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Land Banks

In Europe an important group of institutions has developed for the
supplying of agriculture and the building industries with the capital
needed in their operations. The greatest number and variety of these
are in Germany, in which their development has been continuous since
the days of Frederick the Great.

In order to assist in the recuperation of his kingdom from the
devastation caused by the Seven Years' War, Frederick caused the land
owners of certain provinces to be organized into associations called
Landschaften, which were authorized to issue mortgage bonds on the
joint security of the lands of all the members of the association in
exchange for mortgages on the lands of individual members who needed
funds for the improvement of their estates. These mortgages were made
payable to the association in the form of small annuities, to which
were added the interest paid on the bonds and an increment for the
payment of the expenses of the association.

These associations were governed by the members through a general
assembly, representative boards, and elected officers, and were
supervised by the state and carefully regulated by law. Regulations
were carefully worked out pertaining to the ratio that the loan should
bear to the value of the estate mortgaged, methods of valuation, ways
and means of maintaining an equilibrium between the bonds issued and
the mortgages held, the treatment of defaulting members, etc., etc.
Machinery for the sale of the mortgage bonds delivered to members was
also created, and in some cases later on these sales were made
directly by the associations themselves, and cash paid to the maker of
the mortgages.

Five of these original Landschaften have continued to the present day,
and others modeled after them were subsequently established. In 1909
in all Germany twenty-five were in operation, of which eighteen were
in Prussia. The newer ones have not in all respects followed their
models. Unlike the original five, membership in them is not limited to
the nobility and is not compulsory; the liability of the members for
the payment of the bonds issued has in some cases been limited to a
percentage of the total; the loans are usually paid in cash; and the
bonds are sold directly by the associations; but the principles of
mutual liability and mutual control which were basic in the old
organizations have not been violated in any case. Both old and new are
organized in the interests of borrowers on real estate mortgage
security, and aim to secure funds for these on the lowest possible
terms and for long periods of time, by making the security offered the
lenders greater than any single borrower could supply.

The degree of their success is indicated by the fact that in 1909 the
amount of their outstanding mortgage loans amounted to nearly a
billion dollars, and that their mortgage bonds rank on the exchanges
with Prussian state bonds and have at times outranked them.

Another type of land bank appeared in the early part of the
nineteenth century as a result of the movement for the freeing of the
serfs and their transformation into freehold peasants. The lands of
these cultivators were burdened with a variety of feudal dues and
charges which had to be commuted before they could become freeholds.
In order to facilitate this process banks were established which
assumed the obligations of a peasant towards his feudal superior in
return for a mortgage on his holding, repayable with interest in the
form of an annuity, and in amount equal to the sum to be paid to the
feudal superior for the total extinguishment of all feudal

Some of these banks were established and administered by states,
provinces, and communes, and some by private parties. The public ones
obtained the funds they needed partly from subsidies and partly from
the sale of guaranteed mortgage bonds and the private ones wholly from
the sale of mortgage bonds.

The completion of the work for which these banks were originally
established put an end to their development about 1883, but similar
institutions have since been established in Prussia to assist
colonists in the purchase and equipment of their farms, and in central
and western Germany to promote general agricultural and urban real
estate operations. The colonists sent into Poland for the
Germanization of that province were in this way assisted by the
Prussian government, and in some parts of Germany the same means have
been employed for the purpose of aiding in the process of breaking up
large estates into small holdings, in the construction of dikes,
roads, and reservoirs, and in changing the courses of streams.

Next to the Landschaften the most important intermediaries between
capitalists and investors in real estate in Germany are the so-called
Hypothekenaktienbanken, or joint-stock mortgage banks. These are
private corporations, capitalized by the sale of stock shares to the
general public, and controlled by their stockholders through
directorates, like industrial corporations the world over. Their
business is the making of long-period loans on real estate security,
and the funds thus employed are obtained by the sale of mortgage bonds
secured by the real estate mortgages in which the proceeds are
invested and by their own capital, surplus, and other funds.

They differ from the Landschaften in that they are not cooperative or
mutual institutions, but strictly business enterprises run in the
interests of their stockholders. Their primary aim is to earn
dividends rather than to secure the lowest possible loan rates and
other favorable terms for borrowers. As a matter of fact they are
forced by competition and by the principles of good business to make
loans at reasonable rates and on favorable terms regarding repayment
and other matters, and they successfully compete with the Landschaften
and other cooperative credit institutions of Germany. Their mortgage
loans are usually made repayable on the annuity plan, one-half per
cent each year being the common rate of payment, and they loan about
the same percentage of the value of the lands mortgaged, as do the
Landschaften and other land banks, and the rate of interest charged is
the market rate, into the determination of which, of course, the
competition of all other institutions enter.

While these institutions loan in the aggregate enormous sums on farm
property, their chief field of operations is urban real estate, and
particularly the industry of residence, or as we would call it in this
country, apartment-house construction. It is on this account that the
period of their most rapid development coincides with that of the
recent rapid industrial and commercial development of Germany, which
dates back only to the establishment of the Empire in 1870. Most of
them began operations in the decade 1862-1872, but the most rapid
growth in the magnitude and scope of their business operations has
come in recent years.

In 1899 there were forty institutions of this kind in operation in the
German Empire. The number at the present time is probably considerably
greater, since for obvious reasons combinations among them are not
promoted by the same kind of economic pressure that in recent years
has operated so efficiently in Germany in the field of commercial

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

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

From the beginning Raiffeisen invited to membership in his societies
the well-to-do and substantial people as well as peasants. Of course
these people did not require the society for the satisfaction of their
own credit needs, but Raiffeisen saw that they would greatly
strengthen the credit of the societies and he was able to appeal to
them on philanthropic grounds. This class of people have a leading
part in the administration of the societies of which they are members
and have contributed greatly to their success.

At the outset the Raiffeisen societies had to rely chiefly on
borrowing for the acquisition of the capital needed, but with time and
success savings deposits, surplus funds accumulated out of profits,
and lastly the proceeds of the sale of shares have played an
increasing role. At the present time many societies are not obliged to
borrow at all, and not a few have surplus funds which are placed at
the disposition of other societies which are still obliged to borrow.

Like the Schulze-Delitzsch societies the Raiffeisen associations have
federated. At present there are thirteen so-called unions, and at the
head of all is a central bank with head office at Berlin and branches
at Koenigsberg, Danzig, Breslau, Cassel, Frankfurt, Coblenz, Brunzwick,
Strassburg, Nuremberg, Posen, and Ludwigshafen. The central bank is a
joint-stock company, organized on the principle of limited liability,
the stock of which is owned by the local societies. It formerly had
close relations with the Imperial Bank, but is now associated with the
so-called Centralgenossenschaftskassa, endowed by the state of
Prussia, in such a way that advances and discounts are extended to it
on favorable terms.

The Raiffeisen societies rival the Schulze-Delitzsch in the rapidity
of their growth and in the role they play in the economic life of
modern Germany. In 1908 they numbered 5,047, of which 4,340 were
credit associations. The collective balance sheets of these societies
in 1907 showed 490,734,834 marks assets, 489,234,357 marks
liabilities, and a membership of 405,819.

While Germany was the pioneer in the establishment of land credit
institutions, and while such institutions have attained a greater
variety of form and a higher degree of perfection in that country than
in any other, other countries have advanced along similar lines and
now have institutions and a fund of experience well worthy of study.
The institutions of Germany have in most cases served as models in
these other countries, the mortgage banks and the Schulze-Delitzsch
and Raiffeisen societies having been most frequently copied. These
models have been adapted to foreign conditions and modified in
interesting and instructive ways as well as copied without essential

Among the mortgage banks developed outside of Germany the Credit
Foncier of France is especially noteworthy. In its organization it
was modeled after the Bank of France and is second only to that
institution in the magnitude of its operations and the scope of its
influence. Its head office is in Paris and it has at least one branch
in each department. Its capital stock owned by private parties amounts
to about $40,000,000, its surplus to over $4,000,000, its loans
secured by mortgage to over $400,000,000, and its total resources to
about $1,000,000,000.

Like the German mortgage banks, it secures the greater part of its
loan funds through the issue of mortgage bonds and a large percentage
of its loans are made on mortgage security for long periods of time
and are repayable on the annuity plan. However, it transacts a greater
variety of business than does the typical mortgage bank of Germany. It
loans on city and farm real estate and to communes, and it transacts a
large commercial banking business, though this is distinctly a side
issue, incorporated with its other business in order to give
profitable employment to funds, sometimes large in amount, which are
temporarily on hand awaiting investment.

At various times it has absorbed competing institutions and at times
it has established collateral institutions to transact lines of
business for which its own constitution and legal limitations did not
fit it. Among these the most important are the Credit Agricole and the
Foncier Algierienne. It was obliged ultimately to absorb and liquidate
the former, but the latter still flourishes in the colony of Algiers.

Mortgage banks have also gained a footing in most of the other
countries of continental Europe. In Italy they passed through a period
of storm and stress, owing to their connection with the issue banks of
that country and the consequent confusion between commercial and
investment banking which resulted, but they have recently been
established on an independent basis and are now developing along right
lines and with apparent success.

The Schulze-Delitzsch and Raiffeisen societies have been imitated in
Austria, Hungary, Belgium, Switzerland, and, to some extent, in France
and India. The so-called "Banche Populari" and "Casse Rurali" of Italy
are respectively modified forms of these two German types, and rank
among the most important means employed in that country for the
improvement of the condition of the peasants and small tradesmen.
State, provincial, and communal aid for these institutions has been
more frequently evoked and more extensively employed outside than
inside of Germany, and other important modifications of the German
prototypes have been made in Italy and elsewhere.

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