Part 22

_Third_: Every local association, or primary unit, should be an association of men within a restricted locality and the business should also be confined to the immediate vicinity of the association.

_Fourth_: I do not believe that the membership of a primary unit should be less than twenty-five, nor more than fifty.

_Fifth_: I think that the capital of a primary unit should not exceed $25,000, and that the shares should be $100 each. No person should own more than two hundred and fifty shares, or 10 per cent of the capital.

_Sixth_: All loans made should be recommended by the local association. In case of a loss by the sale of property taken over, one-quarter of such loss should be borne by the primary unit, of local association, making or recommending the loan upon which the loss was made.

_Seventh_: All expenses connected with the examination and recommendation of a loan shall be paid by the primary unit, or local association.

_Eighth_: The application for a loan should then go to a state organization, which should be created by a union of all the local associations. I suggest a central organization in each state for the purpose of lessening the expenses over the entire state, as the laws affecting real estate in the several states have some peculiarities to those states.

_Ninth_: Each state organization should have charge of all the business done in that particular state; the examination and final approval of the security; the examination and approval of the title; the collection of all interest; the payment of all taxes and insurance, and the final repayment of the loan.

_Tenth_: The state organization should be a union of all the local associations in any particular state, and should hold one-quarter of the capital of all the local associations as its own for the purpose of carrying on the business of that state.

_Eleventh_: All property upon which loans are made should be conveyed absolutely to the state institution where located with a waiver of all rights of foreclosure; but, providing for the advertisement and sale of the property, as if a judgment had been rendered. This is essential to save the cost of foreclosure.

_Twelfth_: In case of a loss, as the result of the sale of any real estate taken over, one-quarter of it shall be borne by the state organization.

I make this provision because no local association could carry all its losses, and yet it should be responsible for a sufficient amount of loss to impose a serious obligation upon the local association recommending the loan, and also a serious obligation upon the state institution for having finally approved and completed the loan.

_Thirteenth_: All the expenses of the state institution incurred by way of caring for the business of all the local associations should be paid by a percentage charge on all the business done in the state. This is desirable so that the mortgages shall go to the national organization, free and clear from any charges and obligations whatever.

_Fourteenth_: I would have a national organization which should fix the rate of interest to be paid by the borrowers, and the rate of interest of all the bonds and debentures sold. All bonds and debentures should be sold by the national organization, which should be under national supervision for the purpose of giving to the debentures the highest possible credit wherever they may be offered for sale.

_Fifteenth_: I think that one-half of all the capital of all the local associations in the United States should be transferred to the national organization, and be held and treated by it as if it were its own capital. And such capital shall be holden to the debenture holders as a guarantee, and for the purpose of securing the best possible credit for the national organization.

_Sixteenth_: The national organization, and all state associations, and all local associations, shall be under the supervision, and be examined by an auditor appointed by the President of the United States.

_Seventeenth_: To secure unqualified success for a Land Credit Bank in the United States, no business should be attempted until the capital paid in shall amount to at least $25,000,000; that is, until the national organization shall have a cash capital of its own of $12,500,000 in order that its debentures may bear the lowest possible rate of interest that a large capital with a national organization under national supervision will insure.

_Eighteenth_: The debentures of a national organization should be free of all taxes, local or national.

In general these are my recommendations, which I hope will be incorporated in the measure we are to prepare.

MR. MERCHANT: Mr. Farmer, I notice that you propose to confine the loans to agricultural land. Don't you think that a good and equally helpful business could be carried on by loaning money on city and urban property?

MR. FARMER: Possibly that is so, but I do not think so, and in any event, I never would combine these two classes of loans. If we are to have national Land Credit Banks doing a country and city or urban business, let them be kept entirely separate. The general business permitted and carried on by the Crédit Foncier is a just ground for severe criticism. It is permitted to take deposits. An American Land Credit Bank should have no such power. It should be confined, in my judgment, with extreme strictness to loaning money upon improved agricultural land. Mind you, I do not say that there should be no other Land Credit Bank to do some other kind of business. That is a matter for future and separate consideration.

MR. LABORINGMAN: Mr. Farmer, in all that you have said you have not once even mentioned Credit Unions or Mutual Credit societies. I had been betting on you to help me out in my fight for a recognition of the principle of coöperation, but it looks as if you had deserted me.

MR. FARMER: No, Mr. Laboringman, on the contrary, I will do anything in my power to help you or anyone work out the great saving principle of coöperation; but since I have been attending these talks two or three things have stuck in my crop and I could not get them out even if I tried, and one thing in particular applies especially to the agricultural societies, called credit unions.

_Mutual credit societies or credit unions are organized to furnish capital for production; that is, it is commercial capital, or credit for commercial purposes, not for investment purposes at all. Not a single dollar of a credit union should ever be loaned upon real estate. Not a single dollar! Not a single cent!!_ Such a practice would literally destroy the principle upon which they are founded; mutual aid to assist in production, not investment. Don't you remember how Mr. Banker pounded that into us; and convinced us all, too? But more convincing than anything else as to this great economic truth, that not one single dollar of credit union money should ever be loaned upon land, is the history of them. We must not forget that they were organized to secure personal credit and to depart from that practice is a perversion of their purpose and just to that extent must result in failure.

The coöperative idea for personal credit was originated in Germany by Francis Frederick Schulze, a little before the middle of the nineteenth century. It passed over into Austria and Hungary in 1851, into Italy in 1860, into Belgium in 1864, into France in 1883, into Scotland in 1889, and into Ireland in 1894. These dates are given to show the order of advance and the recentness of the movement in some parts of Europe. The first German association was formed in 1849 by Frederick William Raiffeisen. Herr Schulze did not get his started until the following year.

Herr Raiffeisen was poorly educated but deeply imbued with religious feelings. He lived among peasants in a sparsely settled and impoverished locality, and his object was to help the lowest classes. The associations which grew up under his guiding hand were mutual societies confined to small farming districts. The thought of profit was discarded and they were managed by the gratuitous services of their members. Herr Schulze was a talented writer and speaker, and when he took up his life work was holding a judicial post in his native town of Delitzsche. His philanthropy, although intense, leaned to the practical side. He believed in paid services and fair returns for money. The associations formed under his leadership were located mainly in towns. They were managed by salaried officers, and membership was dependent upon the purchase of shares on which dividends were allowed. But both kinds were founded upon the fundamental principle of combining persons together and using the credit created by their united guaranty for providing funds for members who might wish to borrow.

In the early days the mutual credit associations were formed simply by articles of agreement in the nature of a partnership contract, and members were jointly and severally liable without limit for all the loans that were made. In course of time, when the Government began to take official recognition of the associations, some of the followers of Schulze favored a limit to this liability. Hence the mark of distinction became clearly defined between "Raiffeisenism" and the "Schulze-Delitzsche" propaganda. The German law, as it now stands, requires mutual banks to have share capital, but allows them to be organized upon the limited or unlimited liability plan. All true Raiffeisen banks, in order to preserve their character, have shares of only a nominal value and devote dividends to educational or charitable purposes. In Germany these local banks are grouped under central banks, which in turn are linked together by two general central banks, and their funds are made to move freely for agriculture throughout the Empire. The centralization of the system has also been inaugurated in France.

Personal credit in agricultural Europe is obtained usually by means of the coöperative credit associations. They are also used by artisans and small tradespeople in the towns and cities. These associations are in fact the only banks which the farmers will patronize for short-time loans in the nations where they abound in the greatest numbers. With their aid poverty and usury have been banished, sterile fields have been made fertile, production has been increased, and agriculture and agricultural science raised to the highest point. Their educational influence is no less marked. They have taught the farmers the uses of credit as well as of cash, given them a commercial instinct and business knowledge, and stimulated them to associated action. They have encouraged thrift and saving, created a feeling of independence and self-reliance, and even elevated their moral tone.

The picture can hardly be overdrawn. Every traveler who visits the places where these little associations exist speaks in glowing phrases of the prosperity and contentment that prevail. They are organized on such simple lines that their management requires only ordinary intelligence. Failures have rarely occurred. In France and other countries they hold a record of having never lost a cent. The working capital and number of members of individual associations are so small as to be insignificant, yet they do one-third of the banking business of Italy; while the combined amount of their operations in Germany equal that of the commercial banks. But the mutual banks, both in town and country, are looked upon with favor in the financial world because they keep millions of dollars of petty sums in circulation which, except for them, would be idle and hoarded. They are, in fact, feeders for the commercial banking system.

In 1909 in Belgium 458 banks, with a membership of 25,762, had outstanding (roughly calculated) $4,000,000 of loans; in France ninety-six regional banks did upward of $25,000,000 of business on a capital of $2,983,646, while the 2,983 local banks, with a membership of 133,382 farmers, had $2,622,241 of capital and a record of over $20,500,000 of operations. There were nearly 6,000 banks in Austria. The membership was over 725,666, and the loans ran over $86,500,000. In Italy 690 banks that furnished reports had a working capital of over $170,091,946. In Germany there is one bank for every 1,600 of the population, and the total business done was over $4,888,000,000. In one Province there is a bank for every 3,000 acres of land; and so on for all other nations that have coöperative credit institutions. The rate of interest charged was one or two points lower than in commercial circles, yet these banks, with a few exceptions, made a fair profit on the turnover of their capital. In some instances it ran as high as 5 per cent and 7 per cent.

With this striking array of figures to show its stability and usefulness, it is remarkable that the farmers of the United States have been so slow to adopt this system of banking for temporary loans on personal security. It has existed in Canada for twenty-two years. In the Province of Quebec there are a number of mutual banks that have loaned hundreds of thousands of dollars. But Massachusetts is the only State in our country that has made an attempt to encourage its introduction. It already has a law allowing the incorporation of credit unions. It was passed in 1909 after a careful study of European legislation, and furnishes an excellent example for the other States. The first concern to start under this law was the Myrick Credit Union at Springfield. In twelve months it had one hundred and five members, a capital of $3,000 and $10,000 of outstanding loans. Interest rates have been low, yet it paid over 6 per cent dividends on its capital. Thirteen new unions were formed in 1911 and have $25,000 of capital. A pamphlet issued by the State bank commissioner gives a comprehensive description of the fundamental principles that a mutual association for personal credit must adhere to. I cannot do better than to quote from it. They are as follows:

_First_: The association shall be organized on coöperative lines. As the members may be either borrowers or lenders, according to circumstances, its affairs must be conducted in such a way as to give fair and equitable treatment to both classes.

_Second_: The association shall be one of persons and not of shares. To this end each shareholder has one vote, irrespective of the number of shares he holds. Furthermore, a limit is set to the number of shares or the amount of deposit which a member may have in the association, in order that no one person may have a too dominating influence or be able to damage the association by suddenly withdrawing large sums.

_Third_: Loans shall be made only for the purposes which promise to result in a saving or a profit to the borrower. Each applicant for a loan must state the object for which he desires to borrow, in order that the credit committee, which passes on all loans, may rigidly exclude thriftless and improvident borrowing.

_Fourth_: As loans are made only to members and as any member may become a borrower, care must be taken to admit to membership only men and women of honesty and industry.

_Fifth_: As personal knowledge of the character of the members is essential, the membership in an association must be restricted to citizens of a small community, or of a small subdivision of a large city, or to a small group or organization of individuals.

_Sixth_: Every provision must be made to bring the association within the reach of the humblest citizen. The par value of the shares should be small (it averages about $5), and they should be payable in very small installments. Loans of very small amounts should be made and should be repayable by installments if desired.

_Seventh_: In making loans it should be recognized that character and industry are the basis of credit, and a loan may be made to a member who has not adequate security to pledge for it, provided he can obtain the guaranty of one or more other members, but no member is obliged to guarantee the loan of another member unless he desires to do so.

_Eighth_: Borrowers must carry out to the letter the conditions of repayment and agreed upon at the time their loans are made. Prompt payment of obligations is a fundamental requirement of these associations.

It should not be inferred from the great success and good accomplished that the coöperative credit associations could be taken as models in their entirety or that the establishment of such societies would act as an immediate panacea for all the troubles that beset agriculture in America. They seem to be adapted only for localities where the population is fixed and settled and welded together in close relation by community of interests.

Let me call your attention to what the Government report says in support of this position. The Germans have had their sad experiences and it would be the height of folly for us to travel over the same road again, only to learn by our own experience what we can now know without paying for it.

Too much emphasis cannot be laid on the fact that these small credit societies are not organized for making loans on real estate. The deposits and funds received by them are withdrawable on short notice. This privilege must be allowed in order to attract the capital needed. But as loans to members yield interest considerably under the ordinary market rate, the only way they have of paying for the use of this capital is by making quick and numerous turnovers with it. In Germany they have taken long-time mortgages, but the practice is strongly denounced by all students who have investigated into the cause of the remarkable success of the Raiffeisen and Schulze-Delitzsche systems as contrary to the theory on which they are founded. Credit is indispensable to every business. It is the means whereby $1 is made to do the work of $50, as the saying goes, but its classifications and limitations cannot be ignored without danger. A loan to acquire something merely for consumption is not tolerated, no matter what may be the security offered. The loan must be strictly for a creative purpose. This is the first cardinal principle, and so rigorously is it adhered to in Europe that the credit societies invite to their circle only those who are producers of wealth.

_Another principle is that personal and real credit are inherently and irreconcilably separate and distinct, and each must have specially adapted institutions for carrying on its operations. This is only a reaffirmation of what we have already decided over and over again._

The recognition and observance of these principles have done much to prevent thriftless debt among farmers, and are undoubtedly the reasons why the land credit is so thoroughly organized on the European Continent. A loan on chattel or character security should naturally be for a short time and for temporary purposes, for such security is perishable and subject to loss or change. The long-time loan requires an unchanging and permanent security, and the only thing possessing this quality is mother earth herself. But when capital is once sunk in land it becomes fixed and can never be recovered except from the income created thereby or the amortization sums paid in representation of that income. A debtor should not be called upon to pay back the loan in a lump or in advance of his receipts from the land. To do so leads only to further borrowing, usually on more burdensome terms, when the mortgage expires. On the other hand, a private individual cannot be expected to take his money back in driblets or wait long years for its complete return. So private lending on real estate is a theoretical and also a practical wrong. The proof of this lies in vast numbers of foreclosures and the excessive interest rates of farm mortgages in western United States, where they are largely held by persons. The smallness of the annual payments and the length of an ordinary loan in Europe are shown in the tables of the Crédit Foncier, which have been given already. A glance at them makes it apparent that amortization, the basic principle of a land loan, can be brought into full play only by the aid of large corporations or associations with charters perpetual or lasting a long time.

MR. BANKER: It does not seem to me, under the circumstances, as though we could treat the Mutual Credit Associations or Credit Unions wisely. Indeed, I am of the opinion that legislation by us would interfere with and retard the progress of such associations.

UNCLE SAM: Mr. Laboringman has waited patiently to have his say about coöperation.

MR. LABORINGMAN: Yes, I have been biding my time, for I have something to say that ought to interest all of you, as a possibility at least, and if it is reasonable to do so, I hope that you will include some sympathetic laws by way of encouragement.

England was the birthplace of modern industrialism, as you all know. There, too, was started the great movement of modern coöperation. Small and insignificant was the beginning. In 1844 the Rochdale pioneers put all their little savings into the pot, and they amounted to only $140. With this they started a store. By 1845 they had seventy-four members and $900 of capital, and did $3,500 worth of business, by keeping their little business open only two evenings a week. They were an object of derision and all sorts of jibes.

S.P. Orth describes the situation as follows: Last year the British Government made a careful and complete report on coöperation in England, and found more than three million persons in the membership of the various societies, and over three times that number under the immediate sphere of coöperative influence. That means that one person in every five in the United Kingdom is now interested or influenced by this vast association of producers and consumers. During the past ten years, the increase of membership has been 55 per cent and the trade 75 per cent.

The productive and distributive business alone amounts to $640,000,000. The retail societies have $200,000,000 of capital. "Last year the sales of these retail societies totaled more than $352,000,000, or about $142.50 per member." It is most significant that the societies, in their own mills and factories, produced nearly 50 per cent of these goods themselves; that is, production and distribution are going hand in hand. They began by making boots and butter; now they make cloth, iron and all sorts of things.

The average profits for the last ten years have been nearly 15 per cent and there is now a serious discussion whether the cost of articles to the customer should not be lowered.

In some of the districts, notably some of the mining districts, the coöperative stores have a virtual monopoly, and their system of banking or keeping the surplus credits for the customer is a great boon. But in other very poor districts, keeping up the prices has worked some hardship. It is now proposed by some of the stronger societies to open special stores in the poorer districts and cut the prices.

All business, until a few years ago, was done on a strictly cash basis, but recently the insidious credit system has crept in, and it may lead to serious consequences.

Last year, out of its surplus, the Union of Coöperative Societies, a federation of all English coöperativists, voted $230,000 to charity, $450,000 to education, i.e., libraries, lectures, and concerts, and $50,000 to propaganda.