I took a class in college called Regional Economics, and it explained how communities trade goods and services with each other in the same way we think of countries trading in international economics. Each community has something to offer to the rest of the country, or even the rest of the world. It also suggests that if a community lacks anything to export, it might die. Maybe.
The class also focused on an interesting argument that is analogous to the classic phrase “which came first, the chicken or the egg?” You see, economists couldn’t seem to figure out if jobs attracted people to communities, or if people attracted jobs to communities. It turns out, a lot of research indicates both are true. Jobs chase people, and people chase jobs. So economic development feeds on itself, which is also the idea behind the “multiplier” effect.
People working and earning money creates more jobs for other people. If someone is getting paid to work, that person will then want to spend their money at a restaurant or a retail shop, which means someone else will need to fill a job at a restaurant or department store.
These economic effects often depend very heavily on the assumption that people have access to credit. Those jobs at the restaurant or retail shop may never come to fruition unless there is a local lender who is willing to provide a loan to open these businesses. I am not suggesting lenders should lend money simply because people ask for it, but they may carry some responsibilities as trustees of their community by assuring credit is available.
Having examined banks in small towns across South Dakota, I can tell you that the local bank or credit union can have a huge impact on the vitality of their community. I have seen dying communities, and typically, there is a scrooge of a banker nearby. Bankers who refuse to take any risk will hoard deposits and always have any excuse on why they can’t lend to the local business owners. As a result, businesses don’t open, and the town struggles to keep people and services. Likewise, it is amazing to see a small community hold on to what it has, because an innovative lender has found a way to get credit to local businesses and co-ops.
This also provides a good outlet for a credit union’s liquidity as well. Many credit unions, especially in small communities, have too much liquidity. This surplus cash is often kept with correspondents or corporate credit unions, where they receive an exceptionally low interest rate. If these funds were instead lent to small businesses, the credit union might see a yield of 4% or greater on those funds.
Credit unions have done an excellent job at providing consumer loans to their members, but just like banks who accept deposits, they are also trustees who have a responsibility in making sure those deposits are reinvested in the community. That should include helping small businesses, who provide goods, services and jobs in the local community.