Co*operative Banking. A PAPER READ BEFORE THE EAST of SCOTLAND CO-OPERATIVE CONFERENCE ASSOCIATION, i8th December 1886. 3 3 ^, 2 . 5r ( -Co-operative Banking. '1 ■ __ OUR RELATION TO EXISTING INSTITUTIONS. tO It would be unwise on our part, in discussing this ques¬ tion, not to recognise the proud position now occupied by the banking establishments of the United Kingdom in the monetary transactions of the world. We cannot ignore the fact that at present they are indispensable as chan¬ nels for the free circulation of the currency and credit of the country ; and further, that they perform important and useful functions as media for the promotion and develop¬ ment of our industrial and trade resources. Again, it would be difficult to imagine how, in the past, our agri¬ cultural interests, manufacturing enterprise, or home and foreign trade, could have been developed, or have attained their present efficiency or enormous volume, without the aid of the intricate mechanism of exchange which has grown up and become a necessary part of the existence of these banks. By means of their deposit, current, and cash- credit accounts, drafts, bills of exchange, and discounts, they are constantly facilitating the flow of capital—col¬ lected through the agency of their branches—from districts where it tends to accumulate to centres of commercial activity where it is rapidly absorbed; and by keeping in touch with the financial establishments of foreign nations, they greatly benefit the business portion of the community. But while it may be granted that these banks admirably fulfil their functions as credit institutions for the further¬ ance of trade and production on a competitive basis, can it be said—indeed, can it be hoped—that they will, to any appreciable extent, render similar services to co¬ operative enterprise 1 With shareholders indifferent or unsympathetic, if not antagonistic, to our principles, and 4 with directors and managers trained to look upon com¬ petition as the very life of healthy trade, can we reason¬ ably expect that our savings, in passing through such hands, will be employed for the benefit of our movement? It cannot be denied that the established banks are, to a large extent, only banks for the middle and upper classes of society; and that the percentage of interest allowed for deposits in no wise compensates for_ the want of encour¬ agement given to humble ventures in productive enter¬ prise. Consider for a moment the grave consequences that follow the placing of our trading funds or capital in these non-co-operative banks. In the ordinary course of busi¬ ness it comes into the possession of shopkeepers, commis¬ sion agents, wholesale dealers, and the like,—men who are more or less opposed to us, not only in principle but in practice ; or worse, it may pass into the hands of specula¬ tors, who, investing it in foreign securities,—government debts, railway and mining companies, land and cattle com¬ panies, &c.,—may starve or cripple our home industries. We know that vast sums of capital are thus annually pass¬ ing from our country into the commercial, industrial, and agricultural enterprise of foreign nations, which, acting like a two-edged sword, cut down the prosperity of our own manufactures, while strengthening the hands of those we have to compete with in our own markets. It is not only short-sighted but simply suicidal for working-men co-operators to aid and abet such a policy, for while by the success of their distributive stores they have accumu¬ lated between three and four millions of savings, yet they allow thousands of their fellow men and women—men and women whose poverty increases the burden of the poor-rates and forces down wages in the labour market— to endure the bitterness of enforced idleness,—an idleness they might do much to render unnecessary. Can co- operators reasonably complain of the selfish spirit existing among capitalists if they make no effort to crush a similar spirit in themselves ? It may be wise to wrap our talents in napkins and carefully preserve each his own little hoard; but would it not be wiser, as the parable teacheth, to lay them out at usury amongst our fellow-workmen ? It is not enough that we can save capital, we must learn to make an intelligent use of it. The way out of the difficulty 5 is clear and distinct, and the necessity for action daily becomes more imperative. To the work of distributive must be added that of productive reform, and both will make more rapid and truer progress, if fostered and con¬ trolled by that connecting link, a body of trained financiers, who are in direct sympathy with co-operative principles. With all the accumulated experience of our existing bank¬ ing institutions to guide us, with higher principles to unite us, and nobler issues at stake, need we hesitate to make an effort to bring our finances more directly under our own management ? WHAT OTHER NATIONS ARE DOING. It is painful to notice the apathy shown towards this very important question by the vast majority of those within our ranks. It cannot be said that ample informa¬ tion, both as to theory and practice, has not been sup¬ plied. For many years, through pamphlets. Congress reports, and very frequently in the columns of the News, the subject has been discussed and reported upon. We owe special thanks to Mr E. V. Neale for his valuable contributions on the movement as developed on the con¬ tinent of Europe. It has been again and again thoroughly demonstrated that industrial or people’s banks have been successfully established in Germany, Austria, Belgium, Italy, and the United States ; and still we remain inactive, —like Micawber, perhaps, “ waiting for something to turn up.” In Germany the first people’s bank was formed in 1814, at Delitzsch, in Saxony, with 170 members and a capital of^30 ; in seventy years the number had risen to 1965, having an estimated membership of 800,000, a capital of their own of ;i^8,75o,ooo, doing a trade of ^200,000,000 per annum, and making a profit of ^600,000 a year on that turnover. In Hungary there are 400 co-operative banks, in Italy 368, and in the American States they have spread over a large part of the Union, numbering no fewer than 1700 in Pennsylvania alone. The influence of these institutions in promoting thrift, industry, and independence among the poorer classes is undoubted, and testimony to this effect can be abundantly produced from Government reports as well as from private 6 individuals. In the Co-operative Congress Report for 1886 we are told “that the people’s banks in Germany, by making capital accessible to their members, enable them to save ; and by providing them with an acceptable dividend on the savings which they have paid up on their shares they gradually convert their members into cajpital- ists.” In the report on Hungary it is said that “ they develop the thriftiness, economy, and self-reliance of the people, and make them independent of money-lenders and usurers.” What an immense advantage it would be to thousands of our working classes could they manage to evade the clutches of the pawnbroker by receiving a small loan at a reasonable rate of interest, when sickness or temporary want of employment had thrown them into pecuniary difficulties ! No doubt trade and friendly societies partially meet this evil, but every one who has studied the subject knows that there is indefinite room for expansion in this direction, and no more forcible reason could be advanced for organising co-operative banks for the benefit of our industrial classes. In the Government Report on the system as developed in the United States, it is stated that not only is thrift and industry encouraged, “ but real estate rises continually in value, and the drink bill is checked.” What golden opportunities in the future for the Chancellor of the Exchequer, and what bright prospects for the cause of temperance, should people’s banks be successfully intro¬ duced into this country! . Speaking on the spread of the movement m Germany, Ex-Provost Ewen, of Hawick, an enthusiast in the cause, made the following remarkable statement in a lecture recently delivered in Paisley ;—“ By means of co-opera¬ tive banks in Germany the character of the people’s industries had been changed so much that it was said that there were more people working for themselves than for masters. They had enabled the people to provide capital for themselves, whereby many thousands of them, of all trades, had raised themselves into independent positions.” The recently issued Government Report on “The System of Co-operation in Foreign Countries supplies evidence largely corroborative of this statement. We are told “that of all co-operative enterprise in Germany, these people’s banks are the most developed 7 and the most successful, and that they appear to have, in a great degree, overcome the indebtedness and misery which was so often the lot of the working classes a quarter of a century ago, in consequence of the usurious interest that they were compelled to pay on even the smallest loan.” The following account of the main principles on which these banks work their business is also taken from this Report ;— 1. The loan seekers are themselves the directors of the institutions established for the satisfaction of their needs, and share the risk and profit. 2. The transactions of the association are based throughout on business principles ; the fund of the association pays to the creditors, and the loan takers pay to the fund of the association, bank interest and com¬ mission, according to the rates in the money market. The managers, especially those who have charge of the funds, receive remuneration according to their services. 3. By full payment once for all, or by small continuous contributions on the part of the members, shares in the capital of the association are formed, a'ccording to the amount of which the profit is divided, and placed to their credit until the full normal sum is reached, by which means an evergrowing capital of its own is acquired for the business of the Association. 4. By the entrance fees of members, and by reservation of shares, a common reserve fund is accumulated. 5. Sums further necessary for the complete carrying on of the business are borrowed on the common credit and security of all the members. 6. The number of members is unlimited ; entrance is open to all who satisfy the requirements of the statutes, and any one is free to cease to be a member after giving due notice. You will observe that the financial arrangements of these banks, relating to the accumulation of capital, the formation of a reserve fund, and the regulation of advances or loans on heritable security, bear a close resemblance to those of our own distributive stores ; but at this point the parallel stops, for not only do these banks advance money against bills, bonds, mortgages, and on credit account with approved personal security, but also against sale warrants, statements of accounts for goods, and specifica¬ tions of work undertaken. It is gratifying to note how intelligently and' carefully these transactions are managed by the directors—working men for the most part, be it remembered so as to ensure a maximum of good sound commercial business at a minimum of cost and loss. The small percentage of bad debts in proportion to business done abundantly testifies to this. “ Of the risk attending these transactions, a pretty good judgment may be forrned from the following statement of the losses of the societies which made returns to Dr Schulze-Delitzsch during the ten years from 1871 to 1881. The losses are stated at an average per member in marks, of which each equals is., and is divided into 100 pfen¬ nings :— 1872. 1873. 1874. 1875. 1876. 1877. 1878. 1879. •63 3-48 I-80 3-49 2-89 3-38 274 3-80 1880. 1881. 2-03 173 making a total, per member, of 25-97 marks, or ^i. 5s. ii^d. The total membership of these societies during these ten years was 3,604,789, so that the total loss was ;^4,696,235, or 12s. lod. per ^100 on the total advances during the same period, which were £ 73 h 9 S 3 A 53 ” This small percentage of loss is all the more remark¬ able, when we remember that almost the whole of the period referred to was one of severe trade depression, not only in Germany, but- also in all the most important commercial countries of the world. _ Mr E. V. Neale, from whose valuable pamphlet I have just quoted, further remarks that the sound financial position of these banks “depends greatly upon the local character of the businesses to which their operations have been generally limited, and the sound judgment which, in consequence, the managers were able to form as to the solvability of their customers. Naturally this local trad¬ ing implies a constant supervision over the managers by the shareholders, for which the constitution,of the banks provide by the formation of a supervising committee. 9 The losses which have overtaken some of these banks appear generally to have come from over-confidence in the manager, leading to a neglect of these precautions.” A brief analysis of the occupations of the various share¬ holders or members of the German people’s banks is specially interesting, as it clearly demonstrates their democratic nature. In the Report for 1884, we find that 32’8 per cent, of the members were manufacturers, mine- owners, builders, physicians, teachers, &c., and people of independent means, while 67-2 per cent, followed the call¬ ings of farmers, gardeners, foresters, fishermen, labourers, artisans, port and railway servants, shopmen, &c. The class of dependent workmen contributed in per cent., while the number of independent artisans reached the large average of 30-2 per cent, of the whole. It appears that 98,548 independent agriculturists belonged to such societies in 1884; and that loans or credits amounting to nearly ^4,950,000 were granted by 559 societies, on 3329 accounts, in 171,718 separate sums to the same class, in the same year. This demonstrates how indispensable these institutions have become to large sections of the industrial population of the German Empire. There are two points in connection with the working of these German associations to which I should like to draw your special attention before leaving them. The first is, that in the great majority of the banks the liability of the members is unlimited. Dr Schulze-Delitzsch attached great importance to this provision, “ considering it indis¬ pensable as the foundation of that trust on which the system rests ; but, on the other hand, we have the experience of the Italian, Belgian, and Hungarian associations, where the liability of the members is limited to the amount of the shares for which they sub¬ scribe, and there is no apparent indisposition on the part of the people in these countries to trust their savings with them.” Intelligent management and sympathetic contact with the people probably neutralises, or in a manner dispenses with, any advantage that unlimited liability of member¬ ship may have over limited; looking of course on the associations as healthy living organisms, having an equitable relation to the different sections of the com¬ mercial community. The extreme importance of attracting outside deposits, and thus opening up for poor people monetary resources formerly confined almost exclusively to the rich, cannot be over-estimated ; and we are told that the character of these German associations as loan societies for the poorer classes is not materially impaired by the admission of non-members as depositors into the business, provided always that the extension of credit to me 7 nbers remains the main object they have in view. These loans on deposit or current account from non-members is a great source of strength, placing at the disposal of the banks much larger funds than they could command of their own, which, lent out at remunerative rates of interest, gradually accumulates a working capital and reserve. “ The result of this process is shown in the following statement of the banks which made returns to Dr Schulze-Delitzsch in 1882, from which it appears that— The charge for interest was . The cost of the business And the loss from bad debts . While the net profit, after providing for these charges, was ^790,986 269,078 40,072 413,121 ■ It is further gratifying to note the many signs of healthy development in these institutions. In 1884 the propor¬ tion of “own” to borrowed capital was 32'18 per cent., being o'13 per cent, higher than in 1883. The reserve funds also show a considerable increase, and it is becom¬ ing more and more the rule to cover losses, in the first place^ out of the profits of the year. The second point, with which I will deal very briefly, is the existence of a central association or bankers’ bank, situated in Berlin, forming the connecting link between the local associations and the commercial world. Its functions are analogous to those of the human heart and as necessary. Through it are constantly coursing the multiplicity of business transactions of the local banks scattered all over the empire,—debt, capital, and credit in all its forms, being kept in constant circulation. 11 OUR OWN POSITION. Passing from the consideration of the co-operative ( bank movement as it exists in other countries, let me now bring under your notice our own position in relation to this question. Banking facilities, there is no doubt, exist to a certain extent in the ordinary business regulations of most of our distributive associations ; but these facilities, whether in the form of withdrawable share capital, opportunities of trading against share capital under certain specified con¬ ditions, the formation of building and loan departmerhs and penny savings banks, do but touch the fringe of the financial problems co-operators are called upon to grapple |B Again, while our Scottish Wholesale Society fulfils the functions of a deposit bank, in a limited degree, to the federated associations of which it is the head, and has K ' lately extended its efforts by granting loans on heritable security to impecunious societies, yet, let it be noted> ' these services are only rendered to associations in their corporate capacity^ and not to the individual members thereof. The English Wholesale Society, however, goes further. It receives not only sums of ^lo and upwards on deposit- receipt, bearing interest, at seven days’ notice, or for fixed ^ periods of longer duration, from persons not otherwise customers, but also opens current accounts with any society located in places where they may have banking correspondents. It may also be mentioned that the profits made in the English Wholesale Banking Depart¬ ment are apportioned on co-operative principles, customers participating therein as well as shareholders. It might be a question, worthy of consideration by the Scottish Wholesale, whether it could not open cu^ent , accounts with its members on similar terms to those ! ' adopted by the English Society; and perhaps a step towards extending banking facilities to individual mem¬ bers of stores might be made by both of the Societies issuing cheques against deposits, on the Cheque Bank system, making arrangements to have them cleared through the London Branch of the English Wholesale, A 12 For abundant proof of the great want of efficient bank¬ ing machinery to facilitate the investment of our surplus funds, I need only remind you of the growing difficulties experienced by our wholesale and retail societies in dis¬ posing of the share or loan capital of their members— accumulating so rapidly in their hands—on advantageous terms. That the English Wholesale should have recently been compelled to invest ;^ioo,ooo of these funds in 3 per cent, consols,—funds saved to a large extent on the trade transactions of the stores, netting profits ranging from 10 to 20 per cent, on their sales,—is an anomaly we hope the intelligence of co-operators will not suffer to live long. We have further evidence of a like nature in the returning of share capital by distributive associations to their members, and in the lowering of the rate of interest allowed. Such a state of things, we would suppose, could hardly exist if a well-regulated system of co-operative ^ banking was established in our midst. We are told that the English Wholesale Bank has an annual turnover of about ^16,000,000, but what would it be were the ^25,000,000 of trade done by the English stores passed through its ledgers ? It is no uncommon experience for a country branch of any of our great joint-stock banks to have a turnover of from three to four millions per annum, and you may accordingly judge what scope there is for co-operative banking flourishing, if supported by the private custom of the 820,000 co-operators of this land, in addition to the business of the stores. Again, in the course of time, the funds and business of trade unions, friendly societies, and building associations, would naturally drift into co-operative banks. I observe from a recent report issued by the registrar of trades unions, that in Scotland and Ireland, 34 societies, who had made returns, possessed funds amounting to ^25,000 at the close of 1886, and had an annual income of ;!^24,5oo. Returns made by 153 English societies showed funds amounting to ^479,889, and an annual income of ^^462,057. But many unions make no returns to the registrar, and it would take up too much space to quote statistics relating to the financial position of friendly and building societies. We have thus immense resources at our command for the establishment of many co-operative banks. 13 THE PRACTICAL SOLUTION. Now, the practical solution of this question lies, not so much in the further extension of banking facilities by our \ wholesale societies, however desirable in itself, but in persistent efforts on the part of distributive and pro- - ductive associations, favourably situated, geographically, towards each other, to promote the establishment of local banks for their own convenience and benefit ; which might be federated to the present wholesale societies, if the rules relating to their banking departments were so altered as to allow their being worked on a basis distinct from the other businesses they are engaged in. The necessity for establishing co-operative banks on a / local footing is strongly insisted upon by Mr Ewen. He ^ I argues that “the extinction of small industries in country I places, and in towns in this country, is a great calamity ^ to the labouring classes, and to the community generally, in as far as it reduces the purchasing power of country i - people. That there is a most pressing necessity for re¬ adjusting the condition of capital and labour, and work¬ ing back to the wider distribution of capital, by means of better banking for the encouragement of small farms, small factories, and small industries of every kind ; so that, as the wealth of the country increases, the pro¬ ducers may have a fairer share of it.” He considers “ local banks on the co-operative principle would do far more to distribute the wealth and increase the trade of the country than the large monopolist banks do. Co¬ operative banks would encourage co-operative produc¬ tion, and if the working people would take up the move¬ ment, they would not only save money, but help their class to reach a higher social position in life.” These words of Ex-Provost Ewen convey admirably, and with no uncertain meaning, the true spirit of our new industrialism. We can distinctly connect the growth of ^ pauperism and irregularity of employment with the growth of our great manufacturing industries. The remedy for this social disorganisation lies in the revival of our ancient trade guilds, purged of the barbarisms of the Middle Ages. With the true instinct of the poet and social economist combined, Carlyle in his “Past and Present,” and Ruskin in his “ Political Economy of Art,” 14 and other works, have pointed to this solution of the problem ; and no body of men are more active in pro¬ moting its accomplishment than the co-operators.* Returning from this digression, these local banks—to quote the words of Mr Ewen—“should be joint-stock with limited liability, the shares transferable and each, £i of which should be paid up by instalments to suit the incomes of working men. The remaining £4 should be reserved liability for the security of the deposi¬ tors and the stability of the bank. The capital may be ;^5o,ooo or ^100,000, but ^10,000 or £20,000 might be enough to begin with, to be increased as the business increases. It is not so necessary to have a large paid-up capital as it is to have a large number of shareholders for the strength and popularity of the bank, because deposits form the working capital, and the reserve or uncalled J capital is the sheet anchor, while the more shareholders there are the more trade they will bring to the bank, both in the way of deposit and business customers. “ Co-operative banks and other co-operative associa¬ tions should work in harmony. Good committee men would most likely prove good directors ; but if the necessary administrative ability be awanting in our ranks —which I am loath to believe—it can, like every other commodity, be bought, and we have the money to buy it. “ When the co-operative bank is opened, it should lay itself out for giving all reasonable banking facilities to the smaller class of customers for the deposit of their savings, and for the obtaining of small loans up to £200 or so, with a special desire to give banking accommodation to parties who may have a moderate capital of their own, but would be the better of more money to work upon.” It is almost certain, that as these banks grow in strength and number, co-operative production will lift its head and become a power in the land. In Germany or Italy, countries where co-operative banking has reached a high state of development, the existence of long-established, well-managed productive * “ I believe, most firmly, that as the laws of national prosperity get familiar to us, we shall more and more cast our toil into social and communicative systems; and that one of the first means of our doing so will be the re-establishing guilds of every important trade in a vital, not formal, condition .”—Political Economy of Art, pp. 164, 165. associations, hungering after capital and custom for the extension of business, would be almost an impossibility ; while the formation of such societies as the “ Labour,” “Aid,” and “ Productive Federation ” Associations, would meet with speedy and abundant success, promoted as they are by men well known and valued for their business knowledge and ability. What the Germans and Italians have done, it is surely possible for us to accomplish. It augurs ill for the proverbial sagacity and energy of our people if they permit these nations to outstrip them in the race for social and industrial improvernent. I believe it only requires vigorous and constant agitation, for no con¬ siderable length of time, to bring about an activity of thought sufficiently strong to culminate in practical results. There are no obstacles in the way, more difficult to remove, more insurmountable, than those already successfully overcome by the workers in connection with our movement. The members, capital, and business, are ready to hand, and it only requires some organised effort to make success certain. In conclusion, it would be well to remember that the ' power and prosperity of our joint-stock banks depends, not so much on any privilege bestowed upon them by the State, nor on any great command of capital of their own, but to a large extent on the confidence, the trust, they have inspired in the great mass of the people who have deposited their savings with them. The success of such banks as the “London and Westminster,” “Capital and Counties,” “London and County,” and “National Pro¬ vincial Bank of England,” demonstrates this. All are banks having no note-issue of their own, and yet, not¬ withstanding the privileges bestowed on banks of issue by the Acts of 1844-45, they have fought, and fought success¬ fully, for popular favour and business. While the great source of their strength lies in the confidence they com¬ mand from the public, their great source of profit lies in the large amount of funds placed at their disposal in the - form of deposits on which they pay low rates of interest. Their high profits are earned, not on the turnover of their capital, but on the turnover of their deposits, which are relatively very much larger than their capital ; and the division of the profit being made on the capital only, they are able to pay dividends ranging from to 20 i6 per cent. The following statistics taken from the balance- sheets of two of these banks, for the half-year ending June 1886, further illustrates the above remarks :— London and West- minster Bank Limited. London and County Bank. Paid-up Capital and Re¬ serve Fund . ;£4,44S,620 ;^3,000,000 Deposits and Current Account Balances . 23,626,373 28,259,022 Ratio per cent, of Deposits and Acceptances to Paid- up Capital and Reserve F und .... 531 per cent. 1053 per cent. Dividend for 1885 16 „ 20 „ It is thus a fallacy to imagine that the power of issuing notes is essential to the success of a bank, for while the bank notes and gold circulated in the country are estimated to fall short of one hundred and fifty millions per annum, the yearly circulation of cheques, bills, drafts, &c., is known to be between four and five thousand millions. The total, taken from the Clearing House Returns for 1885, amounted to ^5,511,071,000, from which, however, we must deduct, say 1,200,000,000 for transactions on Stock Exchange and in Consols, to get at the true amount of ordinary commercial business. This being the case, we have a fair field, and I am sure, as co-operators, we would scorn to ask any favour ; and, in the words of Mr Thomas Hughes, “ I am satisfied that the intelligence and trustworthiness manifested and developed in the conduct of our co-operative societies, and the central institutions which have grown out of them, is adequate to undertake and successfully conduct, under conditions adapted to our social state, a co¬ operative banking business which may soon become no unworthy rival to the people’s banks of our Continental neighbours.” Edinburgh Co-operative Printing Company Limited.