Banking

by William Amasa Scott

Two other groups of German institutions merit attention in this connection, namely, the so-called Schulze-Delitzsch and the Raiffeisen Credit Associations.

The Schulze-Delitzsch societies were the direct outcome of the period of dearth and famine through which Germany passed in the years immediately preceding the revolution of 1848. The first one was not a credit association, but a cooperative buying society, organized by a local judge named Schulze for the aid of his needy neighbors of the small trading class in the town of Delitzsch. In 1850 a credit association on the same plan was organized. Others followed, in rapid succession in and after the seventies, until at the present time they are numbered by the thousands and their members by millions, and they are scattered throughout the entire empire.

The principle of their organization is the association of a comparatively small group of neighbors, or of people who know one another well, or who may easily come to know one another well, by each making a contribution to a common fund to be loaned out to individuals on personal security chiefly, and which, together with the credit of the entire group, may be made the basis of security for larger funds to be borrowed on the open market. They are carefully organized on the cooperative principle, each member having an equal voice in a general assembly which chooses a board of directors and a small administrative board, to which is intrusted the actual management and administration of the affairs of the society.

Loans are made to members only, usually for short periods of time, on the personal security of the borrower and of others who are willing to vouch for him, and on the unusually favorable terms which the credit of the entire organization and very low costs of administration render possible. The knowledge which each member has of the character and business methods of his fellow members who borrow, and of the use to which borrowed funds are put, and the stake which each one has in the financial stability and success of the organization, bring the percentage of losses to a very low figure, and make it possible for these societies to grant their members maximum accommodations at minimum prices.

To the funds accumulated from initiation fees, membership dues and the sale of the associations' credit have been added, in constantly increasing amounts in recent years, the savings of the members themselves. Many societies have such an amount of funds intrusted to them in this way that they are not only entirely freed from the necessity of borrowing, but are obliged to seek opportunities for investment outside their own group.

This condition of affairs, in addition to many other common interests, led to the federation of the Schulze-Delitzsch societies into larger groups, and these in turn into state and national associations, through which surplus funds in one could be made to serve the needs of others inadequately supplied, and through which all the societies could be brought into efficient connection with the general money market of the country. For a number of years these federated societies conducted a large central institution, first in Frankfurt and afterwards in Berlin, known as the Deutsche Genossenschaftsbank. In 1904, however, this institution was absorbed by the Dresdener Bank, one of the eight great private banking corporations of Germany, which now serves as the central agency for all these societies.

The membership of these associations is not restricted to any class of persons, and they actually include a very large number of small farmers. An inquiry made in 1885 showed that in 545 of them, with a total membership of 270,808, there were 72,994 farmers, and that one-fifth of the total loans of these associations were made to this class of their members. They must, therefore, be numbered among the land banks of the Empire, or at least among the institutions which are helping to solve the credit problem for the agricultural classes.

The Raiffeisen societies resemble the Schulze-Delitzsch in many particulars and differ from them in others. Like them they are strictly cooperative in character, and, when organized for credit purposes, designed to supply members with loans on the most favorable possible terms. Their development was also due to the hard economic conditions of the period immediately succeeding the revolution in 1848.

They differ from the Schulze-Delitzsch societies chiefly in the following particulars: They charge no initiation fees and do not rely to the same extent on the proceeds of the sale of shares, the amount of which they place at a very low figure, often the lowest permitted by law; they make long-period as well as short-period loans, indeed the former chiefly; they do not pay dividends on their share capital, but instead put all profits into reserve funds or prevent their accumulation by keeping the loan rates low; they exercise more care than do the Schulze-Delitzsch associations to keep their societies small, laying great emphasis upon the importance of personal acquaintance between members and thus upon mutual watchfulness; and, in their origin, they were peasant organizations pure and simple, and hence more strictly land banks.

Their founder, F. W. Raiffeisen, Burgomeister of a small village in Westphalia, Prussia, wanted to rescue the poor peasants of his and other districts from the clutches of the usurers, into whose hands they had fallen and by whom they were being exploited in a most shameful manner. Since it was loans that these people needed and since their cash resources were always very low and in many cases nil, he felt that to require, as a condition of membership, entrance fees and the purchase of one or more shares of stock, however small, would be fatal to the success of his plans. He also firmly believed that in the integrity, industry, frugality, and agricultural skill of these people was the basis for sound credit and that cooperation was a means by which these elements of sound credit could be made available and attractive on the money market. At the beginning, therefore, no entrance fees or share subscriptions were required. Later Prussian law made share subscriptions compulsory and they were, of course, introduced, but they were made so low, and the acquisition of the money for their purchase so easy, that they have not been a serious obstacle.