1 Historical Roots of Co-operative Banking in Europe
The roots of co-operative banking can be traced back to the second half of the nineteenth century in Germany, where it was inspired by the English Rochdale Society of Equitable Pioneers (1844),1 whose ideas of collective self-help among and to the benefit of working people allowed them to withstand the unemployment and deprivation experienced by its members. The birth of these credit co-operative entities in Germany is linked to the dissemination of a widespread theoretical debate at the time about which social models of development could support the political and economic turnaround that Germany was experiencing. Since the Middle Ages, Germany had been a fragmented political territory, made up of several autonomous political units, which were federally coordinated (Colombo 2012). This structural organization of the as yet non-unified German State—Germany would become a nation state in 1871 through the unification efforts of the ambitious Prussians—influenced the design of the primitive credit co-operatives, which were conceived as independent local entities, coordinated within associations or federations. In parallel, the development of co-operative banking was sustained by philosophical avant-gardes following the theories of Marx, whose view of politics and the economic life greatly affected the start-up and spread of credit co-operatives within Germany and beyond, in neighboring countries, such as France, Italy, and the Netherlands.
As reconstructed by Birchall (2013), unlike the more industrialized Britain, in the early nineteenth century, Germany was taking its first steps toward industrial growth through the creation of a network of new internal railways and a customs system, designed to facilitate free trade between the various German aristocratic states within the German lands. The abolition of serfdom favored the rise of independent farmers, who were required to act more and more within a market-based framework, although lacking the necessary monetary resources and competence skills. At the same time, artisans, whose production capabilities were mainly channeled toward serving local communities, were still the most productive paradigm in the country.
The arrival of the famine which hit Germany and the whole of Europe in 1846–1847 further exposed the problem of the lack of capital which not only was a cause of the sluggish German economic growth (Kemp 1985) but was leading to the disappearance of small businesses, artisans, and farmers. There was an urgent need to find ways to give credit to those who were able to use it in a productive form but were unable to offer any type of security in exchange (Birchall 2013). As honesty was the only moral guarantee (Luzzatti 1863) that could be given by those aspiring to take advantage of the new markets emerging from the fledgling industrialization process taking place in Germany and across Europe, there was a consequent need to identify organizational models that would allow for the “capitalization of honesty” and the “democratization of credit” suggested by the French liberal economists Leon Say and Leon Walras (1866).2 Initially production and consumer co-operatives and soon after credit co-operatives were the tools used to release the production and consumption potential of the working classes which would otherwise have remained untapped. As is well defined by Wolff (1893), the lack of capital determined the persistent condition of poverty of small entrepreneurs and self-employed workers who could not obtain credit from commercial banks as the latter were only targeting wealthy customers.
Credit co-operatives as the solution to the problems of consumption and production was identified by two leading German figures: Franz Hermann Schulze-Delitzsch and Friedrich Wilhelm Raiffeisen. However, their organizational models differed in several ways. For Franz Hermann Schulze-Delitzsch (1808–1883), a Prussian lawyer and liberal politician, British friendly societies were effective associative models to enable self-employed individuals to purchase raw materials on better terms, thus increasing their profits. Having set up a production co-operative for shoemakers in his home town of Delitzsch in 1849, Schulze-Delitzsch soon realized that the availability of credit was at the heart of the consumption activities of urban workers as well as being the fuel that supported the productive efforts both of new entrepreneurs and of already existing manufacturing and trading businesses, which were facing growing competition from the start-up of industrial production on a larger scale. Credit co-operatives “a la Schulze-Delitzsch”, also known as Volksbanks or people’s banks or popular banks, were means of “financial inclusion”, inspired by the founding ideas of savings banks which were already widespread throughout Europe (the first savings bank was established in Hamburg in 1778) (Colombo 2012) and whose main aims were to educate poor people to save for precautionary purposes. Unlike savings banks, which were closely tied to local and national public administrations, credit co-operatives were private ventures, whose foundation was initially supported by rich promoters as well as workers, artisans, and the forefathers of small and medium enterprises (SMEs).3 Irrespective of their condition or wealth, every member was of equal importance and entitled to one vote per head, exactly in line with the principle of economic democracy followed by Schulze-Delitzsch and shared by the emerging middle class in the large German cities. Members were required to purchase shares issued by the credit co-operatives which were simply a means of reinforcing the unlimited liability of members, acting as a mechanism to align their incentives as both investors and customers (borrowers and savers). In order to facilitate members’ access to credit associations, shares could be bought by installment which as well as serving to democratize access to the role of members was also a way of educating members to save. In fact, the ability to save was an essential condition to qualify for the status of member. Schulze-Delitzsch’s idea of credit co-operatives was nothing short of a socially oriented public company, with the unlimited liability of members tempered by the required paid-up capital, which was built up through the issued shares. Members’ remuneration, although not guaranteed or fixed in value, was not excluded but was more oriented toward the idea of sharing unreserved profits in proportion to the investment made by members, as in joint-stock companies.
Indeed, the popular banks theorized by Schulze-Delitzsch constituted a hybrid creation, being designed to allow the ascent of the urban working class and, for the reasons highlighted above, unable to avoid adopting a co-operative nature, but needing some of the reinforcing mechanisms of the joint-stock company, such as the paid-up capital and the distribution of unreserved profits. In this way, Schulze-Delitzsch tried to modernize one of the fundamentals of the co-operative movement: the rebate of profits made by credit unions in sole proportion to the work undertaken by co-operative members. Rebates were at the heart of mutuality, inspiring non-credit and credit co-operatives as, in contrast to shareholders of joint-stock companies, co-operative members had to be compensated according to the volume of business undertaken with their union, or in other words, their participation in the activities carried out by co-operatives in the form of labor. One distinctive feature of the new popular banks was the abolition of the role of directors on a volunteer basis, which was typical of co-operative movements. Directors had to be remunerated with salaries and commission in compensation for their efforts in running sound banking operations and allowing the latter to grow. Additionally, lending made by popular banks was meant to finance the short-term financial needs of urban artisans and small entrepreneurs, which normally arose from the costs of operating the business, such as the purchase of raw materials, and any kind of collateral was accepted as security for the loans (Fay 1938). As reported by Birchall (2013), critics of the Schulze-Delitzsch model of credit co-operatives emphasized that the efforts of popular banks to be inclusive were inadequate as poor people could not afford to provide any kind of security other than their reputation and that their credit needs could not be satisfied by short-term lending, given that they were only able to repay slowly the investments which were financed.
In another part of Germany, in Westerwald on the right bank of the river Rhine, a rural area within the Prussian empire, Friedrich Wilhelm Raiffeisen (1818–1888) was developing his own model of credit co-operatives in parallel to Schulze-Delitzsch’s. Both were unaware of the other’s ideas and become fierce adversaries when they later came into contact, once their original designs for credit co-operatives became public knowledge. The economic environment observed by Raiffeisen differed in several ways from the urban one which met Schulze-Delitzsch’s eyes. In both cases, the terrible famines of 1846–1848 needed to be tackled actively, and each identified co-operative solutions as the means to lower the cost of production, fight against usury, and address the persistent lack of access of low-income people to basic banking services. Raiffeisen was the son of a farmer and mayor of a small rural village, who himself became a mayor and later a wine trader and cigar manufacturer (Birchall 2013). He was a fervent Lutheran who actively engaged in works of charity and social activities aimed at helping and developing the impoverished local community he served as a public servant. He first founded the charitable association of Heddesdorf in 1854 with the aim of educating children, helping the unemployed to find jobs, promoting the increased education of community members through the creation of an open-access library, helping poor farmers to buy cattle and grain, and organizing a system of popular mutual credit (Colombo 2012). However, his initial philanthropic idea was soon replaced by a purely co-operative model, as already enacted by Schulze-Delitzsch (Fay 1938), and entirely founded on the principles of self-help and solidarity between members, who were the sole beneficiaries of the co-operative outputs, whether through production or credit co-operatives. Raiffeisen’s thoughts called into question the value of the political and economic community, still vital in Germany at that time, despite the Prussian modernist pressures and their efforts to oppose the legacy of the past corporatism (based on the joint liability of small community members) of the Middle Ages. Raiffeisen based everything on the possibility of asymmetrical exchange, which he saw as necessary to build a new and fairer economic system. In it, solidarity and efficiency were combined with the possibility of giving without receiving anything. As highlighted by Colombo (2012), the charitable and voluntary activity imagined by Raiffeisen is active and communitarian, where a group of people carry out charitable actions to create a community, that is, a cohesive social body, which entirely benefits from an organized system of unlimited solidarity and mutuality between peers. Rural credit associations became the center of the system, playing the role of piggy banks and thereby guaranteeing the freedom of the local community and becoming the driving force for economic development on a co-operative basis. Whereas in England, co-operatives were born with the aim of promoting consumption, in Germany and the other countries where Raiffeisen’s ideas spread, credit became one of the pillars of the co-operative structure.
The bank model developed by Raiffeisen differed in many respects from that of popular banks. First, the members were not required to subscribe to shares due to their condition of poverty which made them unable to meet that payment. As in Schulze-Delitzsch’s popular banks, members had one vote per head and had unlimited liability for the bank’s obligations. This position ...