929). Role of foundation from Carruthers, Guinnane, and Lee (2005).
85. Universal Savings Corporation v. Morris Plan Company of New York et al., The Federal Reporter 234, September–October 1916 (St. Paul: West Publishing, 382–86). The link between the European examples, especially Scottish cash credit, and the Morris Plan is not certain but seems very likely. In his history, Herzog (1928, 13) intimates the link; Stein claimed to have first developed the system in 1898, five years after the publication of Wolff's People's Banks, which Stein and Morris would almost certainly have read as they pondered how to bring credit to the masses.
86. Saulnier (1940), 87.
87. Moody and Fite (1971), 64.
88. Desjardins's remark could slip unnoticed into modern debating forums. Yunus, for example, has defined “microfinance” to exclude for-profit, investor-owned lending. See Clinton Global Initiative panel discussion, September 28, 2010 (j.mp/dWhuM9).
89. Mushinski and Phillips (2008).
90. Cleveland and Huertas (1985), 118–21.
91. May 5, 1928.
92. Today, the Bank Rakyat Indonesia's unit desas system is an even better example of a public agency operating like a private one. See chapter 4.
93. “Friendly Societies,” Encyclopaedia Britannica, 11th ed., vol. 11, 218–21; Hollis and Sweetman (2001), 297–303; Horne (1947), 39–70.
94. Herzog (1928).
95. Hollis and Sweetman (2001), 303–05; Tucker (1922), 92.
96. Hollis (2002), 13; Seibel (2005), 3–4.
97. Dichter (2007).