German Coöperative Credit-Unions
No healthy social science ever came before the public with plans which were to render labor, energy, and mental exertion unnecessary. Even if it were possible, no sound political economy would desire to make the struggle for existence less earnest. Social reforms, however, have the object of dividing material goods — and the spiritual ones to which the first serve as a necessary basis — more in proportion to useful intellectual and physical labor performed, and less in accordance to inheritance, privilege, and class ; of easing the contest for the means of subsistence in some places, and giving it a better prospect of success; of rendering it really earnest in others.
Such is the aim of the credit-unions, founded and managed by a warm-hearted humanitarian for the purpose of elevating the moral and material welfare of entire classes of society. They are not charitable institutions. On the contrary, one main object is to render laborers and tradesmen independent; to give them such a consciousness of their own dignity as men as shall make them scorn charity. Their watch-word is “selfhelp ; ” the principle upon which they are based is “ that man has received from nature not only wants, but also powers, the proper use of which gives him the means of satisfying his wants.” Schulze-Delitzsch comes repeatedly back to this fundamental proposition, and is unable to.value too highly a manly selfreliance. “ We wish no aid from the state,” cries he, “ we desire no public subventions ! Let us alone. Give us freedom and the liberty of managing our own affairs, and we ask no further assistance.” Schulze-Delitzsch does not decry generosity and the doctrine of human “ brotherhood.” These are noble principles of our nature, and useful in relieving individual cases of distress. He contends, nevertheless, that where classes of the people are concerned, charity, whether public or private, is powerless. Instead of strengthening, it weakens; instead of elevating the character of the recipients of its benefits, it debases it. Coöperative associations. rightly understood, have a far weightier mission than that of relieving dependent poverty, namely, that of preventing it.
The Schulze-Delitzsch credit-unions presuppose two economic propositions : (1.) Wealth tends to accumulate in a few hands. (2.) A proper use of credit is of assistance in operating against this tendency, politically and economically injurious. Some writers are inclined to dispute these propositions, although modern political economists of note appear to be as unanimous in assenting to the first as in defending the value of credit.
It would seem that the careful student of history, as well as the close observer of his own times, ought to have little doubt that wealth has a dangerous tendency to accumulate. From the era of Lycurgus up to our own times, legislators have had to occupy themselves more or less with measures to prevent this. It is certain that concentration of property in a few hands had much to do with Rome’s corruption and final fall. The agrarian laws did not prove sufficient to maintain a middle class, — the stronghold of freedom, “ in which are generally to be found all the arts, wisdom, and virtues of society.” We must remember that that is a wrong view of political economy which confines it to the treatment of ways proper to increase national wealth. The increase of national wealth is by no means necessarily a blessing. It can become also a curse to a country. By flowing into the hands of the few, it may make the rest of the citizens their dependents, and to a certain extent, de facto, their slaves. Legislation has to be conducted with great shrewdness to operate against too vast an accumulation of wealth. This may be brought about by directly opposite causes. In England primogeniture has favored it; in Westphalia an equal distribution of property among the children. The farms in W estphalia have become so small, in a large number of cases, as to make a further division impracticable : upon the death of the father, the land must be sold to give each child its share ; the consequence is, some large proprietor “ rounds out " his great estate by buying the little farm which formerly nourished a humble but contented peasant family. Other examples are not difficult to be found. Let us turn our attention to the city. Hackney coaches do a considerable business in large towns. A has five coaches and horses, B one. One of A’s horses dies, and a coach is smashed by a runaway. A has credit, buys a new horse and coach, his family avoid unnecessary expense for six months, and he is as fortunate as ever. At this juncture, B’s one horse falls, breaks his leg, and must be shot. The poor man has no credit to enable him to purchase another, and is obliged to sell his hack to A in order to pay a small mortgage still remaining on it. A at once buys another horse, and B steps down into the class of day laborers. These are not fanciful examples. Any observant man sees such cases happening continually. The inventions and technical progress of the last few decades, though in themselves blessings, have been unfortunate in strengthening the natural tendency we have described. The means of communication, the transport of goods and passengers, formerly supported in every large country thousands of independent men, too rich to become the clients of the great, too poor to domineer over others. In countries like England and America, where railroads are managed by private parties, a few men of enormous wealth and power, with an army of subalterns, have taken their place. Similar movements have been accomplished in nearly all industries.
The tendency of our time is to conduct all business on a large scale, and crush out the “ small man.” Technical progress and the modern means of communication require increased stock in trades and commerce. A high preparatory education, increased skill, and large capital are now the elements of success. The credit-unions aim at preserving the independent existence of as many of the poorer classes as possible.
But how is credit to accomplish this ? asks some one. There are those who condemn all credit as injurious. If we are not mistaken, this was the opinion of the late Horace Greeley. His repeated advice to any and every body was, under all circumstances, to avoid debt as the pest. It caused him an inward groan to relate that a person who should walk down Broadway, and ask the men he met if they wished a loan of ten thousand dollars, would receive an affirmative answer from nine out of ten. But such views result from too narrow a consideration of national and private economy. Credit, when rightly managed, is of immense benefit to a community, and its development is a mark of economic progress. One highly celebrated German economist, the late Professor Hildebrand, was so impressed with the importance and utility of credit that he divided the economic development of a people into three stadia, as follows : In the first, barter and truck prevail, — barter and truck economy; in the second, payment in money, — money economy ; in the third, credit pushes aside, to a great extent, the employment of the precious metals as money, — the credit economy. We consider that this division contains scientific errors, but we will not busy ourselves with them at present. It serves to show the weight that a distinguished scientist attached to credit; which is nothing other than a commercial transaction, in which the service or performance (Leistung) of the one falls in the present, the counter-service (Gegenleistung)of the other in the future.1 We will point out the main benefits to be derived from a use of credit, following the order in which they are given by Professor Conrad, of Halle, in his lectures on Political Economy : (1.) Credit fur-
nishes a more perfect and convenient means of payment in large sums and between distant places than the precious metals, saving time and labor. This is effected by means of notes, checks, and bills of exchange. (2.) Credit takes the place of corresponding amounts of gold and silver. This is a saving, as it enables us to employ the precious metals for other useful purposes. (3.) Capital is employed more productively. He who possesses capital, but is for any reason unable to make use of it, transfers it to another for a compensation, to the benefit of both, as well as that of the public economy. It is given, cœteris paribus, to him who is ready to pay the highest price for its use; that is, in general, to him who can employ it most productively. (4.) The laborers, artisans, and traders, although unprovided with means of their own, may by the use of credit obtain capital to assist them in their labors, and that without sacrificing their independence. This point is to be particularly borne in mind as of especial weight in judging the credit-unions. Credit is thus of importance in avoiding that separation of capital and labor which excites so much bad feeling, and which forebodes danger to modern civilization. (5.) Credit gathers together the smallest sums, which, by means of joint-stock companies and otherwise, are economically employed. Capital is concentrated, but its returns are disseminated among the people, — politically, a weighty point. (6.) The possibility of employing every sum, however minute, urges people on to saving. (7.) Credit binds together the interests of those having dealings with one another. Under a highly developed system of credit economy, it is the interest of each to show himself worthy of trust; this can be of advantage in the moral education of a people. (8.) It enables men to save for their old age, and make provision for their families in case of their death. Were there no such thing as credit, the best one could do would be to heap up, and then consume afterwards, the capital gathered together. (9.) Capital, when obtained under favorable circumstances, yields a larger return than the interest. Were it otherwise, borrowing, except in case of special need and distress, would cease. The prudent and skillful laborer, who can command credit, is thus enabled to obtain, besides his wages, a surplus from the use of the capital.2 “ Credit, WELL USED, is therefore economically as productive as a favorable climate, or a high education of a people.”
The dangers of the credit-economy are not to be underestimated. Temptation to indulge in a disproportioned consumption and to undertake precarious speculation may be mentioned. There is also danger of the rich man’s acquiring a still greater preponderance over the poor by a more extensive use of credit. The credit-unions are especially directed against the last-mentioned misfortune of the credit economy. A slight inquiry will show that banks and the other ordinary resources by means of which the rich obtain credit do not exist for the poor. What does the mechanic, with a small shop in some little town, know of the money market and its ways ? He is ill-acquainted with these things, and were he perfectly familiar with them would not be able to employ them for his purposes. The expenses of a journey to a money centre would often equal a third or a fourth of all he needed; and on arriving there, he would find himself unprovided with security which, would be accepted, even though those acquainted with his affairs might know that he was good for ten times the amount desired. This is also true, in a higher degree, of ordinary laborers. Generally, these “ little people ” have to get on as best they can without the use of credit, however necessary and profitable it might be to them, or have recourse to a usurer ; and in every small town, and great one too, will be found men who live by bleeding such people. Usury laws have too often proved themselves of little worth. In Germany they were abolished in 1867. Before this time, and before Dr. Schulze founded the first union in Delitzsch, in 1850, the interest which tradesmen in that town were obliged to pay was enormous, and a refutation to those who would have us think usury an unreality, an illusion ! One tradesman, who had a lively little business in Delitzsch, wished to borrow fifty thalers ($37.50) for a few days, to make purchases at the Leipzig fair. He was obliged to pay an interest of one thaler a day, or an annual interest of seven hundred and thirty per cent. SchulzeDelitzsch reports that inquiry among small dealers and laborers has shown him that an interest of one thaler a month for a loan of twenty thalers was common enough, —an interest of sixty per cent. per annum.
The success of the credit-unions shows conclusively that they supply a need which was felt. Less than thirty years ago Dr. Schulze founded the first one in the provincial town of Delitzsch, in the province of Saxony. In 1851, the year after, two men, who have done much for the welfare of their fellows, Dr. Bernhardi and the tailor Bürmann, founded a second in the neighboring city of Eilenburg; the third was established in 1853, in Zörtig ; in the next two years, four more were founded in various places. These seven unions flourishing, Dr. Schulze published the first edition of his work, Vorschussund Creditvereine als Yolksbanken, in 1856. The idea took at once, and they have been spreading all over Germany since that time. In his annual report for 1878, SchulzeDelitzsch was able to mention the names and the locations of 1841 credit-unions. Full reports were made to him, as the representative of their interests, by 940 unions. These unions had, at the termination of the year 1878, 480,507 members, and had made loans during the same year to the amount of 1,456,003,733 marks.1
The want of people’s banks was so keenly felt that numbers were established, especially in the larger cities, about the year 1848, in response to the cry for such institutions. They did not prosper. Some soon closed up ; others led a miserable existence, wavering between life and death. The cause was the false foundation upon which they were built, namely, that of charity. Wealthy people, of good intentions, lent the money necessary for conducting the business. There was not always a sufficient examination into the ability of the receiver of the loan to repay what had been lent him, nor, indeed, did he in all cases think it incumbent upon him to pay at the appointed time. Money was lost. Those who should have been grateful for assistance received found themselves often disappointed in their expectations, and demanded increased loans of their patrons, or loaded them with reproaches. In short, universal discontent reigned on all sides. Germany’s experience has demonstrated, says Schulze-Delitzsch, that institutions of this character which are to possess life must stand on their own feet, demanding neither private nor public charity.
Schulze-Delitzsch, therefore, in establishing the unions which bear his name, proceeded from the stand-point that the greatest service those whose position in life has given them the advantage of greater intellectual development can render to the laboring classes is to teach them to grasp the means of selfhelp which lie within their reach, and to strengthen their trust in their own power (ihr Selbstgefühl zu stärken). These unions find their strength in the power of organization. The motto adopted is the French one : Un pour tons, tous pour un. In other words, they are founded on the principle of the full liability of each and every member for all debts of the association. The security offered is a different one from that recognized usually in business circles ; it is in considerable degree personal. One laborer alone, have he a project never so sure of success, and be he never so skillful himself, is not able to borrow money from capitalists, least of all from banks, unless he can pledge property, easily realizable, to more than the full amount; if he does not do it, some friend is obliged to do it for him, or he must be deprived of the use of credit. If several artisans and laborers, however, each having need of credit, bind themselves together in such a way as to be unitedly responsible for the debt of all, a capitalist can well afford to lend them money. He can calculate upon the theory of probabilities, as the life insurance companies do. If they are ordinarily clever men, — and provision is made for that in the credit-unions, as we shall see hereafter, — a certain per cent are bound to succeed well enough to pay any reasonable loan made to all. Some might be inclined to smile at such an investment as dangerous, but the plan has worked brilliantly in Germany.
It is doubtful if, in America, any one kind of business can show so small a proportionate number of failures as the cooperative German unions. Yet these unions have provided the poor and propertyless with credit. Their good name has grown, and more money has often been offered them, at low rates of interest, — they pay on an average about four and a half per cent per annum, — than they could use. In places where they have been established, the unions have made all those worthy of credit able to oh tain i t (creditwürdig, creditfähig). Instead of charging interest varying from fifty to seven hundred per cent., they have lent money to the “little ” man at rates varying from six to ten per cent. — as for example in rare cases, to defray the expense of starting a new bank, the rate has been eleven per cent. One chief element in the organization of creditunions is, therefore, the full liability of all members. The second is a saving and formation of capital by the members. They must become share-holders. No one can become a member of a credit-union without purchasing shares in the business. A majority of those, however, for whom the associations are designed are unable to purchase their shares at once; accordingly, they are sold on part payments, each of which is so small that the ordinary laborer can spare the sum. Thus in a few years it happens that a large part of the stock of the banks belongs to the members. The calculation is that each member shall buy shares to the amount of fifty to one hundred thalers. As Germany is a poor country and wages low, the corresponding minimum for the United States ought to be, at least, one hundred dollars. This may be considered insignificant, but it is not to be forgotten that a main point to encourage in saving is to create a taste for it. A large part of those who join the unions never before had so much capital in their possession ; in fact, never before had any capital which was yielding a revenue and accumulating.
In cultivating a habit of providing for the future, the importance of the first step cannot be overestimated. The selfrespect and importance of the laborers are raised as soon as they become, even in a small way, capitalists. The feeling that they are members of a large and powerful institution has been found to help wonderfully. This may be called sentiment, but as it is, like many other sentiments, a reality and a power for good, that is no objection. Very many can be led to save only by such powerful motives as the associations offer, inasmuch as the shares are made a source of gain, and credit can be obtained by the most only by becoming members. It is touching to read of the race in saving which sometimes takes place between the members of the creditunions after they have become fairly started, particularly after the first dividends have been declared. The poor strive to keep up with those better circumstanced by the most rigorous economy, by cutting off every unnecessary expense. The unions thus become savings-banks and render the pawn shops unnecessary for its members.
The principal items to be taken account of in considering the coöperative credit-unions are : —
(1.) The seekers of loans are in general members and managers of the institution which is to supply them with credit ; they have a decisive voice in the administration; the profit and loss are alike shared by them.
(2.) The monetary transactions are conducted on business principles, as in banks, — service for counter - service ; those who lend money to the union receive the usual interest; those who borrow pay the market rate for the loans ; the directors and other officials receive salaries which correspond to their positions.
(3.) The members buy shares at once, or by means of payments in small sums from time to time. The shares furnish the standard for the distribution of the dividends ; the latter are often added to the money paid for the shares. Dividends and shares thus build a continually increasing capital stock.
(4.) The money, apart from its own capital stock, which the union needs for conducting its business is borrowed. All members are fully liable for the amount.
THE LEGAL REQUIREMENTS FOR ESTABLISHING CREDIT-UNIONS IN GERMANY.
We give the legal status of the unions in Germany, because the laws have been framed with special reference to the cooperative credit-unions. Under German law coöperative unions have flourished as nowhere else, and have been followed as far as possible as models in other European countries. In any country or state, those founding such unions should first consult some honest and capable lawyer, and one interested in the coöperative cause. It were desirable, indeed, that the leader of the movement should be an able lawyer. It is owing to Schulze-Delizsch’s legal knowledge and general ability that they have succeeded so well in Germany. He was formerly what we would call a county judge, and has long been a member of the Prussian and German Imperial Parliaments. In effecting the passage of the Imperial Association Law ( Genossenschaftsgesetz), he is considered as having rendered one of his greatest services to his country. The chief cost and trouble is in starting the first association in each state. After one has been established, and formularies and statutes drawn up which can serve as models, the foundation of others is easy. No outside help is required. The elements for an organization are in every place. All that is necessary is earnestness.
In Germany no concession from the state is required. Private law (jus privatum) is alone concerned. The purpose of the association is the mutual assistance of the members in their private affairs. The German courts have even decided that the unions cannot be regarded as business concerns, conducting a business for profit with the public, when they lend money only to members, although they may borrow money from third parties. The union furnishes its members with the means of carrying on various kinds of business. The profits and dividends come from the members themselves, and the members obtain them from their labors and trades. Legally, the dividends cannot be regarded any more as profits than the money which I take out of one pocket and put in the other. This decision of the German courts frees the unions from the tax to which trades and banks are subjected. Unions which do not confine their loans to members, but lend to the general public for interest and commission, are, on the contrary, naturally regarded as business concerns, in the ordinary sense.
We will best understand the legal position of the unions by comparing them with various other business associations. They differ from the societas of German-Roman law inasmuch as (1) the societas is formed by a certain limited number of definite persons. The entrance of new members and the withdrawal of old ones change its entire character, leading generally to its dissolution, even when the remaining old members and the new-comers form a new societas. In the credit-unions an easy means of entering the association and of quitting it is one of the fundamental conditions. Again, the benefits of the union are not confined to a small number of partners, as in the societas, but are extended to the greatest possible number. (2.) A societas doe3 business with the public, and stands as a unity opposed to the public. The creditunions do business within themselves. The members are the consumers. This is also the case with the “ Consumers’ Unions ” and " Raw-Material Associations, which arose in Germany about the same time. If they have a larger capital than the members need, they may do business with the public, but that is a secondary consideration. The productive associations produce for the public, and occupy a different position.
Joint-stock companies answer the purposes of the unions as regards the change of members, the entrance of newcomers, the liberty of any member to quit the association, and the decision by majorities. But the full liability of the members, one of the chief considerations, fails. By uniting this element of ordinary partnership with the provisions we have named of joint-stock companies, we have the requirements necessary for establishing credit-unions. This was brought about in Germany by the federal law of 1867, which became imperial law in 1873. There are, however, other differences between the position of the credit-unions and that of joint-stock companies : (1.) To become a member of a joint-stock company, one must have a certain ready capital, which shuts out poor people. (2.) The amount of the capital of joint-stock companies must be fixed beforehand and made known to everybody. The capital cannot be changed without the knowledge of the creditors. The basis of the SchulzeDelitzsch unions is eminently personal credit. The French law of July 24, 1867, calls them, on account of the changeable capital, “ sociétés à capital variable,” In societies in a healthy condition the stock usually increases, on account of the savings of the members.
The unions are entered in the public registers, together with their statutes, bylaws, and officers, and gain thereby the rights of a legal and commercial person in respect of holding property, bills of exchange, mortgages, etc. They can conduct legal proceedings before the courts, can sue and be sued. They are obliged by law to keep books which shall show plainly at all times their assets and liabilities : to publish during the first six months of every business year a statement of their balance, also the number of members who have quitted the union and who have joined it. They are obliged to send in monthly and quarterly statements to the commercial court (Handelsgericht) of the names of all new members and those who have left. Once a year an alphabetical list of all members must be sent to the court, and a notice published to the effect that at such a place it may be seen by any one desiring, as also a copy of the statutes. One very weighty provision of German association law is that all claims against members expire two years after they have left the union, either voluntarily, by death, or by the dissolution of the society. This is called the zweijährige Verjährungsrecht) the two - years - prescription law.
The statutes are subscribed to by all the members, thus forming a written contract. An abstract of the statutes must be published by the court. By these different means the public is inspired with confidence. It knows with whom it is dealing. The directors of the union are responsible for the correctness of the list of members, under pain of punishment. The names of the directors are published in the papers. The directors represent the union before the court. Notice must always be made to the court of a change of statutes or directors; in case of dissolution, of the liquidators.
CONDITIONS OF MEMBERSHIP.
To demand ten or twenty dollars at once as a condition of entrance excludes the poorer class, and there is no object for doing this, even when the middle classes take an active part in the union, as frequently happens. The unions are founded on the principle of self-help, and this is the decisive point. As already emphatically remarked, the unions are not charitable institutions. He who cannot probably make use of credit, help himself by it, and return the loan when given on favorable terms cannot become a member. Therefore, as long as a man can care for himself and his own, even though wretchedly, he is to be admitted. Otherwise, “ he is dead for the unions, and to be cared for by public or private charity.” The test of a person’s worthiness is his ability to pay each month even a small sum for his shares. This indicates a certain moral force and strength of will. Schulze-Delitzsch reports that he knows many laborers and tradesmen (Handwerker) without property who were at first refused credit, but who paid regularly their contributions. As a result, they have finally obtained credit corresponding to their conditions in life, and since have been among the most regular dealers with the unions, having always a balance in their favor. If the balance amounts to but thirty or forty dollars, it is not to be despised. It is with such small amounts as these that the great work is done in Germany.
It is evident that, on account of the liability of the members, only persons legally independent can join. Minors and wards are excluded, except that they can use the unions as savings-banks and thus become creditors. In Germany no married woman can join without the written consent of her husband. Admission is promised to no one and to no class of people indiscriminately, any more than admission to any other private society. Applicants have to be accepted by the directors and an admittance committee. A very important proviso is the right of appeal to the members, which any applicant has who has been rejected by the directors and committee. Did not this exist, the management would have the power of crushing every opposition by admitting only those favorably disposed to it.
Although every member has the right of leaving, he may not do so at any time. Limits must be put upon this right in order to insure solidity to the union. No one can leave except at the close of the financial year, when all accounts are arranged, and the balance and share of each one in profits and business are reckoned. This is the requirement of German law, which also requires a fourweeks’ warning when one intends to withdraw. The death of a member has the same legal effect as a warning, and closes his membership with the year, even if the death happens just before its close. This is of evident importance to the heirs. No one, after quitting the union, can demand his share in the business to be paid to him before the expiration of the first three months after the close of the year. This regulation is necessary for the safety of the creditors and the members. On leaving, no member has any claims on the reserve fund or on the property of the union as such, — furniture, etc.
THE FULL-LIABILITY PRINCIPLE, OR SOLIDARITY.
Herr Schulze - Delitzsch is a strong advocate of this stipulation of the law, dangerous as it may seem. Without it credit-unions have not been able to thrive in Germany. In Bavaria, in 1873, the unions had the choice offered them between a full-liability law and a limitedliability one, and chose the former. In Austria the law does not allow creditunions to be formed with full liability, and their leader and attorney in that country, Herr H. Ziller, regards this restriction as a reason why they do not flourish so well in Austria as in Germany. He is agitating for a full-liability law.
The coöperative credit-unions teach the members the unity and identity of their interests. During the late crisis the different members have assisted one another as far as possible; the various unions have done the same. This makes them a good moral school for the members. The unions have fully stood the severe test of the crisis in Germany. The unions and the members have an interest to help one another over a hard point, as the failure of one is not a matter of indifference to the others, owing to the resulting discredit brought on the whole organization. This circumstance cultivates a feeling of personal responsibility.
Where the liability is limited, there is too much temptation to speculation, as in Austria. According to Dr. Schulze, the English law of August 7, 1862, which limited liability to the amount invested in capital stock, injured the cooperative cause in England. The law of the 24th of July, 1867, had a similar effect in France.
The prudent and skillful management of the unions of Germany appears from the fact that the eighty unions which reported in 1859 lent over 4,000,000 thalers, and that of this sum only 470 thalers were lost.
In Germany there are various other coöperative associations, some of which we have already named. At the close of the year 1878, the number of associations of all descriptions, so far as known, was 3146. Coöperative unions have existed over twenty years in Germany, but all the failures of importance during this time, including the voluntary liquidations, which have caused any considerable loss amount to, at the most, 120, so far as is known.
Two paragraphs of the German association law deserve attention: —
(1.) The creditors must first bring to a close bankruptcy proceedings against the union before they can turn to the members.
(2.) The opening of bankruptcy proceedings against the union does not place its members in a state of bankruptcy.
Paragraph 2 is of especial weight. Since in many cases, a good part of the citizens of a town are membersto declare them all in a state of bankruptcy would stop business in the place, and produce so much harm as to be injurious to the creditors themselves. During the bankruptcy proceedings, the directors or liquidators prepare a plan for dividing the deficiency among the members, and, after it has been approved by the court, it is executed summarily,
MEANS OF RAISING THE MONEY FOR THE UNIONS.
The unions must take the same position as other banks, and not borrow from them, but direct from the public. If they borrow from banks, the costs and dangers are increased. In times when money is “tight,” the other banks would be unable to satisfy their wants. The greatest care is to be taken to reserve a right of demanding a previous notice (Kündigung) before one can withdraw one’s deposit. If the union borrows the money on an average “ on three months’ notice,” it is clear that it cannot lend its money on an average of “six months’ notice.” Safety demands that competition should be made with other banks rather by offering a higher rate of interest than by making any concession as to the “ right of demanding notice.” Thus the union in Delitzsch granted four per cent, interest, while the city savings-bank gave only three and one half per cent. In general these provisions are not needed, but they become necessary at once in a time of crisis, as a single inability to pay occasions bankruptcy and ruin. The right may perhaps be granted the smallest depositors to draw out their money at once.
Encouragement is to be offered to deposits for a long time by offering a higher rate of interest, which is of course lost when the depositor withdraws his money before the expiration of the term. The writer has noticed that this regulation seems to be general in Switzerland. Some prominent banks there, for example, the Banque Cantonale in Neuchâtel and the Comptoir d’Escompte in Geneva, give only two per cent, interest for deposits which can be drawn out at any time (disponibles), but advance it gradually until it reaches four or four and a half per cent on deposits for two years. Another bank, that of Chatelain, Clandon & Cie, in Neuchâtel, gives four per cent, on deposits which are disponibles, four and a fourth per cent, when the deposits are on three months’ notice, four and a half per cent, when they are on six months’ notice, four and three fourths per cent, on nine months’ notice, five per cent, on deposits for one year. That seems to be rather high for Switzerland. The regulations of the credit-unions have to be fixed more or less by experience and special circumstances. The larger the reserve fund and the shares of the members, which cannot be drawn out like deposits, the more favorable the conditions which can be offered.
In most of the German states and provinces the unions are organized into a whole, which has its directors. When one union has a lack of money and another a superfluity, the directors bring the two unions together, to their mutual benefit. This is also accomplished by means of advertisement in the paper which is the organ of all German coöperative associations, the Blätter für Genossenschaftswesen, published in Leipzig. The union which has a surplus lends to the union which has a want of money at the rate of five or six per cent, per annum and a small commission. Monthly, quarterly, and yearly reports are made, and thus the condition of each union is known.
Care is to be exercised in prosperous times not to accept more money than is needed and more than corresponds to the funds in possession of the unions. A temptation to speculate can too easily arise if the unions are not on their guard in this maiter.
There is a German Imperial Organization, or Central Board, which stands at the head of the state and provincial organizations. This superior organization includes all coöperative associations in Germany which choose to comply with the conditions required for joining it. It now embraces some 1100 unions of various kinds. As attorney (Anwalt) Schulze-Delitzsch stands at the head of it. This arrangement has been the chief promoter of the coöperative cause in Germany. Schulze-Delitzsch’s repeated warnings against every beginning of an unhealthy development, his watchful care, and his readiness and ability to defend with pen and word the interests of the unions have contributed more than anything else to their sound business basis to-day. It is undoubtedly due to him that that certainly very dangerous full-liability act has not led to great abuses. The English have tried to supply the place of such a law by not allowing any one to withdraw the capital which he has placed in a coöperative association. The share any member may have can only be sold to another. This regulation gives the unions a certain stability, but would seem to be hardly sufficient to prevent two or three buying up all the shares, and thus defeating the purpose of the institution.
FUNDS OF THE UNIONS.
The first concern of a coöperative credit-union must be the formation of a capital of its own. It gives the association a solid basis. Banks would naturally hesitate to lend money to an association without capital proper, because however safe the full liability act might make such a loan, its collection, in case the union failed, would be attended with unpleasantness to say the least.
The next question is, What should be the proportion between the capital of the union and the borrowed money ? The experience in Germany answers the question as follows : Even at the opening of a credit-union, its capital should never be less than one-tenth of the money borrowed, that is, one-eleventh of the whole capital; after two or three years this one tenth should have increased to one fifth or one fourth ; and finally to one half.
The stock of the credit-unions is divided into two parts : (1.) The reserve
(das Gesammtvermögen des Vereines), the property of the union itself. (2.) The shares of the members (das Mitgliedervermögen).
(1.) The reserve. The reserve gives an additional security to the union. When members quit, they can take no part of it with them. In case of dissolution only is it divided among the then remaining members. The reserve is formed in the beginning of a union by contribution on the part of the members. Afterwards an entrance fee is charged, which ought to become larger in proportion as the reserve grows, since the new member would have his share of the same in case of a dissolution. The entrance fee, at the same time, must never be so high as to shut out the poorest man. In Germany the maximum is ten marks, even when it is paid in part payments, from time to time, during two years or more. The entire profits of the first year are generally added to the reserve ; fifteen to twenty per cent of those of the second or third years ; afterwards five to ten per cent. The reserve should increase in proportion to the growth of business and risk. It should also have a certain fixed relation to the capital the members have invested in shares, — say, ten per cent. The reserve is not to be used to cover any loss so long as undivided profits still remain in possession of the union ; after the profits are exhausted, recourse is had to the reserve ; after that is gone, to the stock of the members. The reserve does not need to lie idle, as the creditunions neither indulge in nor favor speculation. It must, nevertheless, be invested in such a manner as to be perfectly safe and to be realizable at all times. A separate account must be kept of it.
(2.) The shares of the members. The monthly contribution towards the payment for the shares must not be less than one half a mark in the smaller places, in the larger not less than one mark. As already stated, the ability of a laborer to save a small sum has been found by experience to be a good test of his worthiness to receive credit. When one reflects on the small wages of the laboring classes, and what saving means to them, one will be ready to avow that saving implies in them especial energy and understanding.
The amount which may be invested in shares depends upon the business done. After a credit-union has been doing business for some time, the capital needed is to be divided by the number of members. This gives the maximum which any one person may invest. If any member were allowed to buy more than a corresponding number of shares, it would be possible for a few members to take possession of the whole concern, and its raison d'être would cease. Let us suppose that a credit-union is able to make use of $20,000, and is composed of 200 members; we find, by dividing 20,000 by 200 that $100 is the maximum amount which any one member may invest in shares. It is, however, advisable to borrow part of the capital necessary for conducting the business, as thereby the profits are divided among a smaller number of shares, and the dividends are larger. In Germany, a bank which abstains entirely from unhealthy speculation and stock gambling has been found to be perfectly safe when fifty per cent of the capital belongs to the share-holders. The profits of the other half of the capital are then divided among them in the form of dividends.
Loss and profit are divided among the share-holders in proportion to the shares which they own. The division is not made in either case in proportion to the shares for which one has subscribed; only the money actually paid into the treasury is considered. Any loss would otherwise fall hardest on the poorest, who are naturally most in arrears in their payments. The dividends have always given a sharp incentive to saving. After the first dividend has been declared, it frequently happens that many members increase their savings, so as to have in a short time three and four times as large an investment in the undertaking as before.
THE ORGANS OF THE CREDIT-UNIONS, AND THEIR COMPETENCY.
(1.) The general assembly of all the members. The unions are grounded on self-help ; the members, therefore, are not merely passive. The general assembly is the constituent and legislative power. Its functions are: (a) the formation and change of the statutes ; (b) the dissolution and liquidation of the union ; (c) the election of directors, officials, plenipotentiaries (Bevollmächtigte), to transact business for the unions, the board of control and administration; (d) to listen to complaints against the directors and other officials of the union, and, when necessary, to order them to be tried before the court; (e) to decide in cases of dispute between the other organs of the union; (f) to dispose of the profits and to audit accounts.
All matters are decided by vote, but in certain cases of particular importance more than a simple majority is required to effect a decision.
(2.) The directors. The direction consists of the chief officers of the union, who represent it before the courts and public generally. Care must be taken to elect men of acknowledged probity and good sense. Security is required from these and the other employees.
(3.) The board of control and administration. This board is consulted in important and difficult cases, which are prescribed by the statutes.
(4.) The cashier and other officials. All employees receive full compensation for their services.
FORMS IN WHICH LOANS ARE MADE.
Loans are made on (1) promissory notes and (2) bills of exchange, which are preferable because they can be realized on without possibility of dispute or delay; (3) on account current (conto corrente). The third form comes more and more into use in Germany, on account of its convenience for those desiring loans. It is, however, a more difficult and dangerous form of making loans than the first and second methods. It presupposes a certain skill and experience in banking, and no union should be hasty in beginning it. When such accounts are kept, it is necessary always to have on hand bills of exchange, notes, etc., which can be realized on at once.
The rules which Schulze-Delitzsch recommends to unions keeping accounts current are : —
(1.) To pay not over two per cent, per annum for any deposits that one may make who has such an account.
(2.) To begin an account current with no one who has not deposited at least fifty thalers in the union’s bank.
(3.) To fix the maximum of money to be lent on such an account, under all ordinary circumstances, at one thousand thalers.
(4.) To pay the amounts desired on an account-current at once when, they do not exceed fifty thalers, but not over one hundred thalers on one day; to reserve the right of fourteen days' notice when five hundred thalers are required, and of thirty days’ notice for one thousand thalers. Usually no use is made of this right, but the amount is paid at once. A commission of one eighth of one per cent, is charged. If any person has given notice that he will need five hundred thalers in fourteen days, he cannot give any further notice of a demand for money before the expiration of fourteen days.
(5.) Interest must be paid semi-annually.
(6.) The union reserves the right of closing an account current by giving fourteen days’ notice.
It is not easy to avoid the use of checks when accounts current are kept, but they are in general to be avoided, as being more suitable for large banks.
AMOUNT OF CREDIT TO BE GRANTED.
The people’s banks must be on their guard against persons coming with demands for large sums. The ordinary banks are more profitable for the “big people ” (die grossen Leute), and it looks suspicious when these wish to patronize the unions. There is a danger of temptation by offers of high interest and commissions. As the directors are usually paid partly by a percentage, the maximum of credit to be granted to one person should be fixed from time to time by the general assembly. The greater care is to be exercised, inasmuch as ruin does not come at once. Things may appear to be going very well for a year or two, and high dividends may be repeatedly declared, when all is preparing for a crash. This state of things is brought about by prolongations of the loans from time to time; finally, further prolongation is impossible, accounts cannot be settled, and ruin follows.
The maximum of credit to be allowed any one should always bear a certain fixed relation to the stock and property of the union, and not exceed one fifth, or at the most one fourth, of the same. By regulating the maximum in this way, a consciousness of the risk incurred is kept alive in the minds of the members. In the largest and richest unions, the maximum should rarely exceed two thousand dollars. As already pointed out, too great prudence cannot be exercised in prolonging loans. It is advisable to demand at least a partial repayment every time a renewal is asked for. By all means, the unions must avoid accustoming any member to live on credit, or to suppose he has a permanent loan. The credit granted by the coöperative unions should be eminently a “ productive” credit, to be employed in carrying on or extending one’s business, and not to be eaten up in unproductive consumption.
MEANS OF INSURING THE SAFETY OF THE LOANS.
The basis of all transactions is the morality of the undertaking in which the loan is to be employed. Another one of Schulze’s fundamental propositions is, “ Whatever is morally bad is in all cases economically ruinous.” The credit-unions abstain entirely from stock speculations. They lend no money to assist one in gaining a living without honest labor. Like the Prussian minister of public works, they regard the stock-exchange as a tree which bears only poisonous fruit (Giftbaum).
As the directors of the bank exercise control over the loans, they are not allowed in any shape, directly or indirectly, to borrow money from the unions. That is one condition of their employment, and its violation is punished with instant dismissal.
In cases where there is doubt about the advisability of granting a loan, the board of control is consulted. The points to be considered in the applicant are his financial solidity, his business ability, and his moral character.
One condition of granting a loan is that the applicant should find some one to sign the note or bill with him. A clever and industrious artisan or laborer can easily obtain security among his fel lows, when his project has any reasonable prospect of success. In case of failure of the debtor to pay, his share is first taken, and then recourse is had for the deficiency to the one who signed with him. In Germany a praiseworthy moral feeling exists among the laborers in these matters. They consider it highly dishonorable to bring one of their fellows into trouble, even when they are less conscientious in their transactions with the rich or the union itself.
The shares of the members are not taken as security. If they were, one could draw out his capital without giving the required warning. The shares furnish the public with a certain security, and it is dishonest to mortgage or pawn them. The union which did so would lose stability.
Mortgages on real estate of any description should be avoided by the unions. The cost of realizing on them is too great. As money is usually borrowed on three months’notice, the securities should be of a character to be realized on in the same time. Not long ago, a credit-union found itself with a coal mine on its hands, and was ruined thereby ; not because the mine had been valued too highly, but because the union was not able to sell it at onee and did not understand managing it. The experience of the unions has exhibited so clearly the disadvantages of mortgages on real estate that two general conventions of the coöperative associations in Germany — those of 1864 and 1869—have declared against them.
The interest and commission must be so reckoned as to pay all costs, dividends, contribution to reserve, etc.; otherwise, the enterprise will fail. When the unions first started, one Prussian Pfennig was charged weekly for a loan of one thaler, or three hundred and sixty Prussian pfennigs ; that is, fourteen and one third per cent., inclusive of commission. The cost of starting justified this high rate. Afterwards ten per cent., and then later on eight per cent., per annum inclusive of commission, was the rule. In some towns, where the people’s banks do a large business, the interest has been reduced to five per cent., with a commission of one half per cent., which equals an annual interest of eleven per cent on loans for one month, of seven per cent, on loans for three months. In a few large cities, where the middle classes have taken an active part in the credit-unions, the annual interest charged is five per cent., with a commission varying between one sixth and one fourth per cent., —about the rates which the large banks in Germany charge.
The credit-unions pay an average of four and one half per cent for the money they receive ; the cost of conducting the business is usually about two per cent., making a total expense of six and one half per cent on the capital employed. They receive an average varying between eight and ten per cent for their money, which leaves a surplus for the dividends after adding a part to the reserve.
It remains only to add a few practical remarks, of importance in organizing and managing credit-unions. First of all, let no one deceive himself as to the obligation imposed by the full-liability principle. It is very dangerous, and were it possible it would be advisable to avoid it. The Americans are not such a steady-going, careful people as the Germans. Whoever founds creditunions should remember that they are chiefly for the poorer classes. All formularies should be as clear and simple as possible. In small towns, where the affairs of a union are not very extensive and it is managed by laborers or artisans, book-keeping by single entry is to be recommended, on account of its simplicity. Unions in Germany have been founded and managed exclusively by laborers. In larger places book-keeping by double entry is necessary, and in such towns will occasion no difficulty. Branch unions are to be avoided as far as possible, since they make the business more complicated. In no place should a branch union be established where an independent one is able to exist.
In Germany a central credit-union bank has existed in Berlin since 1864. This connects the unions with the large banking institutions of the country. It has a capital of nine million marks, three fourths of which are owned by the various unions and their members. Such a central bank is to be recommended wherever the unions have obtained importance enough to justify it.
The unions of the various German provinces and states have annual meetings, besides which the unions of all Germany hold an annual convention. At these meetings and conventions the affairs of the unions are discussed by delegates. They assist, warn, and protect each other. The journal which is the organ of the coöperative cause in Germany and the annual meetings enable each union to make use of the experience which other unions have gathered. Schulze-Delitzsch sums up thus the benefits which the credit-union confers on its members : —
(1.) It enables them to obtain at any moment ready money in amount corresponding to their positions, their property, the business they do, etc.
(2.) It saves them the high interest they were formerly obliged to sacrifice for such loans, in case they obtained them.
(3.) The profits of money dealing, formerly de facto a monopoly of capitalists, flow into their pockets, and assist them in the formation of a capital of their own.
The following table of the different credit-unions which have furnished Schulze-Delitzsch with accurate accounts of their condition gives a good idea of the progress which has been made during the last twenty years : —
|1 Financial Year.||2 Number of Coöperative Credit-Unions which reported.||3 Number of Members.||4 LOANS AND PROLONGATIONS GRANTED.||5 FUNDS OF THE UNIONS (EIGNER FONDS).||6 MONEY BORROWED BY THE UNIONS.||7 The per centum of the Capital of the Unions to the Borrowed Capital : Average.|
|a The entire Sum.||b Average for each Credit-Union.||a Shares of the Members.||b Reserves.||c The entire Sum ; that is a + b.||d Average for each Credit-Union.||a Money borrowed from Private Individuals.||b Money borrowed from Banks and Unions.||c Savings Deposits.||d The entire Sum ; that is, a + b + c.||e Average for each Credit-Union.|
Particular attention should be given to column 7, which marks a favorable development in the proportion existing between the capital of the union and the borrowed capital.
The following figures show the trades or occupations of the members of seven hundred and six unions as they existed in 1878:—
Number of members, 346,051.
Farmers, gardeners, foresters, and fishermen having an independent business : males, 77,342 ; females, 3059.
Assistants and laborers for the foregoing class: males, 10,154; females, 687.
Manufacturers, mine - owners, and builders: males, 12,668; females, 277.
Artisans and tradesmen having a business of their own : males, 107,972 ; females, 3604.
Mechanics, miners, and artisans working for others : males, 16,232 ; females, 547.
Merchants: males, 32,894; females, 2257.
Clerks: males, 2374; females, 117.
Carriers ( Fuhrherren), ship-owners,
Literature. The two works chiefly to be recommended to those who wish to become further acquainted with the coöperative credit-unions of Germany are: (1.) Vorschussund Creditvereine als Volksbanken. Von Schulze-Delitzsch. Fünfte völlig umgearbeitete Anflage. Leipzig. 1876. (2.) Jahresbericht für 1878 über die auf Selbsthilfe Gegründeten Deutschen Erwerbsund Wirthschaftsgenossenschaften. Von Dr. H. Schulze-Delitzsch. Leipzig. 1879. Further information, as well as accounts of different coöperative associations in Germany, will be found in the following works: —
Die Raiffeisen’schen Darlehnskassen in der Rheinprovinz, und die Grundereditfrage für den ländlichen Kleinbesitz. Von Dr. H. Schulze-Delitzsch. Leipzig. 1875.
Die Arbeitenden Klassen und das Associationswesen in Deutschland als Programm zu einem Deutschen Congress. Von H. Schulze-Delitzsch. Leipzig. 1858.
Assoeiationsbuch für Deutsche Handwerker und Arbeiter. Von Schulze Delitzsch. Leipzig. 1853. and hotel-keepers: males, 17,377; females, 884.
Conductors, other railway employees, waiters in hotels and restaurants, and sailors and letter-carriers : males, 7033 ; females, 84.
Servants and porters : males, 2449 ; females, 909.
Physicians, public officials, artists, teachers, authors: males, 23,602 ; females, 946.
Those living without work, retired merchants, etc.: males, 10,388 ; females, 13,984.
Summa summarum : males, 320,479 ; females, 27,421.
Although we cannot assent to all of the economic propositions of Dr. Schulze, and although we are unable to regard the credit-unions as by any means a solution of the social problem which exists in all European countries and will soon enough make its appearance in America, we acknowledge that they have done and are still doing a good work in Germany. They assist the cleverest and strongest of the laboring classes in bettering their condition.
Richard T. Ely.
Deutsche Bangenossenschaften. Von Dr. F. Schneider. Leipzig. 1875.
Consumvereine. Von Eugen Richter. Berlin. 1867.
Blätter für das Genossenschaftswesen. Published weekly in Leipzig.
Die Entwickelung des Gen ossen s cha f ts wesens in Deutschland. Von Schulze-Delitzsch. Berlin. 1870.
Die Genossenschaftsgesetze im Deutschen Reiche. Von Ludolf Parisius. Berlin. 1876.
The best German work on credit in general is that by the distinguished professor of political economy in Heidelberg, Dr. Carl Knies, —Geld u. Credit, Theil II. der Credit.
For the condition of the small trades in Germany and the tendency towards concentration, see Die Deutschen Kleingewerbe im 19ten Jahrhundert. Von Gustav Schmoller, Professor of Political Economy in Strassburg, — a work so interesting that it is hard to lay it aside before finishing it.