Credit Union History Part II - Cooperative Lending Begins in Prussia (Modern Day Germany)

Because many people have romanticized views of monarchies, it is important to understand the point in history where cooperative lending began.  By the mid-nineteenth century, representative democracies were spreading around the world - but specifically in European dominated cultures.  German speaking monarchies resisted the move toward democracy, but activist still insisted on being heard.  It was the ordinary citizen who saved the German monarchy from French subjugation.  And the economic powers emerging around the world had one thing in common - they were all more democratic.  

The philosophy of the enlightenment - together with economic power being stronger in more democratic societies - led to new ways of thinking through all aspects of life.  Feudal economics, where the factors of production are at the command of the feudal lord, were being replaced or overwhelmed by more democratic, capitalist economics.  But capitalist economics quickly appeared to replace one set of aristocrats with another, nearly enslaving the bottom rungs of society and threatening the very democracy that had created it.

Hermann Schulze was born into this world of transition.  He was a child, living just fifteen miles away from Leipzig when the Napoleon suffered his first devastating defeat in the Battle of Nations.  He was probably close enough to hear the din of battle from his house.  

He was born to a middle-class technocratic family who had served in the administration of a small city.  His parents and grandparents had served king and country for generations.  Growing up alongside, but never equal to, aristocrats.  He even attended school with them.  But as the democracy movement took hold, he became an early and constant advocate of democratic principles and institutions. The support of democratic institutions is a common theme throughout this history.  The founders in each country will also be conspicuous supporters of democratic movements within their country.  Click on the image below to go to the video regarding his early life (about 14 minutes).

Unlike the other countries we will cover, there were two separate and important founders of cooperative lending in Prussia/Germany.  The second founder was not even as privileged as Schulze-Delitzsch.  His name was Friedrich Wilhelm Raiffeisen (yes, named for generations of kings of Prussia).  He was the middle son of a village Burgermeister.  His father died before he could get much formal education and was forced to join the Prussian military in order to earn a living.  He was steeped in patriotism for both king and country.  However, necessity forced him to adopt cooperative economic principles, and democratic organizational forms.  Click the image below for his (approximately 13 minute) backstory.

The famine was the last political straw for many veterans, peasants, working class, and even middle class technocrats.  Social reform was demanded.  That demand was expressed through petitions, protests, and ultimately through revolution.  It was the violence that finally convinced the monarchy to conceded - but not by much.  It is important to note that our two founders were on two different sides of this controversy.  Even though both established democratically governed cooperative solutions, Schulze-Delitzsch was part of a democratic nemesis to the monarchy while Raiffeisen was a loyal soldier to his king.  Their different approaches to the establishment of cooperative lending is outlined in the video accessed by clicking the image below (it runs for 18 minutes).

Although the video sounds final on the Volksbank and Raiffeisenbank systems, It is worth noting the primary philosophical differences between them.  Schulze-Delitzsch's aim throughout much of his life was preparing Germany for a democratic society.  That aim could only be accomplished through educating citizens so they could rely on themselves rather than a "benevolent overlord".  His cooperatives were meant to employ educated, middle-class, liberal-minded individuals in mentoring their poorer fellow citizens.  One example of that relationship was in the Volksbank itself where uneducated small businessmen and craftsmen would run the bank, with educated, middle-class investors working on the board.  The small businessmen were required to keep financial books (which they typically did not keep in their own businesses because they didn't know how).  The educated mentors would train their small business proteges in basic accounting for the bank, and thereby help them understand how to financially manage their own businesses.  These newly trained small businessmen would require more financial information from their peers as they applied for loans, and the entire business community was edified by financial training.  All parties also became more self-sufficient (which was the ultimate aim of the Schulze-Delitzsch system).  

The Schulze-Delitzsch system forced small-businessmen to understand what drove the financial markets.  The bank leadership were in direct contact with the initial investors of the bank - the liberal, well-educated, middle-class investors who demanded a reasonable return on their investment.  Although all members had the same vote (which was the democratic ideal), their equity investors could force the bank into liquidation if the agreed upon return on investment was not achieved.  This understanding of the financial markets was learned through personal experience by the leadership, and then shared with other peer members.

It might be asked why well-educated, middle-class investors would bother with such a risky investment.  But at this time these liberal-minded patriots were not just investing for a financial return, but were investing in their society, hoping to yield more freedom and democracy.  They were not just building an investment portfolio, but a community - their community.  They believed so much in democracy, that they felt they needed to put their money where their heart was.  And in so doing, they built a financial system aimed at the democratization of society and financial markets.

Raiffeisen began working with farmers on cooperatives.  Cooperatives had been associated with farming for decades.  The cooperation that was initiated with the famine was extended to solve many other problems.  It was a means of obtaining farming inputs at cheaper prices.  Cooperative financing was ultimately attempted as a means of financing equipment and supplies at the beginning of the season, and then productively using saved resources from harvest until the next planting.  Raiffeisen himself saw his "lending unions" as applying the same cooperative system he thought wealthy people used: 

"The wholesale trade and big business, businessmen and manufacturers have all shown us the way.  They have become rich and are getting richer by employing the results of scientific research, discoveries and inventions, by raising the necessary capital and, where the strength of the individual was insufficient, they have come together and collaborated. These gentlemen have become rich through science and the employment of capital. They will become richer and wealthier, accumulate ever larger fortunes and increasingly deprive small businesses and the country of the resources necessary for their existence and advancement. ... Science and capital are the only means of providing the necessary help to farmers and craftsmen as well." [Die Darlehnskasse-Vereine, Raiffeisen (1866), pages 4 and 5.]

The motivation that drove Raiffeisen was not a devotion to democracy, but a devotion to God.  He saw it as his christian duty to care for his neighbor, and felt that all christians should act the same way.  He aligned his movement with the local christian churches (both Lutheran and Catholic).  Often the local clergy acted as educated mentors to the local, uneducated farmers.  But well heeled investors were still needed.  Although initially, the investors Raiffeisen found were moved somewhat by their religious devotion, in the end, they were reading too much from Schulze-Delitzsch, and these two branches began to move closer together.  

These middle-class investors tended to read more academic writings - including the writings of Schulze-Delitzsch.  Much of his underlying philosophy regarding the need for democracy were echoed even in the implementation of the Raiffeisenbank.  The first of the common themes discussed in my last post was the democratization of finance (which is evidenced by the establishment of these banks in the first place - offering financial services beyond the means of those at the bottom rungs of society).  It may not be as obvious that these first cooperative banks were supporting democracy, but if you remember how few people actually voted in the election that sent Schulze-Delitzsch to parliament, it becomes easier to see how the cooperatives that Schulze-Delitzsch founded were really aimed at making citizens more self-sufficient, and thereby more able to make their own decisions - or make their own votes (are requirement for a functional democracy.  Because Schulze-Delitzsch saw self-sufficiency as a necessary condition for a broad based democracy, he made it the primary objective of all cooperatives.  Through his writings, he implied that all cooperative lending institutions should set self-reliance and one of their top priorities.  And therefore, these Prussian (German) cooperative lenders set the stage for priorities of all cooperative lending institutions that followed.

But the US credit union system was not built directly upon these institutions.  The next step in the evolution of cooperative lending would occur in Italy.  Again, the founder would raise the ire of the monarchy, before becoming a champion of the fledgling democratic constitutional monarchy that was the Kingdom of Sardinia at the time - but would grow to envelope all of the peninsula of Italy.  To continue onto the next portion of our story, go back to the previous posting, or click here.