l»tatc fflolUge of 3lgrtc«lt«rE At Q^acnell Hniueraitg Jftljara, ». f- B Cornell University f Library The original of tliis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924014050490 RURAL CREDIT IN GERMANY By HOMER C. PRICE, M. Sc. Professor of Rural Economics Published by ^•-'-'- The Ohio State University- Columbus 1913 INTRODUCTION The widespread interest in the subject of a better system of rural credit in America has centered attention on the European countries in which successful systems are now in operation. Germany was not only the first to develop a rural credit system but at the present time has the most extensive and highly dt-veloped system. The following brief description of the existing institutions that furnish both real and personal credit to German farmers is based upon personal investigation and study while a student at the University of Halle in 1911-12. The report embodies but the merest outline and does not go into the details of the organization or operation of any one of the institutions. The attempt has been made, rather, to give a general sur- vey of the institutions that have been developed to furnish credit to German agriculture and to show their particular field of operation and their relative importance. In the preparation of the material the writer is under special obligation to the officers of the various credit insti* tutions with whom he came in contact and wishes to acknowledge their universal kindness and willingness to furnish the information sought. He is particularly indebted to Geheimrat Dr. Johannes Conrad, Professor of Economics in the University of Halle, Oekonomierat Dr. Otto Rabe, Director of the Chamber of Agriculture of the Province of Saxony and to Freiherr Dr. von Gustedt, Director of the lyand Mortgage Association of the Province of Saxony, for valuable assistance. CONTENTS Page Sources of Working Capital 7 Real Credit 8 1 . Co-operative I^and Mortgage Associations 9 {Landschaften) 2. Land Credit Banks (^Landes-Kreditkasseri) 15 3. Mortgage Banks {Hypothekenbankefi) 16 4. Vuhlic S&vi-ags BaiOk {Oeffentliche Sparkassen^ . . 16 5. Insurance Companies ( Versicherungsgesellschaften) 17 6. Provincial Auxiliary Banks of Prussia {Provin- zialkilfskassen in Preusseri) 18 7. Revenue Banks of Prussia {Rentenbanken in Preussen) 18 8. Agricultural Improvement Banks {Landeskul 19 turrenienbanken) Proportion of Agricultural Loans made by Different. . . Credit Institutions 20 Persona] Credit 20 1. Raiffeisen Banks 21 2. Shulze-Delitzsch Banks 27 Conclusions 29 Bibliography 30 RURAL CREDIT IN GERMANY The rural credit system in Germany is not only the oldest, but it is the most extensive and highly developed in the world. The fundamental principle on which it has been developed is co-operation of borrowers-. Instead of making their loans independently and individually, the German farmers have organized, pooled their securities and made their loans on the most favorable terms possible and have secured almost as low rates of interest as the government itself. Co-operation in business has not been confined to credit institutions in Germany, but is found in all lines and is probably more highly developed than in any other country. In 1912 there were more than 30,000 co-operative societies in Germany, representing practically every field of human endeavor. In agriculture alone there were over 24,000, of which 16,000 represented rural banks having an aggregate membership of over one and one-half millions and deposits of over $250,000,000. The sources of the capital secured by the German rural credit system may be classified under three heads: (i) Sub- vention from the government, (2) Savings deposits of the rural population, (3) Sale of securities, principally of the land mortgage bonds. Subvention by the government has not been any great factor in the rural credit system of Germany. Where it has been utilized it has usually been for the purpose of aid- ing communities and associations rather than individuals. Through the Land Credit Banks. Provincial Auxiliary Banks, Revenue Banks and Agricultural Improvement Banks the government has furnished some loans, but in reality it is relatively an unimportant factor in the credit system as a whole. The Prussian government has furnished loans through the Prussian Central Bank at Berlin, which was established in 1895 with a capital of 5,000,000 marks furnished by the government at 3% interest. The govern- ment has continued to increase its capital until it now has 75,000,000 marks. The funds of the bank are not for loan- ing to individuals or for use in agriculture exclusively, but 8 The Ohio State University are available for all co-operative banks and organizations. It was established as a state institution, for the purpose of promoting co-operation in Germany. The leaders in Ger- man agriculture do not look with favor upon government subvention for the maintenance of a credit system. They hold it to be uneconomic and unnecessary and that there is abundance of capital available for agricultural purposes if the credit system is rightly organized. The savings deposits, classified as the second source of capital, are an important factor and one that is constantly increasing. As already mentioned, the rural banks alone carry savings deposits of over $250,000,000. These are used principally to supply short time loans on personal security. By far the most important means of providing capital is by the sale of securities. These are usually in the form of mortgage bonds {Pfandbriefen) and are secured by mort- gages on farm lands. The capital that is made available by the three means mentioned above is handled through two distinct types of institutions, viz., (i) the institutions which provide real credit, that is, make loans secured by mortgages on real estate; (2) the institutions which provide personal credit through loans made on the personal security of the borrower and his associates. The loans made through the real credit institutions are long time loans and provision is made for their repayment in annual or semi-annual installments. The personal credit institutions provide the short time loans that furnish the working capital of the German farmers. REAL CREDITS The institutions that furnish real credit to the German farmers are: (i) Cooperative Land Mortgage Associations {Landsckaften) , (2) The Land Credit Banks {Landes Kreditkassen) , (3) Mortgage Banks {Hypotkekenbankett) , (4) Public Savings Banks {Oeffentliche Sparkasses), (5) Insurance Companies (^Versicherwngsgesellschafteii), (6) Pro- vincial Auxiliary Banks in Prussia {Provinzialhilfskassen in Freussen), (7) Revenue Banks in Prussia {Re7itenbanketi in Preussen), (8) 'L,a.nAlra'provem&nt'Ba.uVs {Landeskulturren- tenbanken). Of all these, the cooperative land mortgage associations (^Landsckaften) are by far the most important. RuRAi, Credit in Germany 9 1. Cooperative Land Mortgage Associations. (I^and- schaften.) The co-operative land mortgage banks are the oldest organized form of rural credit in Germany and in many respects the most satisfactory and important. The first co-operative land mortgage bank was established in Silesia in Prussia in 1770, for the large land owners. It was in no sense an institution for the ordinary farmer, but was organized exclusively for the nobility who were hard pressed financially. At the close of the Seven Years' War (1756-1763) Frederick II, King of Prussia (Frederick the Great) , found the formerly rich and flourishing estates of Silesia in a deplorable condition. The continued wars, the frequent changes in currency and the demoralized prices for farm products had almost ruined the land owners. A Ger- man merchant by the name of Biiring in 1767 presented to the king a scheme for financing the land owners. His plan was based upon the theory that the soil is the nation's great- est asset and that in order to obtain credit upon it the securities must be made readily negotiable. Biiring' s plan provided that the king should establish a compulsory co- operative society of the large land owners of Silesia for the purpose of making their loans. Instead of making loans individually they should pool their interests and issue bonds secured by their combined land holdings. This plan, at first rejected, was accepted in its entirety by Royal Decree, August 29th, 1769, and the Generallandschaft of Silesia was established July 9th, 1770. For 142 years this institu- tion has served the land owners of Silesia and enabled them to secure their loans at a rate of interest far lower than could be secured in other provinces where similar systems of credit had not been organized. So successful were the results secured by this first I^and Mortgage Association that other similar associations were soon established. These for the most part were established in Prussia as provincial institutions. lo The Ohio State University At present there are the following Co-operative I^and Mortgage Associations in Prussia, which in 1910 had the following amounts of outstanding loans: Association Founded Outstanding Bonds East Prussia 1788 426,152,350 M. West Prussia 1787 123,074,405 New West Prussia 1861 186,278,210 Berlin 1868 449,563,500 Pomerania 1781 252,007,525 New Pomerania 1871 19,006,900 Posen 1857 301,525,300 Silesia 1770 608,634,180 Saxony , ... 1864 126,675,800 Celle 1790 15,579,100 Hanover 1825 24,706,650 Bremen 1826 10,360,425 Westphalia 1877 74,554.30° Centra] 1873 433,255,000 Total 3,051,373.645 M. Mark equals 23.8 cents. Co-operative I^and Mortage Associations are based on the same general principles in their organization and man- agement, but frequently differ in the details of their opera- tions. One of the most important differences is the amount of property a person must own to become a member and a borrower. Originally these associations were founded for the large land owners exclusively and were known as "Ritterschaften." The members were of the landed gen- try who owned estates (^Ritterguter) which were held for military service and whose owners had manorial jurisdic- tion and certain administrative privileges. However, the limits of membership were soon extended and the tendency has been to decrease continually the amount of property required for membership. In some of the provinces, as in East Prussia, an association was establshed for the small land holders exclusively. In the Landschaft of Saxony, which is representative of an association formed for all classes of farmers, the minimum property .requirement that admits to membership is farm real estate on which the owner pays at least 90 marks per yeat tax. But the Director, Herr von Rural Credit in Germany 1 1 Gustedt told me that the tendency was to fix the mimimum at the smallest amount of land that would furnish employ- ment and a living for a farmer and his family rather than an arbitrary amount that must be paid for taxes. Another point in which the Associations differ is the amount that they will loan on property. Originally it was limited to fifty per cent of the value, -but in most cases two- thirds of the assessed value for taxation purposes is now granted. In case a farmer is not satisfied with the tax valuation of his property as the basis of determining the amount of his loan, he has the privilege of having his property valued by a committee from the association, at his expense. In all cases first mortgage must be given, but in case the property is already incumbered, the association will help the proprietor pay off previous mortgages in order to obtain a new loan. The Co-operative Land Mortgage Associations are semi- public institutions. Their constitutions and by-laws are approved by the General Assembly of the state in which they are located. The oversight of their business is under the direction of a government official (in Prussia, the Minister of Agriculture) and the higher officers of the association, although elected by the members, must be approved by the government. Relation of the Farmer to the Association. A farmer wanting to borrow through the association must first make application for membership (no one can be a member unless he is a borrower from the association). After the title of his farm has been examined and found satisfactory, he has the privilege of borrowing on first mortgage to the limit allowed by the rules of the association, which in most cases is two-thirds of the assessed value of his farm for taxation. The association does not have the money on hand to make the loan but issues mortgage bonds, known as Pfand- briefen, of equal amount to the mortgage. The borrower has the option of taking these bonds and selling them him- self or of having the association sell them for him. There are several features of these bonds that are char- acteristic. First, they are secured not alone by the mort- gage of the farmer for whom they were issued, but by all the mortgages and property of the association issuing them. Sec- T o s u 2 12 The Ohio State University ond, they do not run for any definite period and there is no fixed time at which they mature. Third, the holder does not have the right to demand payment of the face of the bonds, but the Land Mortgage Association has the privilege of paying them at any time. For example, the bonds may be called in and paid six months after they are issued or fifty years after, at the option of the association. As a mat- ter of fact, the selection of the bonds for payment is made by lot and the numbers of the bonds selected are published in an of&cial publication that is received by all the banks. The holders of bonds usually leave it to their banker to watch for the publication of their bonds for payment and to turn the same in. Under no conditions is the amount of bonds outstanding permitted to exceed the amount of mort- gages held by the land mortgage association. Negotiability of the Sonds. The business of the land mortgage associations has been done so conservatively that their bonds are regarded as the very best of security and are favorite investments for tru.st funds, savings banks and any capital seeking a perfectly safe investment that is always negotiable. They are listed regularly in the stock exchanges and are quoted daily in the financial market reports pub- lished in most of the daily papers. They may be bought or sold through the banks any day and are as negotiable as gov- ernment bonds and sell practically as readily. They are is- sued in denominations ranging from loo to 500 marks, with interest coupons to be paid semi-annually. Interest Rates. The interest rate the bond bears is at the option of the farmer making the loan and at present is 3%. 3/^% or 4%. The market price of the bond depends upon the rate of interest it bears and the condition of the money market, and since the farmer in making his loan does not get the money itself, but the bonds of the association ( or the proceeds from their sale) , he is interested in choosing the rate of interest that will give him the largest net return. As a rule this is the bond that is selling nearest to par. On July I, 191 2, 3% Province of Saxony bonds were sell- ing at 81, 3J^% at 90, and 4% at 99.80, and at the same time 4% national bonds of Germany were selling at 100. In case a farmer, making a loan for $1,000.00, chooses, a 3% interest rate for his loan, and 3% bonds are sell- ing for only 81, he gets from the sale of his bonds only Rural Credit in Germany 13 $810.00, but he gives his note and mortgage for $1,000.00 and pays $30.00 per year interest. If 4% bonds are selling at 100 and he chooses a 4% loan, he gets $1,000.00, for his bonds, pays $40.00 per year interest and gives his note and mortgage for $1,000.00. When bonds go above par they are called in and paid off by the farmers refunding their loans at lower rates of interest. Here comes the advantage that farmers reserve for themselves in the privilege of paying off the bonds at will. Just such a thing happened in the seven- ties, the rate of interest advanced to 5% due to the scarcity of money and the enormous demand for it in building rail- roads on the continent. Ten years later, the rates of inter- est sank until 3 % bonds sold close to par, and the farmers rapidly paid off their loans made at the higher rate of inter- est, by issuing new bonds at the lower rate of interest and selling them to pay off the old ones. On the other hand , when interest rates advance the farmers are secure, because their loans cannot be called in nor their interest rates raised. The farmers who made their loans at 3% when 3% mort- gage bonds sold at par, in the nineties, are relishing this feat- ure now that interest rates have advanced to4% . The far- mers in this way are able to take advantage of the money market and make their loans at the lowest rates of interest, and when once made they are secure from any advances. Amortization of Loans. One of the most valuable fea- tures of the loans made through the land mortgage associa- tions, from the standpoint of the farmer, is their gradual amortization through annual payments made with the interest. This is obligatory on the part of the borrower, and usually is ^ % to %% of the face value of the loan. In the Land Mortgage Association of the Province of Saxony the amortization is |4% P^r year. On a loan made at 4% interest is added the % % amortization and ^ % to cover the operating expenses of the association, making a total of 5 % . By paying this amount annually for forty to forty-five years the loan will be paid off. The farmer also has the privilege of paying it all or in part at any time. However, many of the better farmers make no attempt to pay off their loans any faster than is required through the annual amortization payments, finding that they can get their credit cheaper in this way than in any other and can make more interest on the money used in their business than they have 14 The Ohio State University to pay for it. The Saxony association also has the provision that when io% of the original loan has been paid an addi- tional loan can be made. In this way a farmer can continue to carry indefinitely, practically the same amount of loan on his property, if he finds it advantageous to do so. The average length of time farm loans run in Saxony is about twenty-five years. The advantage of a long time loan repaid in annual or semi-annual installments is that it enables the farmer to make permanent improvement from which he gets returns very slowly. The building of a barn could seldom be ex- pected to increase a farmer's profits sufficiently to enable him to pay for it in five years, but in twenty-five to forty years it may prove an extremely profitable investment. The same thing is true of numerous other permanent im- provements such as the draining of land, the planting of orchards, the clearing of land, the building of roads, the installation of water systems. These all represent long time investments that the farmer would gladly make, if he could get his capital at a low rate of interest and repay it in small annual payments extending over a long period of time. THE CENTRAL LAND MORTGAGE ASSOCIATION In order to extend the markets for their bonds, and especially in the hope of securing an international market for them, a Central I,and Mortgage Association was founded at Berlin in 1873, by several of the provincial associations. The results have not been all that were expected. It was thought that by pooling interests and issuing bonds of the General Association that should be secured by the property of all the associations instead of a single association, the bonds might be regarded more highly as securities and looked upon more favorably by investors. But the results showed that the bonds sold no better than those issued by the provincial associations, and as a matter of sentiment and provincial pride, investors frequently preferred to buy the bonds of their home provincial association rather than of the Central. While some of the bonds of the Central Asso- ciation found their way into the international market, they were in no considerable number and had no material effect upon the market. Rural Credit in Germany 15 Medium Between Investors and Borrowers. The land mortgage associations serve as an intermediary between the borrower and persons having money to loan. They mobil- ize the loans and put the securities on the market in the form of bonds in which a person has a chance to invest, though he has only $25.00 to loan. The money of small savers thus becomes available for use in agriculture. In this way immense sums are made available for the use of farmers; and investors who, on account of the small sums that they have to loan would have no opportunity to loan to farmers, have the opportunity of investing their money to as good advantage as the capitalist; the farmer who is a small borrower has the opportunity of getting his loan at as low a rate of interest and on as favorable terms as the large borrower. It serves to standardize loans and offers advan- tage to both the borrower and the lender. y^''-'" 2. Land Credit Banks. (Landes-Kreditkassen) These are similiar in nature to the I,and Mortgage Associations, but lack their co-operative feature. They were first estab- lished in 1830, in Hessen, by the government. In most cases they have been established by the government of the province or district particularly for furnishing credit to the small farmers who were unable to avail themselves of the lyand Mortgage Associations. They have not attained to anything like the importance of the Land Mortgage Asso- ciations, but had agricultural loans outstanding in 19 12 of about $ 1 50,000,000. They have developed particularly in the section in which the Landschaften are lacking, and are found especially strong in western and southwestern Ger- many. Such institutions are found in Hessen, Nassau, Westphalia, Oldenburg, Saxony, Brunswick, Lippe and Alsace-Lorraine. They differ from the Land Mortgage Associations in that their loans may be called in and they may grant personal credit as well as make loans on real estate. They were established for the most part in sections that were in particu- lar need of development, but lacked the capital with which to make the improvements. Their work to a certain extent has been paternalistic. However, they have resulted in building up agriculture and greatly enriching the com- munities in which they have been established. The Land 1 6 The Ohio State University Credit Banks had over 600,000,000 marks outstanding in loans in 19 10. 3. Mortgage Banks. (^Hypothekenbanken.') There are thirty-eight mortgage banks in Germany, most of them established between i860- 1880. They are private stock companies organized for the purpose of making real estate loans and they issue debentures just as the L,and Mortgage Associations. Their loans are made on both city and farm estate. By a national law passed in July, 1899, their activi- ties are specifically defined. They are under strict govern- ment supervision. Thej^ are not allowed to loan over 60% of the worth of property, except in the case of the farm real estate, it is optional with the individual states to allow them to loan two-thirds the value of the property. At least one- half of the loans made on farm real estate must be amortized by payments made with the interest, and in Bavaria the banks are not allowed to make any loans except they are amortizable. They are not allowed to call in loans so long as the payments are kept up. An idea of the importance of the Mortgage Banks can be gotten from the volume of business done by them. In 1910 the 38 Mortgage Banks had a capital stock of 805,000,000 marks and outstanding loans of 10,623,000,000 marks and 10,316,000,000 Pfand- briefen. I,ess than ten per cent of the loans were on farm real estate, and over one-half of these were made by the Bavarian Mortgage Bank. So that for the most of them, agricultural loans have little significance. Patterned after the Landschaften, but organized as stock companies on pri- vate capital, the Mortgage Banks have sought to accomplish for the cities what the Land Mortgage Associations have done for the country. They have organized and are oper- ated for the profit of the stock holders, while the L,andschaf- ten is co-operative and is operated for the benefit of its mem- bers. However, in a country like the United States, where co-operation has never made any great headway, it is likely that the general plan of the Mortgage Bank may prove the most feasible plan of establishing a system of rural credit. 4- Public Savings Banks. {Oeffentliche Sparkassen.') The Public Savings Bank has attained an important place in the life of the German people and has made particularly rapid strides in recent years. Cities, districts, provinces maintain Public Savings Banks for the benefit of the work- Rural Credit in Germany 17 ing classes, to encourage them to lay aside part of their earnings. Through these banks they have an opportunity to deposit their savings where they are safe and at the same time to get interest on them. On the other hand these small sums that by themselves are too small to have any value for investment, are concentrated into large sums that become an important financial consideration in carrying on the business of the country. In 1910 there were over 3,000 Savings Banks in Germany, with deposits of over four bil- lion dollars and over twenty million savings accounts, which represent 30% of the total population of Germany. In the rural credit system of the country, the Savings Banks are one of the most important factors. On account of being scattered so widely and generally throughout the country they are close to the farmers, who have opportunity to go to the banks personally and talk over the matter of their loans. The officers of the Savings Banks are known per- sonally in many cases, by the farmers, and they naturally go to them to make their loans. According to the latest statistics, the Public Savings Banks had loans of over three billion marks on farm real estate, — practically as much as the I,and Mortgage Associations. There are, however, certain disadvantages to the loans made through the Savings Banks, because the loans are subject to being called in, since the funds from which they are made may be withdrawn from the bank at any time. As a matter of fact, it is seldom that this happens. Such loans have the further disadvantage of having no provision for their repayment by the annual amortization plan. Neither are interest rates at which they are made perma- nent, as is the case with the loans made through the Land- schaften, or Mortgage Banks. 5. Insurance Companies. ( V^rsicherungsgesellschaf- te7i.) A favorite investment of the Insurance Companies in Germany, as in America, is mortgages on real estate. In 1908 the 256 German Insurance Companies had about 3,880 million marks invested in mortgages on real estate. This, for the greater part, was invested on city real estate, but a considerable amount, however was loaned on farm real estate, principally on large estates. For the small land owner the Insurance Companies ofFer httle or no credit, as the loans 1 8 The Ohio State University are too small and the expense of doing the business too great to make it profitable for them. 6. Provincial Auxiliary Banks of Prussia. (-Die Pro- vinzialhilfskassen in Preussen.') This class of credit institu- tions is found only in Prussia. The first one was established in 1 83 1, in Westphalia, and at present they are found in the provinces of East Prussia, West Prussia, Posen, Pomera- nia, Silesia, Saxony, and three in the province of Braden- burg. They were established primarily for carrsdng out developments that were of general interest and affected a community and were beyond the scope of an individual. The drainage of a territory that involved large and expen- sive outlets, the straightening and diking of rivers, the building of roads and such projects as were of communal rather than individual interest were the purposes for which Provincial Banks were established. Consequently they were established by government subvention. While the loans were made principally to communities and to co-opera- tive societies, they were made also to private individuals for developing their lands. Although the loans were usually restricted to two-thirds of the taxation value of the real estate, yet exceptions were made for special classes of im- provements where loans were granted to three-fourths, and sometimes to five-sixths of the value of the property. In East Prussia the provincial Bank grants loans for draining land even to the full value of the real estate. 7. Revenue Banks of Prussia. {Rentenbanken in Preussen.) The Revenue Banks are another Prussian institu- tion, founded under the laws of March 2nd, 1850, for the purpose of providing means for the peasants, particularly of the eastern provinces, to free themselves from the last ves- tiges of servitude to the landlords of the estates to whom they at one time belonged as feudal dependents. Seven such banks were established, authorized to furnish the necessary credit for this purpose. At the present, their chief activity is in financing the colonization work that is being carried on by the government in eastern Germany. In 1910 they had outstanding loans of over seventy-five million dollars, and for the purpose for which they were established, have played an important part in the rural credit system of the country. From an American point of view, their work has been RuRAi< Credit ,in Germany 19 exceedingly paternalistic, and to meet a situation that can never arise in our country. 8. Agricultural Improvement Banks. {Landeskultur- rentenbanken.') These are public institutions for supply- ing the necessary capital for carrying out agricultural improvements by means of loans to land owners, associations and communities. The first one was established in the kingdom of Saxony,.in 1 861, and later in Prussia, Hessen, and Bavaria. The purposes the Agricultural Improvement Banks serve to promote are similar to the Provincial Aux- iliary Banks of Prussia {Provinzialhilfskassen) and conse- quently they have never developed to any great extent in Prussia. The more important improvements for which they have been established are drainage and irrigation, building of roads, planting of forests, building and maintaining water-ways, and the building and extending of dikes. The basis on which loans are made is quite similar to that of the I^% depending upon the current interest rate, which was usually I fo higher than the rate paid on deposits. Sources of the Capital of the Central Banks. The working capital is supplied largely from the capital stock and deposits of members. These Banks also carry loans from the two general central banks (the Central Agricultural Loan Bank of Germany, with headquarters in Berlin, founded in 1876 byRaiffeisen, and the National Bank for Co-operative Societies, with headquarters at Darmstadt) and the Prussian Central Bank which has already been mentioned, and in addition, loans from private individuals and other banks. The amount and sources of their capital in 1909 was as follows; 26 The Ohio Stats University Marks Percentage of total Paid up capital 21,493,532 8.2% Reserve funds 4,321,500 1.6% Deposits from the members .. . 187,345,775 71 -3% Ivoans from the general central banks and the Prussian Cen- tral Bank 19,047,687 7-2% Loans from other banks or private individuals 28,616,979 10.9% Other items 1,990,123 0.8% Total working capital in 1909 262,815,596 100.0% Terms on Which Loans are Made. The loans made by the rural banks are principally on personal credit and for a comparatively short time. In some cases loans are made on real estate, but they are not common. In the original Raiffeisen banks the loans were only made for definite, specific purposes that had to be approved by the bank before the loan was granted. Among the peasants and small land owners who had little security to offer, the character and industry of the borrower were important considerations. It has been said of Raiffeisen that he capitalized the integrity, industry, and honesty of the poor man and furnished him capital with which to carry on his business. The association being co-operative, it was to the interest of all to help a member when he was in difficulty. When it was necessary to extend a loan to avoid loss on the part of the borrower, an extension of time was arranged. The one thing that the rural banks have striven for in Germany is to meet the needs of the farmer. This is natural because they are owned, controlled and managed by the farmers, and they have simply endeavored to meet their own needs. This is particularly true in the length of time for which loans are made. In the city a sixty to ninety days loan is sufficient, but in agriculture a loan is needed that extends over the growing season and until the crop is harvested and marketed, which is usually from six to nine months. The hours of doing business are frequently varied to meet the needs of the community in which the bank is located. The relatively small territory to which the busi- Rural Credit in Germany 27 ness of the bank is restricted makes the proximity of the bank also a matter of no small convenience. There are two kinds of loans that are made, viz., loans on current accounts and loans for fixed periods. About one-third of the loans at the present time are loans on current accounts while the other two-thirds are for fixed periods varying from six months to three years or even longer. The practise of giving loans on current accounts is on the increase and is the most convenient form for the members, who guarantee their accounts to a certain amount and are at liberty to draw on the bank up to that amount at any time, but they do not pay interest except on what they have actually drawn. The members give securities for their loans by having other members go security for them by furnishing collateral and by giving their note. The furnishing of securities is the form of security most com- monly used and generally preferred. 2. Shulze-Delitzsch Banks. Contemparaneous with the Raffeisen banks and like them named after their founder Herr Shulze of Delitzch near Leipzig, the Shulze-Delitzsch banks were established to meet the needs in urban condi- tions. Herr Shulze like Herr Raiffeisen was moved by the distressing economic conditions of the lower classes at the middle of the last century and took up co-operation as the means by which they might emancipate themselves. While Raiffeisen devoted his efforts to bettering rural conditions, Herr Shulze confined his efforts to artisans and small trades- men of the cities. The system of credit and banking that he developed was essentially different from that of Raiff- eisen, and is particularly adapted to the commercial business of merchandizing where the turnover is more frequent than in agriculture. They are organized largely on the limited liability basis (in 1910 two fifths of them were with limited liability, ) the shares are relatively high and they distribute fairly high dividends. Their business approaches much more nearly to the regular banking business than does that of the rural banks. Their officers are salaried and their business is conducted on strictly business lines. The loans that are made by them are for short periods, three to six months, and their area of operation is not restricted. They have been exceptionally successful and their business has grown very rapidly in recent years. 28 The Ohio State University The loans granted by this class of banks in 1901 amounted to two and one half billion marks and in 1910 to over four billion. There were 1035 banks of this class with a mem- bership of 645,342 in Germany in 1910. Sources of Capital. The total working capital is less than that of the rural banks, but per individual bank much greater, averaging at the present time over i,5000,ch30 marks per bank. The proportion of the bank's own funds is considerably higher than is the case with the rural banks, as shown by the following statistics for 19 10: Percentage of the whole Capital stock 216,330,103 M 14.8% Reserve Funds 94,187,564 " 6.5% Capital from ouside sources 1,145,014,688 " 78.7% Totalworking capitals, 1910 1,455,532,355 M 100.0% While the rural banks draw their members exclusively from farmers, the Shulze-Delitzsch banks draw their mem- bers from various occupations, of which farmers furnish tne largest class as shown by the following classification of the members in 1910: Percentage Farmers 26.57% Agricultural laborers 2.41% Artisans 23.03% Merchants, manufacturers, etc 19.72% Workmen and apprentices 10.55% Professional men and clerks 8.93% Retired persons 8.79% 100.00% There are no statistics available to show what per cent of their loans is made to farmers, but considering the fact that over one-fourth of the members are farmers, there is no doubt that a considerable volume of their business is done with farmers. General Secretary, Dr. U. Altrock, whose estimate of the real credit carried by the German farmers through the public institutions, given on page 20 estimates that the personal credit granted by these banks is 1,800,000,000 RuRAi< Crbdit in Germany 29 marks, and the statistics of the rural banks show that their outstanding loans are 1,500,000,000 marks. It is probable that the difference, 300,000,000 marks, represents personal credit loans that are made principally through the Schulze- Delitzsch banks. CONCLUSIONS The effective and efficient system of rural credit that has been built up in Germany during the past centmry, for the most part, has been done independently of government subvention. The land mortgage associations obtain their capital from the investing public, by the issuing of bonds. The rural banks obtain their working capital from the deposits of members and others who use them for depositing their savings. The entire system has demonstrated that abundant capital is ready to invest in agriculture when its securities are made readily negotiable. It also demonstrates that capital is available at as low a rate of interest for agricultural enterprises as for any other industry, when the credit system is properly organized. The high state of cultivation to which the farms of Germany have been brought, and the large crop yields, are undoubtedly a direct result of the rural credit system that has made capital available for improving, fertilizing and cultivating the land. To farm intensively requires the investment of a large amount of capital for labor, fertilizers and operating expenses, and as the United States begins to adopt more intensive systems of agriculture, it will call for the investment of far greater capital than in the past. The German rural credit institutions have been devel- oped to meet German conditions. They are determined by the national characteristics of the people, by traditions, by the laws of the country and by the attitude of the farmers toward one another and as a class toward other classes. Cooperation thrives much more readily among German farmers than among American farmers. German farmers are far less individualistic than American farmers and have far more confidence in their neighbors. All of these facts must be taken into consideration in discussing the adoption of any of the German institutions in America. While it is not likely that any of the German organ- izations will exactly fit American conditions, yet the prin- 30 The Ohio State University ciples are applicable, and we should be able to establish institutions founded on these principles that would give equally satisfactory results. There are four things that have been accomplished for the German farmers through their rural credit system that any successful American system must accomplish: First. I