Labor as Banker

WILL the entrance of labor organizations into banking convert unions into capitalists, or will it convert capitalism into something different, something more in accord with the aspirations of labor?

Numerous conservative bankers exhibit a somewhat surprising hospitality to their new competitors. Sincere friends of labor have interpreted this hospitality to mean that bankers are not loath to welcome labor into a field where it is likely to fail, with disastrous consequences to the unions. But the motive of the bankers is probably more ingenuous than that. Some of them may anticipate the collapse of the new enterprise, but their uppermost thought seems to be that, once the unions engage in practical banking, they will understand the financial structure of the country better, and that as a result they will become less ' radical’ and will not direct against the banker so much hostile criticism based on lack of experience. It is the same motive which prompts the laborer to say that he wishes the lawyers who direct the policy of his steel company would spend a few weeks in front of the furnaces before refusing to deal with the union about working-hours. If any considerable part of the wage-earner’s money becomes involved in successful banking, he may act more like a banker than he sometimes does now. He may be less likely to interrupt industry with strikes, or to attempt to gain concessions which injure the interests of capital — so hopes the bank president.

The other alternative of the introductory question is suggested by the theories of certain radical economists who believe that the control of credit is a crucial control in the modern economic process. Very few business houses, and almost no industries, can operate without going to the banker for loans. Even capital issues for expansion or for new enterprises are, at least in the flotation stage, largely dependent upon his favor. The man who decides where the money shall go, who shall have it, and what he shall use it for, virtually decides what sort of industrial order we shall have — according to these radical theorists. A large part of the income and savings of the country is the property of the wageearners, yet these people allow their money and the credit power arising from it to be manipulated by representatives of another class, rather than by their own representatives.

Of course, it is recognized that most bankers do not appreciate the full possibilities of the control which, it is thought, lies in their hands. It is understood that the usual banker is wondering how he can get the largest interestreturn consistent with safety and the banking laws. But supposing the banking function were exercised by representatives of millions of depositors rather than in the interest of the limited number who make a profit in the business of loaning other people’s money, would it not be possible to direct the productive forces of the nation in such a way as to bring greater welfare to a greater number? Would not essential industries be encouraged if necessary at the expense of the luxury industries which serve only the well-to-do? Should we be manufacturing highpower pleasure-cars, for instance, while the farmers were unable to finance the marketing of their grain and the unemployed were starving in the cities? Persons who are conscious of such anomalies, which frequently appear in our civilization, and who believe that the control of credit is the lever by which the economic world might be moved, look with keen interest upon the entrance of labor into banking.

Aside from such theories, there are the opinions naturally arising from the experience of certain groups in practical situations. When a railroad property is wrecked by bad financial management, and the ‘insiders’ fleece the ‘outsiders’ in a manner familiar to students of American financial history, the banker is often blamed. A common complaint is that the railroads are managed in the interests of the bankers rather than of the investors or the public. It is frequently said that in the growing concentration of the financial system, in the web of interlocking directorates of great banks, railroads, and industrial corporations, the banker is the spider in the centre who weaves his trap for the unwary common man. Many farmers, who were caught in the recent price-deflation with insufficient liquid capital, and who either were unable to negotiate loans to save their properties, or were obliged to pay high rates of interest, believe that the deflation was deliberately brought about and intensified by capitalist interests influential with the Federal Reserve Board. Organized labor, suffering from unemployment and wagereductions, was inclined to share this belief. In addition, labor leaders felt that the campaign against unionism which accompanied the depression was a plot deliberately encouraged by great financial powers, and was in many cases forced upon reluctant employers by the banks. Just enough evidence cropped up here and there to give color to these views. Most ‘plots’ are delusions, and if analyzed on the basis of fact, would dissolve into unconscious tendencies or natural concurrences of like results from like causes. But the fact remains that the bankers and the great corporations suffered less from the depression than labor and the farmers, and the fact remains that labor and the farmers had less influence over banking policy than the centres of wealth. It is only reasonable to expect that, if the control of the banking function were broadened, whatever power it has over such situations might be differently utilized.

The labor banking-movement is growing rapidly enough for us to have before long a chance to test at least some of these expectations. There are now no less than eleven banks in various sections of the United States, a controlling interest in which is owned by labor organizations or their members. Their combined resources amount to many millions. About ten more banks of the kind are definitely projected. The Brotherhood of Locomotive Engineers Cooperative National Bank in Cleveland is said to have received requests for advice on the possible establishment of labor banks in no less than sixty-two cities in thirtytwo states. This institution, established in 1920 with a capital stock of $1,000,000, now has resources of twenty millions. The first labor bank to be established was the Mt. Vernon Savings Bank in Washington, D. C., in which the International Association of Machinists and its members own a controlling interest. Its paid-in capital is $160,000; but from this modest beginning its resources have grown to over $2,700,000. In 1922 the Amalgamated Clothing Workers of America opened the Amalgamated Trust and Savings Bank in Chicago, receiving deposits of almost a million and a half dollars in its first nine months.

Labor banks have been opened in the far West, in the South, and in other sections. No less than four labor banks are now in process of establishment in New York City, each of them to have branches in the various boroughs. The first of these to open was a second bank owned by the Amalgamated Clothing Workers. Another, with a million dollars’ capital, to be known as the Federation Trust Company, is sponsored by the Central Trades and Labor Council of the city. The Brotherhood of Locomotive Engineers has bought an interest in the Empire Trust Company, and expects to open a bank of its own besides. The fourth project is that of the International Ladies’ Garment Workers’ Union.

Not all these banks are organized in the same way or are following precisely the same policies. But there is general agreement upon certain essentials. In virtually all cases either the central organization of the union, or a group of its members, or both, own a majority, of the stock. In almost all cases the Board of Directors contains, in addition to union representatives, practical business men who combine knowledge of the business world and of banking with sympathy for the union point of view. In all cases the salaried officers and staff consist of trained bankers.

Most of the banks are organized with at least some concessions to the principles of Rochdale consumers’ cooperation. Dividends to stockholders are limited, in most cases, to about ten per cent; profits above this are shared with the depositors. It has been the policy to attract as wide a circle of depositors as possible, and in few if any of the banks are a majority of the depositors members of the controlling organization. The special inducements to small depositors mark the first break with tradition in the practice of the new banks. This is a shrewd policy for numerous reasons. In the first place, it is good advertising, and is calculated to attract a large volume of deposits within a short time. In the second place, it increases the factor of safety, by avoiding the possible danger of placing the bank at the mercy of a few large depositors, who might be caught in adverse commercial currents or might wish deliberately to injure it. In the third place, it relieves the bank of the peril which might otherwise appear in case it were necessary suddenly to withdraw the funds of the union or its members for use in a strike or lockout.

Aside from the theories about labor banking, it is enlightening to look into the immediate causes which prompted unions to enter upon these enterprises. Too often the person who has not known the union movement at short range thinks of it as a mass of untutored workingmen under the control of unstable or even vicious ‘agitators.’ As a matter of fact, most of the higher union officials are extremely able, practical men, who are entrusted with the duties of daily administration in a large organization which frequently combines the activities of an insurance company, a publishing concern, an organizing staff, and other businesses aside from the peculiar trade-union functions of representation and negotiation in active disputes. These men are accustomed to handling, for their organizations, large sums of money, and are as familiar with banking processes as the average business executive. The advantage of owning one’s own depositary is just as obvious to them as it has been to the heads of large industrial corporations who have acquired control of banks in the past. Why should a national labor union, regularly depositing some hundreds of thousands of dollars, allow its balance to be in the hands of men who might, and sometimes do, aid employers who are hostile to the union? Why should not this money be put to work in ways which would be of help to the members of the organization? With this balance as a nucleus, could not the confidence of the man with a small income be so enlisted as to tap entirely new fields of savings which the purely commercial banks have not attracted?

Rapid as is the growth of the labor banks, they cannot for a long time, if ever, achieve a sufficient control of credit to accomplish any of the more ambitious aims which may theoretically be possible. For the time being they must nourish their growth within the industrial and financial system as it is; they are subject to the banking laws; they must, if they are to compete with other banks, practise banking based upon an order which permits the profitable and safe investment of capital. Only as they can, little by little, seize upon and put into effect principles which may modify the present structure in detail, principles which offer even a sounder development than is attained by the noncooperative banks, can they prosper and grow.

One of these principles is the cooperative plan of sharing profits with depositors. Another is what a private banker would call extreme conservatism in loaning-policy. The labor banks are not likely to be parties to speculative ventures in private interest; they are not likely to look for profits at the expense of safety. The tendency, as so far developed, is to lean over backward in refusing loans for business enterprises where there may be a risk, and on t he other hand, to purchase the safest of bonds, and issue notes only on the highest security. Since the stockholders are not looking for large profits, but rather for safety and the opportunity for service, the temptations of the more commercial banker are reduced. The result of such a policy is naturally to encourage stability in industry and to turn the investors’ money into channels where the larger profits are not realized.

Another possibility of a similar nature is the exercise of the labor banker’s influence for the stabilization of prices. It is a commonplace of post-war economics that booms and depressions, with their accompanying fluctuations of prices and the cost of living, may be either accentuated or minimized by banking policy. ‘Inflation’ takes place when loans are extended too freely on a rising market, and the volume of credit and currency expands more rapidly than the actual production and exchange of goods. This leads to speculation, to duplication of orders, to prices out of line with purchasing power, and so to an eventual collapse of demand and production — to a depression. The depression may in turn be increased and prolonged by too restricted credit. No economic group suffers more than the wage-earning class from violent fluctuations of this sort. They lose on the up-swing by a cost of living which rises faster than wage-rates, and on the down-swing by unemployment, reduced bargainingpower, and wage reductions. The policy of labor bankers, who are coming to understand this principle, is likely therefore to be one of restricting loans, raising rates, and discouraging too rapid expansion when a boom is in prospect, and as easy a credit extension as is consistent with safety after a depression has set in. Whatever influence they may have with the Federal Reserve Board is likely to be directed to stabilization of credit and currency by all available means, especially by a well-calculated rediscount policy.

Naturally the labor banks will be interested in the labor policy of the business enterprises to which they loan or in which they invest. They will be quick to detect the financial insecurity which is likely to accompany hostility to organized labor, and will favor those establishments which have by an enlightened policy insured themselves against aggravated labor-trouble. They certainly will not lend money to any employer who is wasting his resources on detective agencies and an anti-union war-chest. On the other hand, the employer whose policy is approved by organized labor will be made more secure by any financial interest which labor’s banks may take in his business. In this respect the loaning policy of the labor banks is probably sounder than that of the ordinary commercial money-lender.

It is probable also that the labor banks will develop funds for many noncommercial enterprises which have a wide basis of safety, but do not offer a large enough prospect of profit to attract money in a competitive market. Cooperative housing, for instance, is sorely needed in industrial centres, but it is an enterprise which can be undertaken to best advantage only on a large scale. The cooperators cannot themselves, as a rule, finance a large-scale operation — there is needed the reservoir of credit and of managerial ability to start the development in a proper way. Here is a tremendous field for the labor bank. There are possible numerous types of insurance benefiting wage-earners, which the banks may encourage. Credit unions offering small personal loans on personal security are capable of more development. Other cooperative undertakings, established on a sound basis, will naturally make use of the labor banks.

Last of all, there may arise the opportunity to encourage new types of industrial enterprise. It will be remembered that the British Building Guild was financed by the Cooperative Wholesale Bank. Naturally the labor banks will be cautious in floating experiments in cooperative production, in view of the many failures of this form of organization; but the possibility remains, and may look larger as time goes on. It seems probable, at least, that there will arise sound projects of democratic industrial enterprise which will need credit, and that the labor banks will furnish a more ready response to this need than could be found if they did not exist.

The result, then, of the establishment of labor banking may well give an affirmative answer to both the questions of the first paragraph. To be sure, labor banks will not and cannot suddenly overturn the present order, and, on the other hand, they will certainly fail if they so far desert the natural aspirations of the labor movement as to adopt completely the capitalist point of view as it is now understood. Yet, by using their influence on capital within a capitalist world, they may, if wisely administered, tend to modify the policy of other banks, and may start new currents of activity which will broaden out eventually to embody many of the aspirations of labor. While this process is going on, labor itself will learn, much about the economic process, and will be induced to build solidly with the long future in view. All this depends, of course, on the imagination and ability of the men in control. Mistaken policies would lead to disaster in this endeavor. The chief limitation of the movement at present is the difficulty of finding enough practical executives with the necessary sympathy and vision.