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

obligations.



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

banking.



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

1848.



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

obstacle.



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

change.



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.