There was very little need to borrow money until the early 19th century. The society before that time was agrarian, based on the rhythm of the seasons and the growth of crops, and most family units were self-sufficient in ways that we can only imagine.
Barter was the medium of exchange, there was very little money in circulation, and there weren’t many things you could buy with it. Changes began to come with industrialization, and although the use of money as a medium of exchange became more common, most people were still farmers.
But when crops failed for several years in a row due to a long-term drought in Germany and the surrounding countries, farmers found themselves needing money to buy seed and other necessities. At the same time, unrest and a developing middle class were causing major social changes, and the use of credit became essential. People needed to borrow, but interest rates from money-lenders were so high (50% or more) that once you succumbed to borrowing, you might never get out of debt. And if you were unable to repay your debt, you were considered a criminal and sent to jail.
About that same time, the concept of working together for the good of all was being developed and publicized, and cooperatives were forming for different and diverse reasons. These were similar to the old Guild System that had existed in medieval Europe, but with a new, more democratic emphasis. In 1844 a cooperative was organized by a group of weavers in Rochdale, England to help sell and market their products. In 1852 the first true “credit union” was organized in Germany.
The idea was simple: people would pool their money and make loans to each other at reasonable interest rates. Since these people were all connected in some way (they all lived in one town or they all belonged to one church, etc.) they would be borrowing their own money and that of their friends. The basic principles were:
- Only people who were credit union members could borrow there
- Loans would be made for “prudent and productive” purposes only. (A corollary to this is the credit union mandate to “promote thrift”.)
These basic principles are still the foundation of credit unions today.