Readings in Money and Banking Part 61

It cannot be said that the banks created our industries, since the funds which are gathered by the banks in increasing volume are mainly the result of the increasing productivity of capital invested in industrial undertakings. It is true, however, that the creative power which in a comparatively short time placed German industry in its present commanding position took its origin with the men who put to practical use and in the interest of economic progress of the nation the achievements and inventions in the domain of science and technique. It is the undisputed merit of the persons at the head of the banks that they appreciated those endeavours and supported them by advancing the requisite capital, oftentimes incurring great risks for the banks. It is almost self-evident that the banks, which in carrying out their policy of furthering industry had often to a.s.sume considerable risks, have tried to secure, and in a large measure have succeeded in securing, a lasting and decisive control over industrial corporations.

Until the seventies of the last century the financial regulation of German foreign oversea trade had been almost exclusively in the hands of London banks. The establishment in 1870 of the Deutsche Bank at Berlin meant a turning point in this regard. The founders of the Deutsche Bank had recognised that there existed in the organisation of the German banking and credit system a gap which had to be filled in order to render German foreign trade independent of the English intermediary, and to secure for German commerce a firm position in the international market. It was rather difficult to carry out this programme during the early years, the more so, because Germany at that time had no gold standard and bills of exchange made out in various kinds of currency were neither known nor liked in the international market. The introduction of the gold standard in Germany in 1873 did away with these difficulties, and by establishing branches at the central points of German oversea trade (Bremen and Hamburg) and by opening an agency in London the Deutsche Bank succeeded in vigorously furthering its programme. Very much later the other Berlin joint-stock banks, especially the Disconto Gesellschaft and the Dresdner Bank, followed the example of the Deutsche Bank, and during the last years particularly the Berlin joint-stock banks have shown great energy in extending the sphere of their interests abroad.

Among the customers of the joint-stock credit banks figure chiefly members of the commercial and industrial cla.s.ses, who obtain from these banks both their long- and short-term credit, and in the second place holders of medium-sized and large agricultural property, who apply to them for short-term "operation" credit. The credit demands of the members of the small-farm cla.s.s and of the small independent producers are generally met by the co-operative credit societies.

LAND CREDIT INSt.i.tUTIONS

As regards the credit on landed property there is hardly a country with an organisation as perfect as Germany. The beginning of this organisation dates back about one hundred and thirty years. The Prussian State had emerged from the storms of the Seven Years' War (1756-1763) as a recognised European power, but the sacrifices of the years of war had completely exhausted the country.

As the landed n.o.bility was then the princ.i.p.al support of the State and was so regarded by the Government, it became a matter of public interest to relieve the financial distress of the landed proprietors by enabling them to pay off systematically their mortgage debts.

The efforts in this direction, in which the Prussian King, Frederick the Great, personally took an active part, led to the creation of the land-mortgage a.s.sociations (_Landschaften_), which must be considered the first important step toward the organisation of land credit.

"Landschaften" are a.s.sociations endowed with the rights of a corporation and operating under state control. Their boards of directors have the attributes of official authority. They are autonomous inst.i.tutions within the limits set by the state supervision.

The Landschaften obtain the funds for the granting of credit through the issues of letters of mortgage or mortgage bonds--_i. e._, as a rule, the borrowers receive the loan in the shape of mortgage bonds of the a.s.sociation, and it is left to them to negotiate these bonds on the stock exchange. At first the letters of mortgage were made out on a certain estate (estate debentures). But as the purchaser of such letters of mortgage was forced to keep watch over the condition and management of the mortgaged estate--even though the a.s.sociation itself maintained permanent control of the debtor--the sphere of circulation and the ease with which these bonds could be sold were naturally limited.

It was only when the issue of corporate mortgage bonds was started, the security of which was guaranteed either by the entire mortgage claims of the a.s.sociation or the collective responsibility of their members, and when these bonds were given a large market through their admission to exchange transactions, that the highest degree of mobility was reached.

It was mainly to meet the needs of credit on urban real estate that mortgage banks (_Hypothekenbanken_) were created, and thus a special organisation of city real estate credit was formed. The greater number of the mortgage banks now in existence was founded during the decade 1862 to 1872; practically all the others were founded during the building boom of 1894-1896. Most of the mortgage banks cater exclusively to the demand for real estate credit; some others combine this specialty with other lines of banking.

While the land-mortgage a.s.sociations are based on the principle of co-operation and do not pursue a profit-making policy, the mortgage banks have been founded as joint-stock companies. The capital stock serves as working capital as well as guaranty fund.

Bonds are issued against acquired mortgages and secured by the latter.

Almost all these banks issue their bonds to bearer, a privilege granted them by the State. Inasmuch as the bonds are held in many cases by small investors, the State, in order to protect the interests of these bondholders, from the very beginning secured to itself the right of control, limiting at the same time the field of operation of these banks by certain legal enactments and regulations.

On the whole, interest rates on mortgage loans are subject to but slight variations. It should be remarked, however, that the borrower when obtaining a mortgage loan has to pay a bonus the rate of which will be considerably higher in times when money is scarce than in times when its supply is redundant.

In times of a large increase in the supply of bonds the mortgage banks may go into the market to buy their own bonds. Such action prevents serious fluctuations in the quotations of these securities and fits them to be objects of permanent as well as temporary investments, including the investment of funds which must be kept in liquid shape.

In the present day when complaints are urged against the great indebtedness of country landowners, the fact must not be lost sight of that the transition from extensive to intensive operations in agriculture could not have been accomplished without a wide use of mortgage credit, and that such development was necessary to feed the rapidly increasing population of the country. Moreover, through this great growth in the population a basis was created for industrial activity on a large scale.

RAIFFEISEN AND SCHULZE-DELITZSCH BANKS

[188]The Raiffeisen bank is the Schulze-Delitzsch bank applied to the country, with the variations required and justified by the difference of environment.

The model rules of the Raiffeisen societies state that: "the object of the society is to improve the situation of its members both materially and morally, to take the necessary steps for the same, to obtain through the common guarantee the necessary capital for granting loans to members for the development of their business and their household, and to bring idle capital into productive use, for which purpose a savings bank will be attached to the society." One word in the above, viz., "morally,"

intimates at the outset a distinctive trait. Raiffeisen always kept the moral aspect very prominently before him. He insisted that all the members of his inst.i.tutions should profess the Christian virtues. In his propaganda he used to the full the one intelligent power in rural districts, the parish priest or pastor. With their help he developed a new parochial life around the village bank. With their help he touched in the peasant the chord of neighbourly affection and stirred him to give it practical effect.

What is the structure of a Raiffeisen bank? and, first of all, whence comes the working capital?

The subscribed capital of the bank is practically nil; there is nothing but the universal unlimited liability of the a.s.sociating members.

Schulze-Delitzsch, dealing with industrialists subject to unseen risks, who operated in trade matters out of sight and control of the society, obliged his a.s.sociates to subscribe a considerable share capital, not only as a proof of thrift, but as a material guarantee for their individual and corporate debts. Raiffeisen, dealing with agriculturists and villagers, demanded no such security, since each member possessed in his little farm, his cattle or implements, material guarantee far beyond those of any subscribed share. In addition he avoided the danger to which a share bank is always exposed, namely, that the concern may be run for the benefit of a few non-borrowing shareholders, rather than for that of the general credit-seeking members.

Unfortunately this natural difference was elevated, or rather dragged down, into an issue of principle; and the law of 1889, drawn up under the guidance of the Schulze-Delitzsch party, insisted that every co-operative society should have shares. The Raiffeisen societies comply with this by nominal shares of (say) 10 marks[189] on which no dividend is declared; though, occasionally, some of the annual profit is indirectly returned to individuals in the shape of a slight addition to deposit rates and a slight deduction from loan charges, calculated at the end of the year.

Because Raiffeisen wished to create credit among small agriculturists out of the immaterial a.s.set of mutual knowledge, he limited the size of each society to a single village. For his purpose he was right, but his partisans are not right when they look askance at the larger areas of the town bank, where the nature of the members' business and the society's control is different.

All profits remain the collective property of the society, to be used for the society's good. They are divided into two cla.s.ses of reserve fund--(1) reserve fund proper; (2) foundation fund. The former is regulated in the same way as in town banks. The second corresponds to the shareholders' dividend. It is undesirable to have nothing beyond an ordinary reserve fund, because money thus placed can only be withdrawn to cover losses: while if placed in the foundation fund it can be used for positive improvements, such as the extension of premises or the establishment of a burial fund. In actual figures, the reserve funds are not so strong as in the town bank, owing in part to the lower loan charges.

The loan capital, as in the town banks, is made up of small savings and deposits. It is drawn, either from within the area covered by the bank, in which case it comes both from members and non-members, the former being where possible rewarded at slightly higher rates in order to encourage membership; or from without the area, in which case it of necessity comes from non-members. Savings are received in sums from one mark upwards: the smaller amounts being collected by penny stamp books, similar to those used in the Post Office Savings banks of England. The willingness with which the peasants bring their savings to the bank is a triumphant proof of Raiffeisen's contention that the small agriculturists by a combination of unlimited liability and close supervision can become absolutely credit-worthy. No savings since the foundation of the first village bank have ever been lost through bankruptcy.

In addition the bank obtains credit from a central bank with which it has a current account.

The funds thus raised are utilised for three kinds of credit--(1) Simple loans; (2) current accounts; (3) property transfers.

Current accounts are rare except in villages where there is a little industry. With regard to the simple loan, the security, as in town banks, is personal pledge, land mortgage, or (very rarely) deposit of collateral. The personal pledge, as with Schulze-Delitzsch, is the most frequent. But Raiffeisen interpreted it more strictly than Schulze-Delitzsch. Not only must the credit-seeker produce an outside testimony to his character: he must also convince his society that he really merits this testimony. The member of the Schulze-Delitzsch bank is accepted on the strength of his general business reputation, added to his security, personal or material. The member of the Raiffeisen bank, though he have the best of pledges, is rejected unless he is known in his private life to be virtuous and industrious. The man of doubtful sobriety has no chance of obtaining anything from a country bank.

If it happen that an applicant is little known or new in the district, so that no one will go pledge for him, then the society, provided it is convinced of his good character, will grant a loan against land mortgage. This is not to be confused with the real credit granted by a land bank, where the value of the estate alone is considered. It is personal credit with a material caution, and it is not a long-term loan.

Furthermore, the society requires to know not only the character of the borrower, but also the specific object for which his loan is destined.

It must be satisfied not only that the borrower wishes to employ the loan in his business, but also that the operation proposed is likely to turn out successful.

Property transfers are not strictly credit business. They are in the nature of investments for superfluous money, just as a town bank might invest in railway shares, with the difference that the investment is local and designed to meet indirectly the credit wants of members. The nature of the operation is as follows: A dies, leaving his estate to his heirs; and these, perhaps because they wish to leave the neighbourhood or because they want ready money for other reasons, put up the estate for sale in allotments. Or perhaps A during his lifetime wishes to get rid of a part of his estate. X, Y, Z, neighbouring peasants, are buyers, but they can pay only gradually--which they are allowed to do by law.

The credit bank steps in as intermediary. It pays to the heirs of A or to A himself, as the case may be, the price of the estate minus a small commission. X, Y, Z become the debtors of the credit society, paying off their debt by regular instalments, which include princ.i.p.al and interest.

The bank cuts out small traffickers in land, usually Jews, to the benefit of sellers and buyers. It benefits the sellers by charging them a moderate instead of an extravagant commission: the buyers by saving them from permanent relationship with land dealers who seek their ruin.

The bank insists on regular payment of the instalments, because it wants its money back, while the dealer is constantly tempting the buyers to fall into arrears in order that he may eventually acquire the land himself.

There is a second form of property transfer, where the bank not only acts as intermediary but itself holds the estate for a time. Some land dealer, having obtained a mortgage on the estate of A, demands payment.

A cannot pay and is forced to sell his estate by public auction. The dealer forces the sale, just when the estate market is likely to be most unfavourable, hoping to buy the estate for himself at an absurdly low rate. Thereupon the bank steps in; it bids against the dealer, and if he does not offer a good price, buys the estate itself and resells it later in the year, when the market is more favourable. In this way A can pay off his debts at once. Moreover, the bank does not keep the difference between the price of purchase and final resale. After the deduction of a moderate commission, it is handed over to A, who thus obtains a further sum with which he can make a fresh start.

These dealings in property transfers are confined to Southwest Germany, where estates are sold to be split up into little lots. The banks only enter on these transactions where the following conditions are satisfied--(a) where they have a superfluity of money over and above that needed in their ordinary loan business; (b) where some party to the transaction is a member of the society: either the seller or the buyer or the creditors of the seller holding second and third mortgages, who would obtain nothing were the estate sold below its real value.

What is the nature of the machinery by which this work is conducted? A Raiffeisen bank is never what a Schulze-Delitzsch bank sometimes is; a handsome building with barred windows, within which are a number of clerks discharging a constant round of business, while the directors interview special clients in a room apart. It is a small single room, probably at the back of a farm building, opened twice a week and presided over by a single occupant--the accountant. Business is apt to proceed desultorily; a small child brings in a few savings; an hour afterwards a palsied old man, signing by a cross, draws out a couple of pounds, and so on to the end of the day. But this is the unimportant part of the business. The really important part is the weekly meeting of the directors, half a dozen in number, who meet to discuss the various credit claims which have arisen. They are unpaid, as by the nature of their work they can afford to be. The accountant, their executive clerk who keeps the books, "the soul of the society," as Raiffeisen called him, is the only salaried official. The committee of supervision and the general a.s.sembly function as in the town banks; except that their control is more decided, probably because their knowledge is more on a level with that of the directorate, which is itself unspecialised.

What are the results achieved by the rural bank, thus operating and thus controlled?

More than ten times the number of country banks grant only one-sixth of the credit afforded by the town banks. The total membership of the country banks is nearly twice as large, but the average membership per bank is nearly seven times as small.

The average credit advanced per member is 500 marks. The average rate of interest is not exactly known; it appears to be between 4 and 5 per cent., _i. e._, nearly 1 per cent. cheaper than in the town bank. The duration of loans varies between one and ten years in accordance with the requirements of agriculture. They are repayable in small instalments, covering princ.i.p.al and interest, although the member may repay in lump if he wishes. The loan can always be called on four weeks'

notice, but the right is never exercised, unless the borrower is allowing his property to deteriorate or is becoming insolvent through extravagance or has misapplied money lent for a particular purpose. The inculcation of punctuality in payment, as a moral duty, was the hardest of Raiffeisen's tasks, as it was his greatest triumph.

If it be asked finally what Raiffeisen banks have done, which other banks have not, it may be replied that Raiffeisen created out of hopeless chaos the only kind of credit organisation possible for the small agriculturist. Industry necessarily brings business men together to some extent. Agriculture in itself holds the farmer apart, and preserves him in lonely ignorance to be the victim of the perambulating money-lender. To-day more than 50 per cent. of the independent agriculturists of Germany are members of rural banks; and another 10 per cent., chiefly the larger farmers, are members of town banks. The non-co-operative agriculturist is becoming the exception. The Raiffeisen banks are thickest in the southwest of Germany, the home of the small peasant proprietors. Indeed the change wrought in many of these villages is nothing short of a revolution. The experience of the parent village bank may serve in ill.u.s.tration:

"About an hour's walk from Neuwied on the Rhine is situated on a plateau bordering the Westerwald the little village of Anhausen. The district is not very fertile and the inhabitants are mostly small peasant proprietors, some with only sufficient land to graze a single ox or cow.

An owner of ten acres is a rich man. Before the year 1862 the village presented a sorry aspect; rickety buildings, untidy yards, in rainy weather running with filth; the inhabitants themselves ragged and immoral; drunkenness and quarrelling universal. Houses and oxen belonged with few exceptions to Jewish dealers. Agricultural implements were scanty and dilapidated; and badly-worked fields brought in poor returns.

The villagers had lost confidence and hope, they were the serfs of dealers and usurers. To-day Anhausen is a clean and friendly-looking village, the buildings well kept, the farmyards clean even on work days.

The inhabitants are well if simply clothed, and their manners are reputable. They own the cattle in their stalls. They are out of debt to dealers and usurers. Modern implements are used by nearly every farmer, the value of the farms has risen and the fields, carefully and thoroughly cultivated, yield large crops." And this change, which is something more than statistics can express, is the work of a simple Raiffeisen bank.

Both town and country banks are formed into higher unions for general organisation and educational propaganda; the country banks also unite for credit business.

The partisans of the town banks are apt to pride themselves on their complete self-sufficiency. They forget that this is possible for them, not because they have sufficient funds in their own coffers to supply every credit need, but because an increasing part of their business is conducted through the trade bill of exchange, which is a marketable commodity that can be rediscounted by any outside bank, the Imperial Bank, the Dresdner Bank or any other. But agricultural societies, inasmuch as their loan papers cannot readily be bought and sold on the open market, require a special organisation. Hence central organisations act as money equalisers between the different societies. In some districts money is superabundant, in others it is deficient. The central bank acts as a channel through which the abundance of one district can be drawn to supply the scarcity of another, the operations being conducted by means of current accounts with both parties. In Germany as a whole the societies of small agriculturists of the Southwest have always an abundance of money, which is one reason why they dispense so much of their funds in the purchase of property transfers. The societies of large agriculturists in the Northeast (the Ost-Elbien Provinces), where the capital employed on each farm is large and the population thin, are as a whole in continual want of it.

INTERVIEW WITH HERR KLEEMANN, DIRECTOR OF THE DRESDNER BANK