Front Page Titles (by Subject) CHAPTER III.: ITALIAN CO-OPERATIVE BANKS. - A History of Banking in all the Leading Nations, vol. 3 (France, Italy, Spain, Portugal, Canada)
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CHAPTER III.: ITALIAN CO-OPERATIVE BANKS. - Editor of the Journal of Commerce and Commercial Bulletin, A History of Banking in all the Leading Nations, vol. 3 (France, Italy, Spain, Portugal, Canada) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 3 (France, Italy, Spain, Portugal, Canada).
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ITALIAN CO-OPERATIVE BANKS.
EMBODIMENT OF THE POPULAR IDEAL OF BANKING.
THOUGH Italy has not solved happily the problem of banks of issue, she has at least comprehended the ideal of popular organization for banking purposes. In this, she is largely indebted to the energetic and persevering initiative of Sig. Luigi Luzzatti. Sig. Ettore Levi, in his “Manual of Popular Banks,” traces the history of popular credit in Italy as follows: “Popular credit and usury are two terms which for a long time have marched side by side. Credit granted upon the sole guaranty of honesty and labor had seemed to be an impossibility. Credit for the artisan or the merchant on a small scale, however honest and intelligent he might be, existed only in the form of pawn business at the Mont de Piété. Some attempts at personal credit were made in former days.” Sig. Luzzatti cites some remarkable attempts at popular credit made by mediæval guilds—above all, by the English guilds; but their rates of interest were so usurious that the loan was more of a drag than an advantage. The “cassiére” of Venice are another form of co-operative credit; but they also smack more of usury than providence. To Germany really belongs the credit of having first established popular credit on scientific principles. Socialists always and everywhere preach ardently the theory of gratuitous credit; and the Parliament of Frankfort O. M., in 1848, had to take up this question which the workingmen, incited by the Socialists, agitated in numerous meetings. The dissolution of the Parliament interrupted the work of the commission appointed for the study of the question; but it did not stop the Socialistic clamor under the leadership of the famous Lassalle.
THE SCHULZE MOVEMENT.
Against the Socialistic hue and cry arose an antagonist in the person of a humble and obscure justice of the peace of Delitzsch, Herr Schulze; and he became the founder of popular credit. Excluding, from the start, the help from the State and private charity, which would have made the honest workman the recipient of alms, two solutions were left for Schulze’s choice; association of capitalists to make loans to small manufacturers and artisans, or association of the very parties who needed to borrow. Capitalistic association would have had a tendency to transform itself either into a charitable institution or fall into the groove of an ordinary bank. Schulze wanted to avoid both these possibilities. What he aimed at was that the workingman should be the instrument of his own elevation. Before obtaining credit the artisan had to show that he deserved it; and Schulze built his system on the assumption that in legal and peaceful alliance of all minor forces lay the potency of co-operation and the solution of the problem. By associating men who alone could have offered no guaranties of confidence, Schulze made up a fraternal union which would receive savings and easily obtain credit. The association itself is not dependent upon the results obtained for the participants; it gives loans to them upon the surety of a union of individuals—workers and honest men; and this moral guaranty is backed by a capital formed out of the savings of the parties associated. “The capital so created,” said Schulze, “is the only one to protect the artisan. It would be absolutely vain to grant him loans or give him the means of work, such as some reformers have in view; such gifts, like the inheritance left to a prodigal, would soon vanish. Above all, workingmen must be imbued with the sentiment of order, providence, and good administration; this alone can preserve and increase the acquired capital, be it loaned or given. The co-operative societies which have prospered are those that have made up their own capital by the heroic setting aside of part of their daily wages. Those to whom the Government made loans in 1848 have soon broken up.”
The initiative of Schulze has produced marvelous results; Lassalle’s ideas have fallen to the ground by the non-success of the Utopia of gratuitous credit. The popular banks have met with success and are continually extending. Loans under the patronage of the Government, of communities, or from public charity lack success and prove themselves vastly inferior to the popular banks of Schulze. The ideas of the illustrious German economist found in Sig. Luzzatti an indefatigable champion; and he justly deserves the title of founder of the popular banks of Italy.
The question of workingmen’s credit was agitated in Italy at the Congress of the Workingmen’s Societies held at Vercelli in 1858 and at the Congress of Novi in 1859. The Congress of Milan, in 1859, voted upon certain propositions of Boldrini, the advocate. He, while keeping gratuitous credit service out of the question, adopted on a large scale Lassalle’s ideas. Lassalle held that the workingman could not establish associations of credit by his savings and that the sole guaranty which he could give was his honesty. Boldrini’s plan, on the contrary, was to establish a bank with a capital of registered shares or shares to bearer; a bank with the power to make loans to workingmen for 100 lire and upwards. He sustained the principle that labor and probity were sufficient to obtain credit; that it was a cruel irony to ask borrowers for a savings fund which they could not obtain, that credit should be granted largely by the banks to all who were the step-children of fortune and whose only wealth was honesty. According to Boldrini, the German banks which exacted savings besides honesty were too timid and could not go to the core of the question by reaching those who possessed nothing and could not possess anything. Boldrini and some others began to put their ideas into practice by elaborating, in 1863, the regulations of the Labor Credit Society of Milan, and the municipality of that city appointed a Commission of Inquiry relating to the project. At that time, Sig. Luzzatti, a man of but 23 years, but who had already made a name for himself by an important book, “The Diffusion of Credit in Italy,” in which he explained and commented upon Schulze-Delitzsch’s doctrine, gave a series of lectures in contradiction of Boldrini’s ideas. He maintained co-operation and mutuality and pleaded for popular banks on the German plan. Sig. Luzzatti kept up a vigorous campaign, and in May, 1865, at the Turin Congress, he could not only declare victory in the disputed territory, but he had also achieved success in Lombardy by the aid of some friends. The Lodi Bank was in operation; the Milan Bank began transactions with the support of the Associazione Generále degli Operai (General Workingmen’s Association) after the Municipal Council of Milan had declared that Boldrini’s plan was practically not feasible. The good work of Sig. Luzzatti has been energetically carried on. Since 1865, the popular banks multiplied in Lombardy, Venetia, the Romagna, and Piedmont, and to-day these institutions are numerous and flourishing.
PROGRESS OF THE POPULAR BANKS.
In the first years of their existence the popular banks had to fight a stubborn battle against an institution which was far removed from their scope. The Banco del Popolo of Florence had been established in 1865 with the intention to give credit to the classes which were less favored by fortune. The Banco del Popolo wanted to cover the whole of Italy, by means of numerous branches and agencies, and, to use the words of Alvisi, its founder, “the association should not be divided into workingmen and employers; for all workers were part and parcel of the people, and the bank should open the fountains of credit to all workers, from workingman to banker.” With this purpose in view, the Banco del Popolo, organized on the same plan as all other credit associations, took in a variety of transactions, such as deposits, savings, loans, and life insurance. Thus it had nothing in common with the German and Italian popular banks, which are simply associations by which artisans, farmers, small manufacturers, and all who have no access to the great banking establishments join forces and invest their savings for the foundation of a local and autonomous credit institution which provides for their own needs. The Banco del Popolo bore the germs of ruin in its bosom, as soon as it started to develop its programme, which was badly adapted to popular credit; Sig. Luzzatti had foreseen that the development and downfall of this bank would be a complete and very grave disaster. By its untimely rivalry it had delayed the spread of the popular banks.
ORGANIZATION OF POPULAR BANKS.
The popular banks are independent establishments, each having its own by-laws, which are adapted to local circumstances, although a common spirit pervades all of them. Sig. Ettore Levi has suggested the following model, to be modified to meet special cases.
At — a co-operative joint credit association is established under the firm name of Popular Co-operative Bank of —.
The purpose of the bank is to supply credit to its associates on the basis of mutual responsibility and of savings. It is established for ninety-nine years from the date of the constituting act, subject to extension. Its business office will be at —. By resolution of its General Assembly, agencies may be established in the immediate province and in neighboring provinces. The establishment and administration of the branches will be conducted with a view to transforming them into independent banks. The ground capital of the association will consist of (a) — shares, subscribed by the associates, of the value of — each; (b) reserve, — lire; (c) special funds to be procured for specific transactions.
The association may take up loans, to be guaranteed by the association’s capital for the purpose of increasing transactions. Parties wishing to join the association must make written application to the Council of Administration and declare their willingness to submit to the rules and regulations, by-laws, and resolutions of the society. For the transfer of shares application must be made by either the heir or assignee, even if they be members of the society. If such applications are made by parties who are not yet members, they must be signed by two members, who attest to the honor of the petitioner. Co-operative and mutual aid societies can become members of the association as a body, and as such they are to have all the rights and duties of the other associates, but their delegates are not eligible to offices in the association. Parties under guardianship, or otherwise incapacitated by law, also bankrupts, are excluded from membership. No transfer of shares can be effected in favor of such parties, except by court adjudication; and, in such case, the holder enjoys no rights but participation in the profits. The Council deliberates upon the admission of applications of new associates and of old members who buy new shares. A Council of Experts (probiviri) acts as appellate tribunal from the decisions of the Council of Administration.
New members incur the following obligations: (a) They must pay up their shares within three months in fixed assessments and pay an initiation fee; (b) they must acquire at least one share; (c) they must be responsible to the amount of their shares for all obligations of the society. They enjoy the following rights: (a) To obtain loans within the limits and according to the rules of the by-laws; (b) they can vote in the General Assemblies if they have paid the initiation fee, if they have been members of the association for three months, and if they have paid up at least half of one share; (c) they become part owners in the ground capital, and participate in the profits in the proportion of their holdings of shares. No one can own more shares than the amount provided for in the by-laws. However, if such excess should come about through inheritance or court adjudication, the holder would only become a beneficiary in the profits on the excess of shares, and would have to dispose of such surplus within a year. If the shareholder refuses to carry out this rule, payment of dividend is suspended, the association sells the shares ex-officio, and holds the proceeds at the disposal of the interested party.
The Council can debar the following parties from the society: (a) Those who, without valid excuse, are in arrear by three assessments on the shares for which they subscribed; (b) those against whom the society had to proceed in law to compel them to fulfill their obligations; (c) parties convicted of felony; (d) parties who have committed acts which the Council deems dishonorable. Against all such decisions appeal can be made to the Council of Experts (probiviri). Shares of parties debarred under the terms of articles b, c, and d are repaid. If a member dies, it is within the province of the society to compel the heir to sell his shares, if he is not himself a member or has not made application to become one. The society recognizes only one owner for each share. The shares are registered and personal; they can only be transferred, or given as collateral with the consent of the Council of Administration. The Council can grant loans on the shares; and may sell the shares of members who are delinquent in their obligations to the society.
The following statement shows the progress of the popular banks from 1876 to 1893:
The associations are worked: (a) By meetings of the members; (b) by the Council of Administration; (c) by the director and the employees; (d) by the Auditing Committee; (e) by the Discount Committee; (f) by the Committee of Experts (probiviri).
The members hold ordinary and extraordinary meetings, which, if legally constituted, represent the members; the resolutions of these meetings are binding for all business provided for in the by-laws. The meetings approve the annual balance, and elect the officers. The Council of Administration consists of a president, vice-president, and a certain number of councilors, one-third of whom alternate each year. The members of the Council are unsalaried, and the president can obtain no loans from the society. The Council votes the expenses of the administration, establishes the formal balances and the profit and loss account, and fixes the rate of interest for assets and liabilities. It attends to all details of the general management. For special business it can delegate its powers to one or several members of the Council, or to the bank’s employees. The Council appoints a director, who has charge of the general administration under the supervision of the Council. There are five comptrollers—three regulars and two deputies; their services are unsalaried. They see that the by-laws, regulations, and resolutions are carried out.
The Discount Committee consists of the Council of Administration and associate members, whom the Assembly appoints; they alternate in their functions. While they are on duty, they can neither obtain discounts nor vote upon business in which they are personally interested. No loan or discount can be granted without the approval of the Discount Committee. The Expert Committee consists of three members whom the General Assembly appoints. They act as umpires in all differences which may arise in the association, and in all cases where friendly conciliation is required.
TRANSACTIONS OF THE POPULAR BANKS.
The popular credit associations discount commercial paper, warehouse warrants, workingmen’s liens, invoices, public works vouchers, Treasury checks, and pay vouchers of provinces and cities. The discount is deducted in advance; it is charged for five days at least on home paper, and ten days for out-of-town paper. The associations give loans on honor, without collateral. These loans are made to persons of either sex who have no resources whatever, but whose reputation for honesty and thrift is good. Such parties must have a trade or shop; they are presumed to be able to repay the loan, and, as a rule, the condition is made that they must be able to write. Such loans must not be above 100 lire, and are made for sixty weeks as the utmost limit. The repayments are made in weekly installments, although in some cases monthly payments may be allowed by the administration, which fixes the date at which repayment must begin. The loans are granted upon the recommendation of two persons who are acquainted with the borrower, and who vouch for his honesty and ability to repay the loan. Loans on honor originate an account current. The amount of the loan is carried on the debit, and the payments on the credit side.
Such is the method of the Popular Bank of Bologna; the rules of the other banks vary only in minor points from these.
The banks operate also farm loans; i. e., loans on collateral of products of the soil (grain, fodder, etc.), which are stored in its own warehouses, or in places which it designates. The borrower must pay the storage charges for keep and insurance, etc., besides the interest on the loan. Loans on standing crops are made by means of bills of exchange, but the borrower must prove that he is insured against hail and fire. In no case can these loans run for more than one year. The banks also make loans on Government bonds, or securities guaranteed by the State, also on mortgage bonds up to four-fifths of their value. These loans are made for six months; they can be renewed. If the market value of the collateral should fall ten per cent., the borrower must either repay a part of the advance or increase the collateral. The loans may also lead to the opening of current accounts, and, in such case, the borrowers draw against the credit opened in their favor by means of cheques. Open loan credits are allowed to stand for two years.
The following statistics will illustrate the status and operations of this class of banks.
The loans and advances made in 1893 amounted to 432,723,905 lire; discounts to 559,724,495 lire. The loans were of the following categories:
Discounts, farm loans, and open advance accounts are granted only to members of the associations; commercial paper offered for discount must bear at least two signatures of persons well known to be solvent. The notes must not have above six months to run. In the case of warehouse warrants, the merchandise acts in lieu of the second signature.
The banks receive deposits of cash on open account. The depositor can draw upon his credit by cheques; they give out savings-bank books in the names of individuals, and to bearer, and issue interest-bearing bonds. They can make payments and receive moneys free of charge for their members, and charge a commission to non-members; they can issue drafts on the various places of the kingdom and undertake the collection of commercial paper. In certain cases, they even undertake the collection of municipal taxes.
CURRENT ACCOUNTS, SAVINGS DEPOSITS, AND INTEREST-BEARING BONDS ON DECEMBER 31ST.
On December 31, 1894, the deposits in force were distributed as follows:
The banks receive for safe-keeping securities, jewelry, and documents, for which they are not responsible in cases of force majeure. They attend to collection of interest and dividends on securities which are payable in the kingdom, and undertake to have matured securities redeemed. On December 31, 1893, the free deposits amounted to 112,235,011 lire. The net profits are distributed as follows: 70 per cent. to the associates pro rata of the shares which they own; 20 per cent. into the reserve fund, and 10 per cent. left at the disposal of the Council of Administration for gratuities to employees and for charitable purposes. The reserve fund is made up by the assessment on the profits which we just mentioned, further from initiation fees, from the payments of new shareholders in order to acquire a share in the reserve, and from extraordinary profits.
When the reserve reaches one-half of the stock capital, assessments on the profits cease; if it falls below half of the capital, assessments are made anew until the proposed level is again attained.
The popular banks carry a relatively large amount of public bonds and industrial securities, as shown by the following figures: In 1870, 3,474,000; 1875, 29,783,000; 1880, 50,323,000; 1885, 87,514,000; 1890, 115,997,000; 1894, 136,002,000.
The balance-sheet of the popular banks for December 31, 1893, has been summarized in the statistics published by the Ministry of Agriculture, Industry, and Commerce, and we give it below:
This statement may be condensed into a few lines.
The preceding statistics prove that the popular banks’ service is rather costly. Being obliged to pay a high rate of interest on their current accounts as well as on savings deposits, and also being subject to very heavy taxes, they must necessarily charge borrowers high rates of interest. Nevertheless, they have been a powerful agency in the extermination of usury, at least in Upper Italy. The term “usury” is not applied to the loaning at heavy interest, but to the system in which the debtor cannot free himself by any means; when by a skillful game of renewals and costs the borrower is held for long years in the grip of his creditor.
The popular banks are not charitable institutions; only in their loans on honor do they appear to approach that purpose. Yet it must be considered that even these loans without collateral are made to workingmen who, although poor, can obtain the loan only after serious investigation. Seldom are professional charity-seekers or dishonest parties able to obtain money through imposition; and it may safely be said that these loans may be regarded in the light of a regular business form of personal credit. In brief, they are loans against character.
We have explained how the banks grant credit on farm interests. There they meet with serious difficulties; not so much in their current loans, but in advances for soil improvements, for purchases of agricultural implements, seeds and fertilizers, etc. According to the statistics of 1893, this form of operations is handled by fourteen banks and their amount has been insignificant.
Although the agricultural loans generally enjoy a favored rate of interest, yet the conditions for obtaining capital were hard in 1893; the rate was seven and one-half per cent. in one bank; one only lent at from three to five per cent.; in the others the rate was four and one-half, five, and six per cent. The drawback on agricultural loans lies in the length of the term which must be allowed for repayment and in the fact that the banks can only convert their demand loans into long-term investments after previous notice of a few days. This would throw them into the error which cost the Australian banks so dearly. They can only bring their capital and reserves into play, or employ the procedure at the banks of the province of Treviso; i. e., issue special bonds at fixed maturity, in order to raise the means necessary for long-term loans. Long-term bonds, though, offer but slight temptation to capitalists unless a remunerative interest is offered; and naturally the borrower must pay this interest, and somewhat more, for running business expense, for insurance of risk, and for the bank’s profit. The perpetual cry is that, for the so inappropriately styled agricultural credit, capital cannot be found at the low rates charged merchants and manufacturers, and that the cultivation of the soil becomes less lucrative from year to year. These difficulties have been overcome rather satisfactorily by the Scotch banks; and the Italian popular banks have made meritorious efforts to reach a solution of the problem; but complete success has apparently not yet been attained.
COLLAPSE OF THE ITALIAN CRÉDIT MOBILIER.
In our treatment of banks of issue, we spoke of the rescue of the banks which had to be undertaken by the National Bank of the Kingdom of Italy, and which caused so much embarrassment. At the moment when the new Bank Act was to take effect, two establishments of the first rank suspended payments; namely, the Società Generale di Credito Mobiliare Italiano and the Banca Generale. This was a considerable event, which affected the whole of Italy. It is therefore proper to consider in fuller detail its circumstances. The facts that follow are based upon an excellent paper in the “Giornale degli Economisti,” by Professor Maffeo Pantaleoni, who had the direction of the Credito Mobiliare liquidation.
The Credito Mobiliare, established in 1863, had a capital of 75,000,000 lire subscribed, of which 60,000,000 lire had been paid in. It conducted ten branches, or agencies, had absorbed seven banks, and was more intimately identified than any other credit institution with the political and financial interests of Italy. It was, indeed, at the forefront of banks, and ranked with the National Bank. The Banca Generale was a house of more modest pretensions, with a capital of 30,000,000 lire, wholly paid in. It had three branches, and four other banks had been consolidated with it. Its reputation in Italy and abroad was of a high order. Both the Credito Mobiliare and the Banca Generale were organized with a view to creating and fostering private industrial and commercial enterprises, and to placing securities on the market. They were originally neither deposit nor discount banks. The Banca Generale had launched the branch railways, the San Giovanni iron-works, the metallic construction enterprise of Naples, the Builders’ Aid Society, the Venetian Company, the Building Society for the streets of Giulia and Picca in Genoa, and the Agricultural Credit Institution of Latium. Jointly with the Credito Mobiliare, it was interested in the sanitary improvement enterprise in Naples and the steel-works of Terni, and it bore the same relation to the Mediterranean railway system as the Credito Mobiliare sustained to the Adriatic. The Credito Mobiliare, besides its connection with the sanitary improvements in Naples, the Terni steel-works, the Builders’ Aid Society, and the Adriatic railways, had under its special charge the Company for the Purchase and Sale of Real Estate, the Piambono iron-works, the Cirio Agricultural Export Company, the storage warehouses of Bari and Pouilles, several branch railways, etc.
According to its by-laws, the objects of the Credito Mobiliare were: (1) To subscribe to Government, provincial, and municipal loans; (2) to subscribe to foreign government loans; (3) to buy and sell, for cash and on time, public securities, shares and bonds of all kinds issued by industrial and credit concerns; margin operations, however, were prohibited; (4) to promote all kinds of enterprises, such as railways, roads, canals, factories, mines, docks, illumination, development of the soil, improvements, irrigation, draining, and, in general, everything appertaining to the public utility; (5) to undertake the consolidation and transformation into stock companies of commercial concerns, and to issue their shares and bonds; (6) to bid for the privileges of collecting all kinds of public revenues and undertaking public works, and to carry out the resulting contracts and sublet them subject to the approval of the Government; (7) to issue, under authority from the Government, bonds for an amount equal to the values on hand representative of the above-enumerated transactions; (8) to sell, carry on time, and hold in trust public obligations, shares, and bonds, and to make advances on such securities; (9) To sell and buy merchandise and provisions for its own account and for third parties, to make advances on merchandise. provisions, crops, real estate, buildings, and other objects of value, and to open credits on current account; (10) to undertake for other companies and individuals payments, collections, and all other transactions; (11) to receive metallic deposits and securities, and to open current accounts in this connection; (12) to discount bills of exchange or drafts to order provided with two signatures at six months’ maturity or longer.
Although the regulations authorized the Credito Mobiliare to take deposits, the management showed little inclination for such business, but discreetly preferred to operate in a sort of trust capacity, issuing bonds secured by collateral of good quality; the former to mature at the same time as the latter. Thus the character of a deposit bank, whose resources might disappear with the smallest panic, was measurably avoided. This conservative policy enabled the Credito Mobiliare to pass safely through the crisis of 1866, during which it had to pay out 16,000,000 lire on 23,000,000 lire of deposits. But, when the management changed, the bank sought actively to recover its deposits. This was not due to any deterioration of the management, but to a conviction that it was needful to convert the institution into an ordinary bank. Unfortunately, the Credito Mobiliare was not successful in employing its call deposits; and soon after the beginning of 1892 it found itself in a perilous position. It had to choose between two courses—first, to go into liquidation, or second, to continue the business with the deposits, the resources that could be raised abroad, and its great credit, until it could recover out of it profits the capital that had been impaired, mainly by the losses in the sanitary improvements of Naples. It preferred the latter way, although it was the more hazardous. As steps toward relief from its troubles, the Credito Mobiliare increased its capital by 25,000,000 lire, with 20,000,000 lire to be paid in (which yielded about 13,000,000 lire), made new appeals for deposits, had contracts awarded to it for collecting the taxes in a great number of localities, and added to its agencies. Tax collection, as managed in Italy, is very risky business for a bank, since it involves hypothecation to the Government of all the collector’s property and the advancing of past due taxes. The latter requirement compels the collecting establishment to keep a portion of its resources inactive, and no use can be made of the ready funds derived from the services, lest they may not be at hand when they have to be paid into the Treasury. These dangers did not cause the Credito Mobiliare to pause; for it found an opportunity to create, by means of its tax-gathering department, a clientage of depositors for itself, whereof it stood in need. But it did not long enjoy the benefits of the new deposits clientele. When the people came to know of the scandals of the banks of issue they were panic-stricken, and hastened to withdraw their deposits from the private banks. After three months of endeavor to outlast the “run,” the Credit Mobiliare, on November 29, 1893, stopped its payments. The banks of issue did not even attempt to avert the calamity, and this establishment, which had done so much honor to Italian finance, was permanently ruined. Italy has seldom sustained a harder blow, and she is still far from recovery. We copy from Professor Maffeo Pantaleoni’s paper the most interesting figures of the balance-sheet of the Credito Mobiliare.