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by the association and he is accorded a loan to the
amount of not more than two-thirds of the value

100



CREDIT S O C I E v i E S

so ascertained. In return for this ( he >JV$*Jtlifcj
association a first mortgage on the whole of his
property. These mortgages constitute the assets
of the Landschaft, and on the basis of this security,
which may be rediscounted through a central asso-
ciation formed for the purpose, bonds (Pfandbriefe)
are issued at a rate of interest varying from three
and a half to five per cent, according to the state
of the money market. The loan to the borrower
is paid in these bonds and not in cash, and as the
bonds are negotiable and find ready currency on the
market they vary in value in the same way as
the stocks and bonds of an ordinary company. The
borrower may convert his bonds into cash by selling
them on the open market, or he may avail himself
of the assistance of the banking department which
has been created in connection with most of the
Landschaften for the purpose of buying and selling
bonds. It should be noted that the Landschaft
itself is not a banking but merely a bond-issuing
institution, and never pays out a loan in cash. The
bonds have attached to them the usual interest-
bearing coupons, payable at due dates. They are
issued in series, and each series is secured by the
collective pledge of all the properties to which
advances have been made within that series ; this
method, which has obvious advantages of safety
and simplicity, has replaced the earlier system by
which bonds were secured only by the mortgage of
the individual estate against which they were issued.
Each series is confined to. a certain amount and is
dated, and the series are redeemable at a given time.
The period of redemption varies slightly, according

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CO- OPE RATION FOR FARMERS

to 'the' 'circumstances of issue the average duration
being about forty-five years. The redemption is
effected by annual payments from the borrower,
based on the amortization principle ; the payments
are equal each year, and cover repayment of prin-
ciple, interest, administration expenses and contri-
bution to sinking fund the whole working out
on an average at about 4| 5 per cent, per annum.
Each repayment is credited to the borrower on the
books of the society, and the liability of the estate
is correspondingly reduced. At the end of the
period the bonds are withdrawn and paid for in cash,
and the borrowing estates are discharged from their
liability. A new series is then issued. The charges
of the Landschaft salaries of officials and valuers,
office expenses, rent, etc., are met out of the annual
payments, and any surplus which may accrue is
added to the reserve fund which is held to meet
any possible deficiency or losses which may arise
through mistaken valuations or other causes. The
value of the bonds on the market is kept up and an
additional inducement offered to investors by an
annual drawing or lottery when a certain number
of bonds are paid off in cash at face value by the
Landschaft. Finally, it should be noted that in
making loans the Landschaft always issues its bonds
at par, so that the borrower gains if they are at a
premium on the market and loses if they are at a
discount. As there is frequently more than one
series available with different rates of interest corre-
sponding to different market values there is an oppor-
tunity for a borrower to exercise considerable dis-
cretion as to the most profitable form in which to

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CREDIT SOCIETIES

take his loan. There is also an arrangement by
which the whole amount of a loan may be paid off
at certain periods before it falls due, but this must
be done in bonds of the proper series and not in cash.

It will be seen from this brief description that the
Landschaften undertake complicated financial
functions which resemble more the operations of
a commercial firm than those of the ordinary rural
co-operative society. It would obviously be beyond
the competence of the average farmer to create or
conduct such an organization or even to understand
the details of its workings about which indeed many
erudite and lengthy treatises have been and still
may be written. Thus we find that wherever land-
mortgage business is carried on on a large scale,
while its purpose may be co-operative in the large
sense that it is not profit-making and designed only
to benefit the members by making use of their col-
lective strength, it is organized from the top and
conducted more or less bureaucratically and without
that intimate and conscious spirit of co-operative
action among all the members which is so much
to be desired in the other societies we have described.

In Germany security and good management are
assured by the fact that the higher officials of the
Landschaften are appointed and carefully super-
vised by the State, while in Denmark, Holland, and
Russia, where similar associations have been formed
on the German model, the connection with the
Government is very close. Thus while this type
of organization performs undoubtedly a most valu-
able function for landowners, it is of rather secondary
importance to those who desire to act as pioneers

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CO-OPERATION FOR FARMERS

of co-operation on an intimate and local basis; Up
till quite recently, in fact, the Landschaften and their
imitators were useful only to comparatively large
landowners, since it was originally thought that,
owing to the difficulty of. carrying out valuations
and obtaining security which would command con-
fidence from a large number of small farms, the
minimum loan to be granted should be fixed at a
substantial figure. Within the last twenty years,
however, considerable modification has taken place
in this respect, and there are several societies in
Germany which grant loans as low as 15, while
both Denmark and Russia have special Smallholders'
Land Banks which are specially designed to work
in conjunction with the official policy of land trans-
ference. In France the functions of land mortgage
credit are chiefly carried out by a huge joint-stock
company, the Credit Foncier, which, though it has
no claims to be considered co-operative, is strictly
limited in its profits and enjoys a large measure of
support from the Government acting through the
Bank of France. In fact, so long as extortion and
careless or speculative management are restrained
by supervision and statute and every landowner is
assured an equal opportunity of borrowing according
to his capacity, it would seem to make little difference
whether the technical form of organization adopted
may be called co-operative or not.

Before leaving the subject of mortgage credit it
may be well to point out that while the operations
of such a society are complicated and technical, the
risks attaching to it are very small, provided of
course that honesty and complete absence of specu-

104



CREDIT SOCIETIES

lative methods are ensured in the management and
that the valuers employed are efficient and trust-
worthy. The security of landed property taken at
a conservative valuation is not subject to sudden
fluctuation nor can it be dissipated or removed, and
if it changes hands the mortgage remains with the
land. In fact, losses and forced sales are almost
unknown, and the stability of the Landschaften,
which has never wavered, is amply proved by the
fact that their bonds find ready sale on the markets
of Europe, even outside Germany, and that in times
of serious depression they have fluctuated in value
less even than Government stocks. These considera-
tions have led to a movement to establish similar
institutions, with Government assistance and control,
in the United States, where large mortgage loans
are greatly in demand.

The British Isles have so far made no experiments
in this direction. In Ireland the State system of
land purchase leaves little room for such associations,
while in England the prevalence of tenancy and the
comparative ease of obtaining loans through other
channels have acted as deterrents. Furthermore,
mortgage associations are obviously impossible except
in countries where the title to land is governed
by clear and definite rules. In Central Europe
official registration of land titles is universal and
compulsory, but every one familiar with the diffi-
culties involved in the transfer of land in England
will realize the obstacle presented thereby to a
system of collective mortgaging.

Turning to the less pretentious system of personal
credit, we find once more that we must look to

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CO-OPERATION FOR FARMERS

Germany for our model. We have already described
in general terms the pioneer work of Raiffeisen and
Schulze in the middle of the last century, and to
these humble beginnings we must refer the whole
of the present system in agricultural countries. Of
the two men Raiffeisen has had by far the greater
influence on purely rural districts ; the more business-
like Schulze created a type of society which, while
it has done much, and will probably do more in the
future, for agriculturists, has on the whole tended to
benefit particularly the artisans of the towns and
villages.

The outstanding features of a society of the pure
Raiffeisen type are that the liability of its members
is unlimited except by the extent of its obligations,
its share capital is practically negligible where it
exists at all, and its expenses are a bare minimum
the management being almost always unpaid or paid
a merely nominal sum to cover out-of-pocket ex-
penses. Such a society presents a very pure type
of co-operation, and can obviously only exist among
small farmers in a district where every man is known
to, and trusted by, his neighbour, and where all are
on a more or less equal scale. Accordingly we find
that such societies are always limited in their opera-
tions to a parish or other small area and that they
have been most successful in the poorest and most
backward farming districts.

The purpose of these societies, or agricultural banks,
as they are often called, is twofold the granting
of loans to deserving farmers for reproductive pur-
poses and the promotion of thrift. It is worth
noting, in view of modern developments which have

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CREDIT SOCIETIES

tended to lose sight of the fact, that the latter pur-
pose took probably the foremost place in the prudent
mind of the promoter. Raiffeisen called his societies
"Spar und Darlehenskassen " Savings and Loan
Banks and the emphasis was undoubtedly on the
savings. The method of collecting these savings is
by inviting deposits from members and in many
cases from non-members also on which, as a rule,
about 4 per cent, interest is paid. The capital of
the society outside these deposits will be insigni-
ficant, being derived from small entrance fees and
nominal shares, together with such small profits as
may be made by the society from year to year.
The deposits, therefore, form the funds out of which
loans are made to members. It will be seen at once
that great care must be exercised to ensure that
these loans are made circumspectly, as a compara-
tively small loss, resulting in diminished confidence
among the depositors, may bring the society's career
to an end. It is for this reason that the principle
we have already mentioned of limiting the area of
operations to a district in which all the people are
more or less known to one another, must be strictly
observed. As the character of individuals is the
security on which the business of the society is built
up, its success depends more than that of any other
form of association on personal knowledge and on
the capacity of its committeemen to form accurate
and unprejudiced judgments of their fellow-members.
Each applicant for a loan must first become a member
by paying the prescribed entrance fee and accepting
the rules (by which he makes himself liable to an
unlimited extent for the obligations of the society)

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CO-OPERATION FOR FARMERS

and also by taking a share, where shares are issued.
His name must also be submitted to the committee
for approval. If he is admitted he then may make
his application for a loan and he may be called in
person before the committee. He must state, be-
sides the amount of the loan and the time for which
it is required, the purpose for which it is intended.
It is then for the committee to decide whether the
loan is to be granted in whole or in part, or refused.
This is the point at which the skilled judgment plays
an essential part ; the committee should be so consti-
tuted that there is at least one responsible represen-
tative from each district of the area covered, who
will have a satisfactory knowledge of the character
and circumstances of his neighbours. He must
decide whether the applicant is a man of good char-
acter and industrious habits, sufficiently well situated
to have a reasonable prospect of repaying the loan
in due season, and likely to turn it to profitable use
and in this connection he may be expected to
know whether the purpose for which the loan is
asked is a proper one in view of the circumstances
of the applicant. The question of the security
offered is also of the first importance. In most
societies of this type the security required is the
personal bail of two solvent persons of good char-
acter and these persons must also be tested by the
standard of first-hand knowledge as to whether they
are able to make good the sum involved in case of
the borrower defaulting. In some cases " chattle-
mortgages " or liens on crops, stock, farm imple-
ments, and so forth or more rarely small mortgages
on land, are accepted in lieu of personal security ;

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CREDIT SOCIETIES

loans may also be granted on current account on
the Scottish overdraft system, and in Italy small
loans are occasionally made on the word of the
borrower only (prestiti sulV honor e). But these form
a small fraction of the total amounts loaned by
Raiffeisen societies, and must be regarded as depar-
tures from the normal.

If the security of the borrower passes the scrutiny
of the committee, the next point of importance is
the purpose to which the loan is to be applied. It is
a fundamental principle that these loans shall be
made only for reproductive purposes that is, the
money must be used in such a way as to produce
more money within a given period so that the loan
and interest can be repaid. Thus a loan for the
purpose of buying seeds, manures, or live-stock, or
of holding over calves or other stock until they can
be sold to advantage, is evidently legitimate, while
a loan for the purpose of buying clothing or under-
taking a journey will, as a rule, be rejected unless it
can clearly be shown that it will bring a direct profit.
The definition of a reproductive loan must, however,
be varied considerably in accordance with local
circumstances ; thus in India the granting of loans
for the purpose of giving a dowry to a daughter
about to be married, or even of defraying the ex-
penses of the wedding, is considered a legitimate
and normal function of a credit society. In any
case once a loan has been granted for a given pur-
pose it is the business of the committee to see that
it is in fact used for this purpose, and to call it in
as quickly as possible if the} 7 have reason to believe
that it is not so used. Neglect of this rule will

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CO-OPERATION FOR FARMERS

almost inevitably result in creating a class of chronic
borrowers, with disastrous results to the society.

Closely allied with this point is the necessity of
insisting upon punctual repayment. While in proven
cases of genuine hardship due to no fault of the
borrower, an extension may be granted at the dis-
cretion of the committee, care must be taken to
avoid the habit of allowing "renewals." It will be
found that a certain number of borrowers will nomi-
nally repay their loan when it falls due, and will
immediately ask to have it renewed for a further
period on the same terms. In such a case the com-
mittee should insist upon a fresh application being
made to them in exactly the same way as if a new
loan were sought. Where this is not done, a few
members will perpetually enjoy the use of the
society's funds, without the necessity of putting
them to reproductive use. The practice of renewals
is one of the most insidious evils which may be
brought about by the complaisance or carelessness
of the committee and denotes the beginning of
decay.

The amount of the loans to be granted must depend
on local circumstances, but should be limited to a
sum which will enable all members to have an oppor-
tunity of borrowing if they wish. The usual average
of loans in Raiffeisen societies is about 5 to 10 ;
the low limit may be as small as 2 ios., while the
high limit in most cases is fixed at about 50
anything above this being left to ordinary banking
institutions to deal with. The rate of interest must
also vary ; it must be fixed with regard to the current
rates of the district and also to the rate paid on

no



CREDIT SOCIETIES

deposits. A margin of about 2 per cent, between
the rate paid on deposits and that charged on loans
is usually adequate ; many societies attempt to
work on as low as i per cent., but this generally
results in an annual loss and is not justifiable.
Irish experience has shown * that 4 per cent, on
deposits and 6 per cent, (or ijd. per per month)
on loans, is a reasonable rate, and German rates are
somewhat similar, while in India and Russia small
farmers consider themselves lucky to get loans at
from 12 per cent, to 14 per cent.

The period of the loan is determined by the season
and nature of the operations concerned. As the
majority of loans are for a purpose which will only
bear profit when crops are harvested or young stock
comes to maturity, they will seldom be required
for less than eight or nine months. On the other
hand, no loan should be allowed to remain due for
more than a year unless there is some exceptional
reason. It will be seen that even on this basis
loans will run for a considerably longer period than
in the case of ordinary commercial accommodation
in towns, and as the demand will come at approxi-
mately the same time of the year care must be taken
to arrange that the capital of the society is available
at the proper time and for the necessary period.

From this summary description the reader will
observe that the operations of such a society, though
usually small and simple in themselves, require con-
siderable delicacy of handling. In particular y a
society cannot flourish except on the basis of complete
mutual respect and confidence, and for this reason
it promotes to the highest degree the spirit of mutual

in



CO-OPERATION FOR FARMERS

help which is the true ethical basis of co-operation.
It was this fact which bulked most largely in the
mind of Raiffeisen himself during his pioneer work ;
he laid stress above all things on the spiritual, almost
religious, value of co-operation, and he shrank from
share capital, large entrance fees and paid manage-
ment as savouring unduly of commercialism.
Similarly, while it is true that the law at that time
allowed no choice in the matter, there is no doubt
that he would have chosen the principle of unlimited
joint and several liability even if he had been a
free agent in the matter. The advantages claimed
for this method are that it gives every member so
vital an interest in the affairs of the society that
he becomes a sort of benignant spy upon his fellows,
and thus ensures that the aims of the bank are
properly carried out and, further, that it creates a
security even in the poorest districts which would
otherwise never exist. Against this it is argued
that these advantages are merely theoretical ; the
majority of members are not really aware of what
they are risking, and as to the security it would be
found, in case of liquidation, to be illusory, since the
trouble of proceeding against each member would
not be repaid by the small amount realized from
their scanty assets. It must be observed that the
purpose of the security supposed to arise from un-
limited liability is to enable a society whose deposits
are not sufficient for its needs to borrow money
from a bank or other outside source ; but as a
matter of fact the lender will in all cases take as
security the joint and several guarantee of the
members of the committee and will not trouble at

112



CREDIT SOCIETIES

all about the form of liability of the remainder of
the members. On the other hand, a powerful argu-
ment against unlimited liability is that it is bound
to frighten away any well-to-do persons in the
neighbourhood who might otherwise become useful
members of the society and finally it makes the
possibility of the bank engaging in trade very
hazardous.

Without going deeply into these arguments, we
may safely say that unlimited liability is contrary
to the inclination of the times, and we find that
it is, in fact, gradually being replaced by the more
modern system of limitation by shares. A question
which with Raiffeisen was undoubtedly one of
principle has come, now that co-operative organ-
ization is widespread and well understood, to be
regarded as one of expediency, and from this point
of view the victory rests, except perhaps in some
exceptionally backward districts, with limited lia-
bility. Thus we find that even in Germany, where
tradition is still powerful in this matter, a number
of societies, while performing the functions of Raif-
feisen banks, have so far departed from his principles
as to issue shares to a considerable amount, in pro-
portion, as a rule, to the acreage of poor-law valuation
of the application, and to limit a member's liability
either to the value of his shares or to some multiple
of that amount.

This leads us back to the Schulze type of society.
As we have seen, Schulze began his work at the same
time and on much the same lines as Raiffeisen, but
with a decided bias towards business methods. This
bias led him to develop a form of society in which

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CO-OPERATION FOR FARMERS

shares and entrance fees were large, management
skilled and well paid, and the disposal of the funds
similar to that of a commercial bank. One result
of this development was that loans for a short period,
enabling a quick turnover and increased profits,
were preferred, and as a natural consequence the
Schulze societies attracted a membership rather of
artisans than of farmers. Needless to say, the vast
majority of these societies adopted the principle of
limited liability as soon as it was legally possible
for them to do so. Their success has been quite
as striking in its way as that of Raiffeisen societies,
and of recent years they have, especially in Italy,
begun to attract a large business from among the
better-educated and more prosperous farmers to
whom their methods now make a strong appeal.
Their general purpose and method is largely similar
to that of the societies described, but owing to the
usual character of their membership and the wider
area of operation the personal feature is by no means
so pronounced. Loans are of a far more varied
character, and inquiry into their purpose is waived
in favour of a strict examination of the security
offered. Security in these cases is by no means
always personal, and a considerable number of
loans are made against collateral security in a tangible
form ; these loans may be large in amount and vary-
ing in duration. Shares are in some cases as high
as 50 apiece.

To trace the developments and describe the
variation of these credit systems is beyond our scope ;
not only would the task require a volume in itself,
but it has already been adequately performed. We

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CREDIT SOCIETIES

may merely indicate a few of the more important
developments of the movement.

The work of Raiffeisen has found imitators, with
or without modification, in very many countries.
Austria and Hungary have adopted the system along
with the rest of German co-operative methods so
whole-heartedly that they need no separate attention.
In Ireland, as we shall see, agricultural banks on
this model have played an important part in the
development of backward districts ; that they are
gradually dwindling in number and importance is
due mainly to the fact that with increasing prosperity
the immediate need for them has diminished. Yet
it may be said that they were handicapped by their
departure from the German example in laying stress
on the importance of deposits and by their failure
to establish a central bank. It is arguable also that


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Online LibraryLionel Eldred Pottinger Smith-GordonCo-operation for farmers → online text (page 8 of 17)