American Commission on Rural Credits in Europe : speech in the Senate of the United States, August 14, 1912

Front matter

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Introduction

Since the early part of the nineteenth century European farmers have been struggling against adverse economic conditions. Chief among the difficulties against which they have had to contend has been the competition of new countries of immense territory and virgin soil, which, owing to the improvement in the means of transport, have been able to flood the markets of Europe with agricultural produce. Even in the most perishable products the competition has been severe, for the development of cold storage has enabled them to be brought to Europe from the most distant parts of the world.

To make headway against this competition an economic transformation has been necessary, comparable to the transformation which has taken place in industry. The European farmers have accordingly reorganized not only their technical but their business methods.

The new business methods, which have spread all over Europe and have been adopted even by the new countries (the United States and the British colonies), as well as by Asiatic countries, such as India and Japan, consist in the main in the application of cooperation and mutu¬ ality — combined efforts and the acceptance of mutual obligations — to the various branches of the business of agriculture, of which the following are the most important :

(1) The provision of capital.

(2) The purchase of agricultural requirements.

(3) The preparation and sale of agricultural produce.

(4) Farm insurance.

It is with the application of cooperative and mutual methods to the provision of capital that we are here concerned, and we will endeavor to trace not only the principles of cooperative credit, but the methods in which those principles have been applied in various countries.

The main principle underlying all forms of cooperative credit is that if a group of persons combine to furnish a collective guaranty they can, on the security of that guaranty, obtain money at lower rates of inter¬ est than they could obtain it individually.

The collective guaranty may be that of real property. A number of landowners may obtain capital on the security of a collective mortgage of their lands. This is the basis of German Landschaften, one of the oldest forms of cooperative credit institutions.

Or, again, the collective guaranty may be a personal one. A number of persons may obtain capital by making themselves jointly responsible for its repayment. Such liability may be unlimited or limited.

Unlimited liability is a fundamental part of the Raiffeisen system, but in the Schulze-Delitzsch system the liability of the members of the group is usually limited. Where the members are landowners the col¬ lective personal guaranty becomes indirectly a property guaranty.

Upon such guaranties capital may be obtained in a variety of ways. In Germany the Landschaften issue bonds, but the Raiffeisen banks derive their working capital mainly from the deposits they are able to attract. In France the rural banks depend mainly upon capital advanced by the State. In all countries the credit societies are able to obtain capital from the larger banking institutions or from the investing public, derive their working capital mainly from the deposits they are able to lend it to one another at a rate of interest only slightly in excess of the rate which they pay collectively. This requires two conditions — - ( 1 1 that the expenses of management shall be small in proportion to the business done, and (2) that the risk of loss shall be reduced to a minimum.

Where the business is very large, the expenses are not proportion¬ ately high, even if the undertaking be conducted on ordinary com¬ mercial lines, as we shall see in the case of the Schulze-Delitzsch banks. Where, however, the business is small there must be no attempt to pay high dividends and the management must be largely voluntary. In the banks formed on the Raiffeisen system (which are individually small, though in the aggregate they do an enormous business) the pay ment of dividends is either prohibited altogether, or it is limited to a small percentage, while the management is almost entirely gratuitous.

To reduce the risk of loans to members, many safeguards have been devised which are adopted to varying extents in the different systems.

Where the members are landowners and can give mortgages of their property, it is only necessary to insure that the amount of the loan shall be fully secured by the mortgage, allowing for any possible depreci¬ ation in the value of the property. Loans on mortgage are, however, an inconvenient form of credit, where capital is only required for a com¬ paratively short period, and the following are the principal safeguards for loans' given on personal security:

(1) That loans are only made to members of the group and that only persons known to be trustworthy are admitted.

(2) That membership is confined to persons residing within a small district and that, therefore, the members are personally known to one another.

(3) That the members being mutually responsible, it will be to the interest of all members to keep an eye upon a borrower and to see that he makes proper use of the money lent to him.

(4) That, in like manner, it is to the interest of all members to heip a member when he is in difficulties.

(5) That the borrower is required to find sureties or give other col¬ lateral security for the repayment of the loan.

(0) That the borrower binds himself to apply his loan to a specific purpose which will bring in a monetary return sufficient to enable him to repay the sum borrowed, to pay the interest charged, and to leave a profit for himself.

It is not to be supposed that the whole of these safeguards are adopted in all cases. Loans, for example, are sometimes given on the borrower's mere note of hand, without any collateral security. The fix¬ ing of the application of the loan, again, is most important where the borrowers are small cultivators unaccustomed to commercial methods, and is usually relaxed as their economic education becomes more ad¬ vanced. We thus find it more generally insisted upon by the Raiffeisen banks in Austria and Italy, where they are of more recent introduction than in Germany, where the members have now become familiarized with the commercial uses of credit.

We shall now see how these principles are applied in practice. In the survey which follows of agricultural cooperative credit in various countries we shall begin with Germany, since it was in that country that the three most important forms of cooperative credit — the Raif¬ feisen banks, the Schulze-Delitzsch banks, and the Landschaften — were originated. We shall then deal with Austria and Italy, in which coun¬ tries the systems adopted are mere modifications of the German sys¬ tems, and it will only be necessary for us to indicate in what respects they depart from the German model. Then will follow chapters on France, where cooperative credit is based largely upon an elaborate sys¬ tem of State aid. and Belgium, where we shall note the existence of a form of organization not found in other countries. The last two chapters will relate to Great Britain and Ireland, where cooperative credit is not as yet highly developed, and to British India, where it has been promoted directly by the Government.

CHAPTER I. Rural Banks in Germany — The Raiffeisen System

In the first half of the past century the small farmers and small artisans of Germany, who could not have recourse directly to capi¬ talists or to banks, suffered severely at the hands of the usurers, from whom they procured the credit which was indispensable to the exercise of their business. The seriousness of the situation, rendered more acute by the economic transition which was taking place, and was bringing with it a great and urgent need of credit, was clearly recognized by two men. who have deserved well not only of Germany but of the whole civilized world, by devising and putting into practice the best methods of remedying the evil. These were Frederick William Raiffeisen, bur¬ gomaster of Weyerbuseh, and Francis Frederick Schulze, better known by the name of Schulze-Delitzsch. The former was the originator of the rural cooperative banks, which have spread into all civilized coun¬ tries. the latter of the urban popular hanks.

These two forms of cooperative banks, although somewhat different in their organization, are based on the common fundamental principle of organizing the would-be borrowers themselves in order that they may obtain by combination the credit facilities which they would have sought individually in vain.

Such cooperation has made possible, on the one hand, the collec¬ tion among the members themselves, in the form of shares or of small deposits, of a considerable amount of capital, which serves to supply the credit requirements of their fellow members. On the other hand, the cooperative credit societies, being regularly managed and subject to rigorous supervision, have been able to procure credit on favorable terms from outside sources of capital.

The credit given by the Raiffeisen banks, which are rural in charac¬ ter, and by the Schultze-Delitzsch, which are mainly urban, is usually personal credit. Although they occasionally grant loans on mortgage for long periods, they generally confine themselves to the making of loans for comparatively short periods (in the Raiffeisen banks usually for one year, with a maximum of three or five years ; in the Schulze- Delitzsch banks, three or six months) on personal security or on the security of personal property.

Loans on mortgage for long periods are, however, granted by another type of cooperative credit society, of which we shall have occasion to speak later, viz, the Landschaften and Ritterschaften. These are asso¬ ciations formed by landowners with the object of obtaining credit for land improvement by the issue of mortgage bonds.

We shall describe in this chapter the organization and working of the Raiffeisen banks.

1. ORGANISATION OF THE RURAL BANKS.

The fundamental principles of the Raiffeisen system are :

(1) Unlimited liability of the members.

(2) A restricted area of operations.

(3) Gratuitous management.

To these principles, which he wished to be always applied with the utmost rigor and without allowing any exception, Herr Raiffeisen added a body of moral and educational doctrines.

In addition to the rural banks which follow strictly the Raiffeisen principles, and are combined in a national federation with headquarters at Neuwied (now removed to Berlin), there have also arisen other organizations which, although adopting the fundamental ideas of Raiffeisen, have not accepted the excessive strictness of his rules, and have treated as superfluous the mystical doctrines which he had intro¬ duced into cooperation. The societies of this type, after having long hesitated between a separate organization and the Schulze-Delitzsch Federation, were finally collected under the guidance of William Haas into a separate national federation, which had its headquarters first at Offenbach and then at Darmstadt.

The former of these federations became affiliated to the National Federation in 1904, and to indicate the rapid development of the rural banks we may here state that the number of societies embraced within the National Federation increased from 10,786 in 1904, with a member¬ ship of 954,000 and a total business (incoming and outgoings) of 2,490.000,000 marks (a mark is equivalent to 0.238 dollar or 0.0489 pound sterling), to 12,614 in 1909, with a membership of 1,163,000 and a total business of 4,456,000,000 marks.

Certain differences ( not, however, very serious) continue to exist be¬ tween the pure Raiffeisen banks and the societies established on less strict lines. We shall have occasion to speak of these differences in out¬ lining, as we now proceed to do, the leading features of the organiza¬ tion of the Raiffeisen banks. The statements are based upon the

reports of the National Federation and the figures relate (except where the context otherwise indicates) to the year 1909 and to the 12,614 rural banks embraced within the National Federation in that year.

Membership. — The members are farmers, usually peasant-proprietors. The 12.614 rural banks existing in 1909 numbered in all 1,163,186

members — that is, an average of 92 members per bank. The number

of members per bank varies considerably, however, in different regions, the highest average being in Westphalia, where it reaches 160 members per bank. The minimum number required by the legal constitution of the banks Is 7, and some of the recently-formed banks have exactly this number of members. The highest number of members contained in any one bank is 1.400, hut this is a very exceptional case.

Liability. — The principle maintained by Raiffeisen was that of the unlimited joint and several liability of the members. While for other forms of rural cooperation the system of limited liability is increas¬ ingly adopted, the system of unlimited liability is still regarded in Germany as the system best adapted to rural cooperative credit. Of the banks existing in Germany 92 per cent are based upon unlimited liability and about 8 per cent upon limited liability. A fractional per¬ centage of the banks were based upon an ntermedlate system, known as the system of unlimited liability to make supplementary payments.

Shares. — Raiffeisen commenced by excluding shares altogether. In order to avoid any danger of capitalistic speculation and, in fact, up to 1876 none of his banks had shares.

56959—11393

Being obliged in that year to comply with the imperial law which compelled cooperative societies to have foundation capital, he sought to evade the law as far as possible and fixed the shares at a maximum value of 10 marks. The Darmstadt Federation, on the other hand, recommended comparatively large shares, but in no case higher than 500 marks. In very few cases, however, does the value of the share exceed 100 marks.

In 1909 the average paid-up capital per member amounted to 19 marks. But in this regard also there are great differences as between different regions. The necessity of forming a foundation capital is, In fact, not so great in the case of the exclusively agricultural banks, the operations of which are guaranteed by the lands of the members, as in the case of banks which can only offer -i personal guaranty.

Thus in Rhenish Prussia and Hesse, which are mainly industrial, the average paid-up share capital is respectively 103 and 86 marks, while on the other band, the average is lowest in other regions, such as Westphalia and Oldenburg, where it hardly reaches 4 or 6 marks.

In the societies where the liability is unlimited a member can not take more than one share; in societies with limited liability, however, ha may taken many. The value of the shares and, in the latter case, also tlieir number, are fixed by the rules. The shares are repayable to the members upon withdrawal from the society, and interest is paid upon them at a rate which must not in anv case exceed the interest which borrowers pay upon loans from the society.

Entrance fees. — The pure Raiffeisen system does not admit of any entrance fees, as being contrary to the lofty conceptions of mutual responsibility which inspired Raiffeisen's propaganda. Raiffeisen wished that his banks should be open to anyone who required to have recourse to them. The Darmstadt Federation, however, allows small entrance fees, which are immediately carried to the reserve fund.

Area of operations. — Another fundamental principle of the Raiffeisen system is that the area of operations should he limited to a commune or a parish. The system of the rural hanks is, in fact, founded on mutual confidence and collective liability ; the members must not only know each other personally but must also be able to see from day to day the manner in which their money is employed.

Management. — The organization of the rural banks being, so to speak, familiar and friendly, their management is very simple. The administrative functions are divided between the committee of man¬ agement, the council of supervision, and the general meeting. The executive work is carried out by the treasurer, who is often the only employee of the bank, and in any case is responsible for the work of the other employees.

The general meeting appoints the committee of management, the council of supervision, and the treasurer. The conduct of the business is intrusted to the committee of management, upon which often sit the best educated persons of the district, such as the schoolmasters or priests ; for these, however, actual farmers are being more and more substituted.

The committee of management usually give their services gratui¬ tously. This, too, is one of the principles of the pure Raiffeisenism, which, however, permits in any case the remuneration of the treas¬ urer. The Darmstadt Federation also allows the committeemen to be paid for their services when the business of the bank is fairly large.

In 1909 the expenses of management amounted, on the average, to the modest sum of 638 marks per bank. Here, too, one finds marked differences between the various federations. In Ermland, in East ITussia. and in West Prussia the average expenses of management are rather high, ranging from 1.200 to 1,400 marks. The lowest average is found in the Upper Palatinate, where it is 244 marks. If again we consider the general expenses in proportion to the total business done (i. e., the sum of the incomings and outgoings), we find an average percentage of 0.18, with a maximum of 0.53 per cent in the Nassau Federation (Frankfort on the Main) and a minimum of 0.04 per cent in Schleswig-Holstein.

2. THE BUSINESS OF THE RURAL BANKS.

Let us now examine first the sources from which the rural banks draw their working capital and then the methods of advancing the capital so obtained to their own members. We shall thus follow the complete cycle according to which the business of the rural banks is conducted.

Working capital. — The capital which the banks have at their dis¬ posal for making loans to their members is composed of the shares paid up by the members, the reserve lund accumulated in previous years, the savings deposits and deposits on current account, and, lastly, the sums which the bank procures by means of loans from central cooperative banks, other banks, or private individuals.

In the balance sheet, the working capital is approximately the same as the total liabilities. It is true that in the total liabilities are also included items, such as bills issued, which appear in equal amounts on both sides of the balance sheet, and figures relating to certain opera¬ tions (e. g., property deposited, payments, etc.) which are not part of the capital at the disposal of the bank. However, not being able to eliminate such items, and taking into consideration that they are comparatively unimportant in the case of the rural banks, we can consider the" working capital as being roughly equivalent to the total liabilities.

The total liabilities amounted in 1909, for the whole of the German Empire, to 1,900,000,000 marks, being an average of 153,000 marks per bank and 1,664 marks per member. These averages varied between rather wide extremes. The average per bank reached almost half a million marks in the Ermland Federation, while it was as low as 67.000 marks in the Grand Duchy of Baden. The average per member was highest in Rhenish Prussia (the Bonn Federation), where it reached 3,000 marks, and lowest in the Grand Duchy of Baden, where it was 700 marks.

Let us now analyze the total working capital according to the items which compose it :

Marks.

Percent¬ age of the total.

1.2

95.2

11.2

Total working capital .

‘ 1.935,523,262

100.0

Under the head of “ Other liabilities ” are included, besides other items, the sums which the banks have procured by loans from banks and individual capitalists.

The share capital together with the reserve funds form the banks’ own capital ; the remainder is capital from outside sources. Following this simpler classification we find that the former amounts to 73,339,502 marks, or 3.8 per cent of the total, and the latter to 1,862,183,760 marks, or 96.2 per cent.

These figures suggest some interesting considerations. We see, first of ail, that the rural banks succeed in carrying on an enormous busi¬ ness on the foundation of an extremely slender capital. The current accounts and savings deposits furnish, however, the greater part of the working capital, viz, 85 per cent of the total. As against this the loans from third parties only form a relatively small figure, which demonstrates the capacity of the rural banks to provide, for the most part, by the ordinary means, for their operations without having re¬ course, to too great an extent, to loans from outsiders. Out of nearly 2,000,000,000 marks placed at the disposal of the farmers, only 11.2 per cent was furnished by outsiders, while 88.8 per cent was provided by the savings and deposits of the farmers themselves or of the local public.

To the capital of the society we have referred when speaking of the shares; of the reserve fund we shall speak when dealing with the distribution of the profit. We need only remark here that the capital obtained from outside sources is twenty-five times as large as the soci¬ eties' own capital (share capital and reserve). This proposition is gen¬ erally considered too high. There is a tendency, therefore, at present to increase the value of the shares, raising it to 50 or 100 marks, in order to provide the rural banks with a wider margin to cover possible fluctuations in the deposits.

In regard to the deposits it should be noted that savings deposits may be made either by members or by nonmembers, but that deposits on current account can only be made by members. In 1909 the savings deposits averaged 115,000 marks per bank. In the various federations this average reached a maximum of 447,000 marks in the Ermland Federation and was lowest in Federation of Alsace-Lorraine, where it was 43,000 marks. The averages of the deposits on current ac¬ count were lower, being 22,905 marks per bank and 247 marks per member The highest averages were found in the Grand Duchy of Hesse, viz, 84,466 marks per bank and 684 marks per member, and the lowest in the Federation of Posen (No. II) and in the Raiffeisen Federation of Alsace-Lorraine, being, respectively, 4,398 marks and 4,643 marks per bank and 49 marks and 27 marks per member.

We have said that 11 per cent of the working capital is drawn from outside sources. These include the central cooperative banks, the bank¬ ing institutions, and the private individuals with whom the rural banks contract debts by means of banking operations. Since the de¬ velopment of the central banks, however, the business of this kind with other banks or with private individuals has greatly diminished. It will be more convenient to speak of the business done with the cen¬ tral banks when we are dealing with these latter, but we may here re¬ mark that since the working capital of the central banks is formed to a large extent by the funds received from the local rural banks the proportion of the money provided by the farmers themselves to be em¬ ployed in loans for the benefit of agriculture is really even larger than would appear from the figures previously given.

The granting of loans, etc. — The business of the banks consists, for the most part, in making advances to members. Surplus money is de¬ posited with the central banks or invested in banking operations with third parties. With regard to the loans to members, we will speak first of their character and then of the security upon which they are made.

The rural banks make loans of two kinds, viz, loans on current ac¬ count and loans for fixed periods. At the end of 1909 the loans to the members outstanding were thus classified :

Marks.

Percent¬ age of total.

Loans on current account .

28.3

71.7

Loans for fixed periods .

Total loans outstanding .

100.0

The loans on current account were, therefore, about a third of the total loans. In all the banks there is a tendency to extend the practice of giving loans on current account. This is generally the most con¬ venient form of loan for the members, for whom the small rural bank serves as banker, just as the great banking institutions do for the merchants and manufacturers of the city. But this form of loan re¬ quires a higher economic education in the members and more advanced social conditions.

The members guarantee the fulfillment of their obligations to the bank by finding sureties, by the deposit of valuables (share certificates, etc.), by giving a mortgage or by their mere promise. The finding of sureties is the form of security usually preferred.

The period of the loans varies from six months to two or three years and even more in exceptional cases.

Various other arrangements have been thought out to diminish the risk of the loans granted by the rural banks. Thus, for example, the law relating to cooperative societies lays it down that the general meeting shall fix the maximum limit beyond which loans must not be made to the members, whatever may be their financial position or whatever the security offered.

The principal safeguard, however, for the success of the rural banks lies in their very constitution. The limited area of operations and the nature of rural life make it possible for each member to keep an eye upon the affairs of his fellow members, in which, moreover, he is directly interested, so that he can easily judge at any moment of their solvency and of the manner in which they are utilizing the money obtained from the bank.

Profits. — The object of the rural banks is to give credit to their members on favorable terms and not to make a commercial profit.

The Raiffeisen system, accordingly, does not admit of any distribu¬ tion of dividend, all the profits realized being carried to the reserve fund or to the creation of institutions of public utility. The Darmstadt Federation, on the other hand, allows a distribution of dividend on the shares, which, however, must not exceed the maximum rate of interest charged to borrowers.

66959—11393

In 1909 the net profit realized by the rural banks was more than 7,000,000 marks. This is sufficient evidence of the flourishing condition of these institutions. Of this enormous profit only a small fraction was distributed as dividend. Ir no case, in fact, did the dividends distributed exceed 4 per cent of the paid-up shares, and in manv cases no dividends at ail were distributed. In this manner the banks are continually strengthening their financial position. This is demon¬ strated by the steady increase of the reserve funds. In a single year, from 1908 to 1909, the aggregate reserve fund was increased by 7,000,- 000 marks, while the profits realized at the end of 1908 were about 8,000,000 francs. Thus seven-eighths — that is, 87 per cent — of the profits made in that year were carried to the reserve.

S. STATISTICS OF THE RURAL BANKS.

The following statistics will show, better than it can otherwise be indicated, the great development in Germany of the rural banks, which were so modestly initiated in 1862.

We give first a table relating to the number of banks legally estab¬ lished in Germany, as shown by their registration in the Gazette of the Empire.

Table I. — Number of rural banks in Germany on June 1 in each year from 1890 to 1910.

Number.

1890 _ 1, 729

1891 - 2, 134

1892 _ 2. 647

1893 - 3, 040

1894 - 3, 850

1895 - - - 4, 872

1896 - - - 6, 391

1897 - 7, 612

1898 - 8, 595

1899 _ 9, 208

1900 - 9, 793

1901 - 10,487

1903 - 11, 750

1904 _ _ _ 12, 477

1905 - 13. 181

1900 _ 13, 635

1907 _ 14,096

1908 - 14, 709

1909 _ 15, 158

1910 _ 15. 517

We now give some figures showing the business done by the 12.614 rural banks embraced in the National Federation in 1909. It should be noted that while the figures in the preceding table are derived from information which the societies are bound by law to publish, the fol¬ lowing figures are privately collected by the federations (of which we shall give an account presently), and more particularly by the Na¬ tional Federation.

Table II. — Business done by the rural banks in 1909.

Aggregate

figures.

Average per bank.

Number of banks of which particulars are given .

12,614 1, 163, 186

Marks.

2 901,227,744

Total business done (incomings and outgoings) .

Deposits in hand at end of year .

Loans outstanding at end of year .

Loans granted during the year .

4. THE FEDERATIONS AND CENTRAL INSTITUTIONS OF THE RURAL BANKS.

(We adopt here a distinction which is not in general use in English. The word “ federation ” will be employed to indicate a central organi¬ zation of cooperative societies for such purposes as propaganda, educa¬ tion, supervision, and mutual defense. By “ central institution ” we shall mean a central organization of cooperative societies for business purposes. )

The rural banks felt from the beginning the need of combination amongst themselves for common purposes. The need was twofold. On the one hand, a common organization was required to direct the move¬ ment and to give it uniformity ; on the other hand, there was need of central institutions which might equalize the need of credit of the indi¬ vidual banks, supplying them with money when required and employing their surplus funds.

For the first of these objects the federations were formed ; for the sec¬ ond, the central institutions.

(a I The federations. — The federations of cooperative societies are unions formed for propaganda, education, and mutual defense. They embrace not only rural credit societies, but rural cooperative societies of every kind.