Credit unions were a peripheral part of the diverse network of Melbourne's financial institutions. The ideas that motivated the establishment of credit unions had their antecedents in the reaction of small communities in Britain, Germany, the United States and Canada throughout the 19th century to the changes being wrought by the Industrial Revolution. Older ideas of the moral economy encouraged people whose lives were already bound together through shared work or locality to co-operate in buying and selling goods and in matters of credit. Such co-operatives provided an alternative to the anonymous markets and large companies that were coming to dominate economic life. Similar social values were transmitted to Australia and gave rise to a series of co-operative institutions dating from the 1840s such as friendly societies, terminating building societies, societies engaged in selling groceries, provisions and clothing, and rural producer co-operatives, particularly in dairying.
Credit unions emerged much later than these other forms of co-operatives. The first credit union in Australia was established in Melbourne in 1905, the Co-operative Credit Bank of Victoria, whose membership comprised public servants. Principles of co-operation were well entrenched in the civil service as more than 9000 already belonged to the Civil Service Cooperative Society. However, the existence of this first credit union did not persuade others to follow despite the unwillingness of the trading and savings banks to provide personal loans to low-income earners.
Support for credit unions strengthened in the 1930s and 1940s. The awakening of 'social conscience' among the lay community of the Catholic Church, particularly in Melbourne, gave a new role for credit unions as mechanisms for social reform and the creation of religiously motivated self-sustaining communities. The possibility of implementing this new social philosophy was greatly increased in the early 1950s as governments enacted more permissive legislation that facilitated the establishment of credit unions, overriding earlier registration requirements that members shared a common bond based solely on geographic location. The number of societies registered in Victoria rose from eight in 1955 to peak at 221 in 1975, while the membership rose from less than 300 to more than 400 000 in 1983. The overwhelming majority of credit unions up to the mid-1960s were Catholic parish organisations or employees organised at their workplace. Of the latter, the most important credit unions were those formed by teachers in the state education system and workers in the many large public utilities such as the State Electricity Commission.
The growth of credit unions' assets and membership in the 1970s and 1980s was particularly rapid. Their share of assets of all financial institutions rose from negligible to a maximum of nearly 1.5% in 1980. Ironically, the motive for this expansion was not a resurgence of the social philosophies that underlay the rise of the co-operative movement in the 19th century or the social teachings of the Catholic Church in the 1930s and 1940s. Credit unions grew, together with many other non-bank financial institutions, because they were able to compete effectively with banks, whose businesses were still heavily regulated. Lower costs for credit and transactions flowed from the less demanding requirements for capital adequacy and liquidity imposed on credit unions. However, the competitive advantages conferred by lower 'compliance costs' and a special tax status were offset by the lack of economies of scale in back office data processing in what were very small organisations compared to the major banks. As the credit unions became larger organisations through natural growth or amalgamation they lost part of their rationale of co-operation within a closed community with an identity of interest beyond cheaper financial services.
The role of credit unions weakened in the 1990s as the products offered by non-bank financial intermediaries - building societies, friendly societies and credit unions - converged towards a common 'thrift' package that competed with the retail products offered by banks. Credit unions' privileged tax status and freedom from capital requirements were withdrawn. They remained niche providers of financial services whose customers are still linked by the bond of geography or workplace. The bold ideas of the pioneers of credit unions that they would provide an alternative credit system to that offered by commercial banks may not be realised.