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capital market. Bank credit, industrial and commodity credit, credit based on bills of exchange, with its special system of stock-taking -all this constitutes a dense network of credit relationships which absorbs unused capital and puts it into the hands of economic organizers who need funds. On this market, capital is a depersonalized commodity which has a uniform price for all similar credit transactions, in the form of a rate of interest on loans. As a rule, owing to the fact that a considerable volume of capital has been accumulated, its price - that is, the above-mentioned rate of interest on lending - usually proves to be low: it has been varying from 3 to 7 per cent per annum.
In addition to this type of market credit, there exist very numerous forms of credit which is unorganized in the sense just mentioned. The small peasant producer, who works far from the centres of market credit and who is unable to satisfy many of the conditions which credit centres usually impose upon their clients, is almost always denied the opportunity to avail himself of cheap organized credit. He meets his inherent need for funds from local sources, from the unused capital at the disposal of his more prosperous neighbours. Credit of this kind remains unconnected with the organized capital market; and the conditions of this market, including the low rate of interest on capital loans, have no influence on it.
The acute need for funds and the small volume of locally accumulated capital drive up the price of capital to an extraordinary degree and give rise to so-called 'kulakism', that is, to a kind of trade by the local rich who provide money on credit at interest rates of 30-50 per cent or more per annum.
Therefore, for a number of reasons which we shall examine below, there still exists, alongside the international capital market, a system of local credit in the countryside based on usury, which, being unconnected with the first type of credit, is not subject to its laws. The result has been that whereas capital was loaned by the local bank at interest rates of 6-8 per cent, a peasant who lived several miles away from the town was obliged to pay monstrous interest rates.
This disparity has long since attracted the attention of public figures and statesmen; and the question was more than once raised as to whether it would be possible to destroy usury and provide the peasant with access to the global capital market with its cheap credit. However, at the beginning of the nineteenth century numerous efforts to solve this problem had not led to positive results; and only over the course of time did it prove possible to devise feasible methods of linking the peasantry with the credit system as a whole.
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In order to understand the significance of these methods, which were realized by means of co-operative credit societies, we need to clarify, first, the obstacles which had previously prevented the peasant household from making use of the general credit apparatus. Here, the main hindrances arose from two circumstances, namely:
1. The remoteness of the peasant household from the apparatus of banking; and
2. The small size of the peasant household itself and, therefore, the smallness of the amount of credit which it needed.
These circumstances made it extremely difficult, in the first place, to verify the solvency of a peasant seeking a loan. The compilation of reference documents and the sending of an agent to the locality might cost the bank more than the amount of the loan being requested. The overhead expenses involved in obtaining securities for loans might be so high that they might easily, in relation to the loan, exceed the highest rates of interest charged by usurers.
Even greater difficulties faced the banking apparatus in the event of non-repayment of the loan; since the costs of recovery could not, of course, be met in any way out of interest on the loan.
If one adds to this the fact that in the eyes of the capitalist credit system the only possible security for a loan was the capital or property of the borrower - which, in the case of a peasant family, was negligible and difficult to sell off - then we can understand why, for city banks, the granting of credit to peasant households was not only not very advantageous but was simply impossible.
It was obviously necessary to find a credit apparatus which would be in the immediate vicinity of the peasant household, which could observe it at every moment and do so cheaply, and which would base its credit operations not on secured property but on some other kind of security. Such a credit apparatus was realized in the credit association created according to the principles laid down by Raifeizen.
What it fundamentally represented was an alliance of peasant households for the purpose of jointly obtaining credit. The consolidation of the demand for credit of a large number of households multiplied the volume of credit to such an extent that all overhead expenses required for verifying the solvency of a collective borrower and for the recovery of loans in the event of their nonpayment were brought down to the usual, relatively low levels.
Taking into account the ideas concerning credit within the capitalist credit system, Raifeizen based his credit alliance of households on the principle of the mutual and reciprocal undertaking of all members to pledge their entire assets to underwrite the
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alliance's commitments. An undertaking of this kind was very impressive even in the eyes of a commercial operator - since the 300 or 500 peasant households comprising the alliance could provide a security of several hundred thousand roubles which could be realized in the event of bankruptcy.
We are inclined to think that the institution of unlimited liability was merely a concession to the ideology of the capitalist credit system since, in our opinion, the solvency of a credit association is established not by this, but by other principles of Raifeizen. And if we still support this approach at the present time, we do so only in order to get the members - through the threat of unlimited liability -to adopt the most active attitude possible towards the affairs of their co-operative, to monitor its work and to create a public opinion in the countryside which favours the meticulous repayment of loans.
Among the principles conducive to repayment, prime importance attaches to the proposition that all loans advanced by a credit cooperative should be advanced only on condition that they are used for the productive needs of the farm.
The productive purpose of the loan, as we saw in the last chapter, will itself provide the sources for the loan's repayment. Money which is channelled, on the basis of a well-founded economic calculation, towards the expansion of the peasant household's capital or even towards its mere renewal or towards the regulation of the household's money economy, will strengthen the peasant family's productive capacity and enable its workers more fully to develop their working energy and to increase the income which the family earns from its labour. And it is the increase in income, as we saw in the last chapter, which makes it possible to repay the loan advanced.
We must, admittedly, recognize that the very term 'productive purpose' lacks precision and allows of very wide interpretations, particularly when the loan advanced is used in order to regulate the money turnover. Can one, for example, describe expenditure on a wedding, or the purchase of flour when it is in short supply before the New Year, as productive expenditure?
In the practice of co-operatives, such cases have long since been included in the list of productive expenses. But from the point of view of theory this can be done only with some difficulty, by arguing that a wedding provides a peasant family with fresh manpower thus increasing its potential; and that expenditure on flour would, in a capitalist farm, count as expenditure on food, that is, as a part of wages and therefore as productive expenditure. We could say that in the broad sense of the term, productive expenditure should be taken to mean all expenditure which has an economic purpose and which may turn out to have involved no losses.
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We accept the view that a credit association cannot be guided purely by formal considerations or by the formal attributes of productivity but that it has to grasp the economic essentials in each case. Sometimes the erection of a barn may turn out to be an unproductive expense, while the acquisition of a sheepskin coat (for example, by a cart-driver) may be entirely productive. The whole question hinges on the economic calculations upon which the proposed expenditure is based and on how far they offer a guarantee that the household will be able to recoup the capital advanced.
The productive purpose of loans was treated by Raifeizen as the most important framework for the theory of co-operative credit. Indeed, on more profound reflection, we are bound to admit that all the remaining 'principles' stem from this basic principle and represent the conditions on which the basic principle can be fulfilled. Thus it is self-evident that the productive purpose of loans can be guaranteed only when a loan is made available and spent under the constant observation of the institution which makes the credit available. This institution must be informed as to the state of the borrower's household and as to the use to which the loan advanced is being put. It is obvious that these two conditions will be fulfilled only if:
1. The borrower is known to the management and to the other members of the co-operative; and
2. The borrower's household is observed by the co-operative and is accessible to observation.
The first requirement gives rise to Raifeizen's third principle, according to which a credit association can grant credit only to its own members; and this in turn leads on to the fourth principle which requires that the geographical area of the association's activity should so far as possible be restricted or, to use the customary co-operative term, localized.
This last principle confronts us with the complex problem as to the limits of this localization.
It is obvious that the greater the area of activity, the greater will be the volume of credit turnover and the lower - in relation to every rouble of credit advanced - will be the overhead expenses on the administration and management of the association. But it is no less obvious that the more the area of its activity expands, the more remote the association will become from its borrowers; and it will, owing to the weakening of these ties, face an increasing number of loans which cannot be repaid and mounting expenses for the recovery of loans. Therefore, if the area of activity is too narrow this
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is a bad thing owing to the extremely high overhead costs, while if the area of activity is too wide this is also a bad thing because of the losses resulting from non-payments. What is essential is to search for some optimum area of activity where the sum of overhead costs and the sum of normal non-payments are minimal.
Figure 3 clearly shows how this optimum scale is arrived at. The curve AB represents the decline of overhead costs per rouble of credit, depending on the radius of the association's area of activity, that is, on the increase in the volume of credit turnover. The curve DS shows the mounting losses - as this radius increases - which result from postponements of payment or non-payment - calculated per rouble loaned by the association. The curve MR shows the sum of overhead costs and losses. As can be seen from the sketch, this is at its lowest at the point which corresponds to a radius of 5 kilometres, i.e. the optimum radius for the association's area of activity.
The shape of these curves and, therefore, the extent of the optimum radius, depends on a whole number of local economic conditions. The higher the population density in the area where the association operates, and the greater the financial and credit turnover in the local households, the more rapidly the overhead costs will fall as the association extends its area of activity and, therefore, the shorter the optimum radius will be.
It is interesting to note that the Russian credit associations, whose radius of activity was - under the policy of the old authorities -always considerably above the optimum, tried to obviate losses due to non-payment by imposing severe restrictions on the credit they advanced. They made it depend on the distance between the households of their members and the place where the association's management was situated.
Unfortunately, we have very limited factual material for ascertaining this optimum by empirical means. Research carried out by N. Makarov in the Moscow district provided us with indirect data which point to a gradual decrease in co-operative activity, the greater the distance between the households and the credit association's base.
We get a particularly vivid picture in regard to the association in Rzhev-Savelovsk. It can be seen from Table 15 that the further away the members live from where the association is based, the smaller the proportion of peasants who take part in it and the fewer the links between the association and its members.
When trying to provide rural areas not only with credit but with cheap credit, a co-operative credit society must do all it can to make the work of its own apparatus as cheap as possible. One way of doing
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Table 15 The effect of distance on local links with the credit association in Rzhev-Savelov, 1908-1910
Distances % of farmsteads % of Average Number of
participating in members size of payments on
the association who did loan loans per
as members not take per member per
loans borrower year
0-4 versts 77% 44% 59 roubles 2.3
4-6 versts 59% 63% 23 roubles 1.8
6-16 versts 29% 83% 26 roubles 1.5
and over 15% 84% 15 roubles 1.2
this in the Raifeizen system was by offering the services of the association's management free of charge to its members. In a small-scale association which had a small credit turnover and which usually operated for two or three hours once or twice a week, the obligations of a member of the management were not burdensome. Raifeizen regarded these obligations as being of an honorary nature which meant that such work was unpaid, thus making credit considerably cheaper. Raifeizen accordingly based his idea of a credit association on the following five principles:
1. The unlimited mutual liability of members for the association's obligations.
2. The productive purpose of loans advanced by the association.
3. The granting of loans only to the association's members.
4. A small area of activity for the association.
5. The honorary and unpaid character of administrative work within the association.
Let us now try to clarify the way in which the apparatus of credit co-operatives has been built up on these foundations. We shall not deal with the managerial organs of co-operatives - the general meeting, the board of management and the observers' council - since their organization and work are widely known, and it is enough to consult their statutes or any popular pamphlet in order to become thoroughly familiar with them. What is much more complex is the financial structure of a co-operative and its financial methods.
The procedure for granting credit in agricultural associations which engage in credit operations is usually the following. Every member of
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the association wishing to avail himself of credit provides the board of management of the co-operative with information concerning himself and his household, the number of buildings which it contains, its stock, cattle and area of tillage. This report has to be verified and on the basis of this - and also of an assessment of the peasant's personal qualities, his capacity for work, enterprise and conscientiousness - he is granted a credit facility, that is, it is decided up to what limit money can be loaned to this comrade without risk to the association. Before the war the average amount of a credit facility for an association member was about 80 roubles.
If a credit facility is granted to a member of a co-operative, then he can, in case of need, request a loan from the board of management, indicating in his application the purpose of the loan, its amount and the period of repayment. Its purpose must be related to production and must not involve loss, its amount must be commensurate with its purpose, but must not, so far as possible, exceed the amount of the credit facility. The period of repayment is not more than six months. (Loans for longer periods are advanced only under a special procedure and provided that the association has special capital for long-term credit.) If the association has ready cash available and if the request is well founded from an economic point of view, the loan is advanced either for the whole or part of the sum requested; but with the prior deduction of interest covering the period for which the loan is requested.
If, let us suppose, a peasant receives a loan of 100 roubles for six months at an interest rate of 12 per cent per annum, then he will be given only 94 roubles while becoming indebted to the amount of 100 roubles.
Loans are made subject to three kinds of security, namely:
1. Personal confidence in the member who borrows;
2. A guarantee in the borrower's favour by some other member; and
3. The security of goods or cattle.
The sums advanced on the basis of personal confidence are comparatively small. If the loan requested exceeds this sum, it is advanced only where repayment is guaranteed by some other member of the association. Where this guarantee has been given, then in the event of non-payment steps are first of all taken to recover the money from the debtor; but if he is unable to pay, then the money is recovered from the guarantor. It must be noted that when a credit facility is granted to a member of the association, a decision is made not only as to the maximum amount which can be advanced to him on the basis of personal confidence and on the basis
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of a guarantee, but also as to the maximum amount which the guarantor can guarantee on behalf of others.
When an application is made for a secured loan, the amount advanced is related to the value of the security and is usually worth no more than three-quarters or two-thirds of its value. Acceptable securities may include agricultural products - grain, flax, animal hides, etc. - or cattle owned by the borrower.
In the first case, the products offered as security are usually handed over into the keeping of the association. But in cases where cattle are provided as security, they are left in their owner's possession but are made subject to a 'prohibition'; that is, the owner is deprived of the legal right to sell them or give them away or remove them without the special permission of the co-operative that has granted the credit.
The loan itself may be advanced either in money or in kind, i.e. in the form of an authorization to obtain goods from one of the association's agricultural warehouses. The handing over of agricultural machinery, manure, seeds, etc., is not, in this case, a violation of the Rochdale principle which allows trading only in cash, since the corresponding sum of money is immediately transferred by the association's credit department to the account of the warehouse, which represents a cash settlement. In this case we simply have the fusion of two kinds of operation into one: those of purchasing and of granting credit.
Once the loan has been granted and the borrower has given the association a promissory note, the association's board of management has the right to verify whether the money advanced really is being used for the purpose for which it was requested; and in the event of dishonesty by the member, it can demand the immediate reimbursement of the loan and expel the dishonest borrower from membership of the association.
If the economic turnover, for the purpose of which the loan was obtained, has not been completed by the time stipulated for repayment, or if the calculations of the householder who took out the loan have not been fully justified, he may ask the association's board of management for payment to be deferred; and this may be allowed - after careful examination of the circumstances and of the grounds for the request - usually for a period of no more than six months.
In cases where the borrower delays repayment for several days without having given notice to the board of management, a special fine is imposed on him for every day's delay.
Such are the methods of credit operations in the co-operative credit system. But where does the association obtain the resources for granting loans to its members?
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The association's resources are made up of:
1. The association's basic capital;
2. Its reserve capital;
3. Its special capital and, in particular, its capital for long-term credit;
4. Money borrowed by the association for varying periods;
5. Money deposited with the association, subject to various conditions, by members of the public;
6. Money kept by the association for varying periods;
Let us examine each of these sources separately.
Basic capital may sometimes consist of shares held by members of the association. But according to Raifeizen's principles such capital is usually borrowed in the form of a long-term loan which is gradually paid off out of annual deductions from the association's profits. Basic capital which is raised in this way will, after the association has been operating for some years, increase, as public capital accumulated in the process of the association's actual work.
In the USSR at the present time, no final system has yet been devised for raising basic capital for the purpose of organizing small-scale credit. In all probability, however, the Central Agricultural Bank of the USSR will be able to undertake the commitment to finance the basic capital of agricultural associations - relying, in its local work, on local agricultural credit associations and local cooperative alliances.
An agricultural bank, as the centre of all agricultural credit, must in general devote a good deal of its effort to making credit of all kinds available to peasant households through their co-operatives. Its first priority must be to make credit available to local associations so as to finance their basic capital - on the one hand, because of the simplicity of this work and also, on the other hand, because only this bank, which can rely on large-scale and long-term state resources, is capable of performing this task on a mass basis. In all probability, the financing of agricultural credit will attract some of the resources of state savings banks as well as some insurance capital.
The association's reserve capital is formed gradually as its work proceeds by money set aside out of profits; it serves to underwrite all the association's commitments and is a means of covering possible fortuitous losses.
Special capital, created for various particular purposes, is raised through special borrowings, levies or donations and, since it forms part of the association's assets, it can also be used for granting credit. The purpose of providing credit may be directly served by
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special capital for long-term credit, the raising of which is exceptionally important in view of the acute need for long-term credit in our rural areas.
Borrowings are made by the association in the event of a shortage of resources from elsewhere: they are usually made for short periods from other co-operative organizations, from local banks or even from private individuals. When matters are properly handled they should not comprise a large part of the association's resources, being the most disadvantageous and the most expensive way of obtaining money.
The main channel of resources for co-operative credit must come from the population itself - through the transfer of their available resources to the association in the form of deposits. These can be made either by the association's members or, equally, by any local inhabitant who wishes to do so.
Provided that the co-operative movement has fully developed and is generally trusted, and provided that the population enjoys a perceptible measure of well-being, the inflow of deposits into cooperative associations is usually so great that it fully matches the association's credit operations.
A population which has become convinced of the stability of cooperative organizations will usually lend - at a low rate of interest -the money it has saved 'for a rainy day' and which it had previously kept in money-boxes, stockings and trunks. After that it will deposit the unused cash which it was for some reason unable to invest in an advantageous way and, finally, it will temporarily deposit its turnover capital when the latter, owing to the dead season, remains uninvested in production over a period of several months.
In concluding our description of co-operative credit, we need to dwell on certain extremely important aspects of such credit operations.
1. When describing the association's lending activities, we have said nothing about how the rates of interest on loans granted by the association are fixed. Nor could we do so without first examining where the association got its resources from. But we can now point out that the level of interest rates on loans is determined by the level of the rates of interest at which the association can obtain resources, either by borrowing or through deposits. Having obtained resources through deposits at a rate of interest of, let us suppose, 8 per cent per annum, the association will add on a further 2 or 3 per cent to help cover the costs of its apparatus and to make a profit; and will therefore offer loans at interest rates of 10 or 11 per cent per annum.
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The difference between the rates for loans and for deposits in a well-run association must be as low as possible. The profits and the resources for the maintenance of the apparatus must be increased by increasing the credit turnover.
2. When granting loans it is always necessary to ascertain not only how much ready money is available but also for what periods it has been advanced to the association. Money which has been deposited for four months can under no circumstances be loaned for seven months, because when the time comes to repay the deposit there will be no possibility of getting this money from the borrower. In short, the periods for which loans are granted must always be more or less dovetailed with the periods for the repayment of deposits and borrowings, since any discrepancy in this respect can put the association in an exceptionally difficult position.
One can see that the importance of co-operative credit is immeasurably greater than mere help given to individual households in their work. As the co-operative credit system develops and grows stronger, it inevitably attracts, in the form of deposits, all the unused money in rural areas. By supplementing them with the resources and capital of the state, obtained through banks, it makes credit cheap and accessible to every peasant, and makes it generally available. As is now the case in industry, most of the circulating capital in agriculture will be borrowed, and borrowed through cooperatives. It is this borrowed co-operative capital which would be used to build up and organize butter manufacturing and potato-grinding factories, centres for stock-breeding, for the handling of machinery and for grain-cleaning, mills and other co-operative buildings; and this same borrowed co-operative capital would form the basis for all marketing, purchasing and reprocessing operations. In other words, if all the operations just enumerated acquire a wide scope, then they will lead to the gradual co-operative socialization of all capital circulating in agriculture and on the market for agricultural products.
It is customary for us to describe modern capitalism as finance capitalism; because its chief master and its main organizing and guiding force is banking capital which provides the resources for the industrial and trade turnover. If co-operative credit develops and contributes to a powerful inflow of resources into the peasant economy, finance capital will also acquire a guiding and all-determining role in the countryside. But in this case the capital will be public capital, owned by the population itself.
The considerations set out above give an entirely new significance to the modest work of our co-operative associations. They mean that
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this work, despite its everyday character, is of the very greatest importance for the creation of a new social and economic system. The entire system of agricultural credit, from the local association to the Central Agricultural Bank of the USSR, are therefore of exceptional importance for the building of socialism in our country. However, they give us no indication as to the financial rules by which a credit co-operative must be guided when resolving the problems which it faces with regard to the organization of small-scale credit.
When establishing the foundations of the financial policy of a credit co-operative, account has to be taken of a number of diverse economic elements. The most important of these is the nature of the need for resources, the demand for capital which is presented by the local peasant economy. Depending on regional differences in the structure of the national economy, this will significantly change both qualitatively and quantitatively.
It is continuous and very acute in regions undergoing a transition from an outdated agricultural system to one which is more advanced and more capital-intensive. The acquisition of complex agricultural tools, of better breeds of cattle, of fertilizers and of other ancillaries of an intensive economy require a significant increase in the household's basic and turnover capital, which is achieved by the obtaining of credit.
An entirely different type of need for credit exists in regions whose organization is relatively static. In this case, most of the demand for resources arises from the shortage of turnover resources, from the need to replace the depreciating elements of basic capital and, in part, from the expansion of capital caused by the growth of peasant families and the corresponding expansion in the volume of their economic activity. The need for credit in regions of this type is to a considerable extent seasonal. It must also be noted that the extent of the need for credit does not remain identical from one year to another, but changes in accordance with the evolution of local economic life. The need for resources can itself be broken down into a number of categories, each of which has its own specific character. At the same time, the scale of the need for credit is to a large extent determined by credit conditions. Oppressive, usurious credit reduces the volume of the credit turnover, while any alleviation of credit conditions considerably expands this turnover, making it possible for money to be borrowed to launch economic enterprises which would not be advantageous with high interest rates on loans.
A familiarity with a region's need for credit, with the quantitative extent of this need, its seasonal expansion and its dependence on the level of interest rates - all this constitutes the most important initial
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information when organizing small-scale credit. When the extent of the need for credit has been ascertained, an active policy is developed so as to find the resources necessary to satisfy it. A number of ways of raising these resources are known in the practice of credit operations.
Given the conditions of the modern Russian countryside with its extremely underdeveloped capital accumulation, and given the population's distrustful attitude towards co-operatives, the latter are, from the financial point of view, the best apparatus for the distribution of state loans. However, this state of affairs should be regarded as temporary and, as the well-being of the peasantry improves, it is to be expected that co-operatives will be able to attract other kinds of resources for their work.
The basic problem with organizing co-operative credit - and indeed with all organized credit - lies in the organization of intermediary links between individuals who need capital in order to run their farms and those who possess unused or relatively unused capital and are able, in one form or another, to make this available for use by those in the first group.
In this respect, credit is usually supposed to represent, as it were, a special kind of trade, where the commodity is the right to use capital, measured by the amount of the capital and the duration of the period of use; and the price for this commodity is the rate of interest payable by the borrower to the lender.
Because credit transactions are of a unique character and are entered into directly between the owner of the capital and its ultimate user, the price of the credit granted is usually fortuitous; and the credit turnover does not of itself give rise to a capital market. However, as soon as credit transactions develop on a mass scale, credit intermediaries will appear on the economic scene; capital circulating in the credit turnover begins to become depersonalized, the price of credit begins to become homogeneous under the pressure of manifest competition in the supply of and demand for capital and there arises a new economic phenomenon: a capital market with its own structure and its own laws of life, similar in some respects to the commodity market. In many ways, private credit transactions will also become subordinate to the pressure of the laws of this market.
During its historical development, the capital market gradually evolved special types of apparatus which served to organize the trade turnover. One such type of apparatus, which serves local markets for peasant households within the boundaries of the sub-district [volosf], is the credit association. The basic task of the credit association is to organize the local
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capital market for fairly large groups of households which comprise the area of its activity. The first task here is to attract the unused capital in the area into the association's bank. This capital will be provided by members of different economic strata in the countryside; and the inducement will be payment of a price for the capital in the form of a rate of interest on money deposited.
A reading of co-operative balance-sheets - and these make a fascinating subject for economic reading - gives us nowadays a vivid picture of healthy and thriving co-operative work, of its growth and decline, as well as a picture of the malfunctioning of co-operatives and of their gradual fading away.
Figure 4 graphically shows us the normal and healthy growth of a credit co-operative, which began by productively deploying a state grant and which gradually succeeded in expanding its deposits thus relying on local resources.
Another example of an entirely different kind is depicted in Figure 5, which shows how a credit co-operative was unable, owing to its poor organization, successfully to develop the work which it had begun in building up deposits; how it was all the time obliged to make use of capital attracted from outside, while at the same time failing to deploy the capital which it had assembled.
We can also see, when observing the development of balance-sheets, the manifestation of an active financial policy of co-operative credit (see Figure 6).
Thus we can see, for example, how under the pressure of an intensified need for money and under the pressure of requests for loans, a credit association was obliged in 1909 to raise the rates of interest on its deposits, and consequently on its loans as well, thereby attracting resources. However, having doubled its 'passive funds' over four years and in the face of difficulties over the deployment of the resources which it had assembled, it was obliged to reduce the rate of interest on its deposits, thus putting the composition of its balance-sheets into a more healthy state.
We see a very curious example of financial policy in a series of balance-sheets, which we have depicted in Figure 7. A co-operative, having consolidated its position after a number of years of successful work, tried to organize long-term credit - at first, so as to dovetail it with all the long-term deposits. Subsequently, it relied on the constancy of deposit funds including the short-term deposits, thus breaking the basic rule of banking according to which the active funds of a credit centre must be totally determined by its passive funds.
No private bank wishing to avoid bankruptcy can possibly tie up more of its resources in long-term loans than it has in long-term deposits. But for a co-operative, whose deposits are more stable
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even though they are in a formal sense short-term, it is, to a certain degree, entirely possible to break this rule.
It is entirely conceivable that an active policy pursued by a credit co-operative may extend not only to the organization of long-term credit, but also to the encouragement, with the aid of credit, of specific new branches of the peasant economy, for example, dairy farming.
The association's profits are used in order to create its own special capital for this purpose; and with the help of this capital credit is organized on preferential terms so as to encourage the acquisition of milch cows and the purchasing of the essential fodder. This preferential credit can also be used to finance not only individual households but agricultural co-operative associations. In general, the financing of other types of co-operation is an essential obligation of local credit co-operatives.
In addition to the examples just examined relating to financial policy for the development of a credit co-operative, its tasks include the management of its own balance-sheet in accordance with the state of the peasant money economy during different seasons of the year.
In order that we may fully grasp the national importance of the economic features of the seasonal policy of peasant co-operatives shown in Figure 7, we would direct the reader's attention to a comparison between the money turnover of the co-operative apparatus and the money turnover of the peasant economy.
A considered examination will convince us that credit co-operation is a form of gradual socialization of a very large part of agricultural capital - which is now more fully and more appropriately used for the development in the public interest of the productive potential of the countryside.
The harnessing of this capital for consciously formulated social purposes endows the organized public co-operative apparatus with an exceptional degree of power over the development of the agricultural economy, and enables it, through its financial influence on peasant households, to lead them along the path of the advancement of agricultural production.
1. Editor's note: The 'Principles of Raifeizen' were broadly adopted by the credit societies of the European Co-operative Movement during the period in question. They included full mutual responsibility of the Societies' members towards each other, the restriction of loans to productive investment and to Societies' members, as well as the assumption that each Society would be small and be led by unwaged officers elected by the membership.
The Peasant Family's Money Economy and its Organization on Co-operative Principles
The disintegration of the system of the natural economy in the countryside, and the gradual involvement of the peasant household in the commodity turnover, has more than once been the subject of extensive investigations. However, the literature has offered hardly any study at all of the organizational changes caused by the development of money transactions in the household's internal structure.
We know practically nothing about the particularities of this revolution. We have no clear notion as to what changes the peasant household has to make in its organizational plan in order to make the transition from a natural type of economy to forms of commodity production. But these changes are very significant, and only after becoming familiar with them can we fully understand the nature of the money economy which is operated by the peasant homestead.
Let us try, as thoroughly as possible, to grasp the organizational patterns of both types of household.
A natural economy is the most vivid example of an economy of the consumerist type. Within it, all the individual items of the consumer budget have to be satisfied from its own output. As a rule, these items are diverse and numerous; and in order to cater for this variety, the peasant family had to develop a no less complex and varied plan of production. A household that aims at satisfying in kind scores of family needs must naturally have scores of different sectors. Therefore a natural economy was always the most complex of all modes of agricultural production.
It is true that at the present time such a form of natural economy is very hard to find. The structure of the economy has, almost
92 The Peasant Family''s Money Economy and its Organization
everywhere, been penetrated by elements of money relationships, which have simplified its organization. The development of the market made it possible and profitable to abandon many small sectors and, by expanding the production of basic and more profitable goods, to dispose of the surplus portion of the harvest on the market. The money obtained from these sales financed the items of the consumer budget which, in a natural economy, had to be catered for through the organization of special sectors of production.
A simple comparison between two peasant households - one of which is organized on principles close to those of the natural system, and the other of which is based on commodity production - provides clear confirmation of what has just been said. Let us take the Zemstvo's book of statistics for the Totem district of the Vologda province which is one ot the remotest corners of our country and one of those most heavily based on the natural economy; and let us excerpt the final columns of the budget tables, relating to the groups of households which were largest in scale. Let us then compare the average figures arrived at with those for the ordinary household in Volokolamsk.
Table 16 makes it possible, at first sight, to identify substantial differences. We can see that money expenditure as a percentage of the overall amount of the consumer budget is, in the case of the households in Totem, equal to a total of 20.9 per cent; whereas in a household in Volokolamsk it reaches 66.3 per cent. In other words, the peasant household in Totem represents an economic organization which is to a certain degree isolated and has few social or economic ties with the outside world. By contrast, the peasant household in Volokolamsk has already become drawn into the world's economic turnover; and it lives not only by its own income but by a share of the common national income. An economy structured in this way was naturally bound to affect the manner in which its production was organized.
The numerous items of the consumer budget, which in the Totem district are satisfied in kind, make it necessary for the household to have a complex organization, providing 32 different kinds of product. However, in the Volokolamsk district, only ten items of the budget are satisfied in kind, which makes it possible greatly to simplify the structure of its economic organization.
The comparative complexity of the economic structures of the two households in question can be partly judged from Table 17. Thus in the Totem household, 87 per cent of all income is consumed in kind within the household; and its production is determined by the needs of consumption. However, in the Volokolamsk household, only 39.6 per cent of what is produced is intended for direct consumption by
The Peasant Family s Money Economy and its Organization 93
Rye 58.5 - 26.0 40.0
Barley 13.3 - -
Wheat 9.5 0.6 7.5
Oats 4.4 0.1 5.0 -
Malt 3.9 - - -
Groats 7.8 - - 13.5
Peas 3.8 - - -
Potatoes 5.8 - 12.0 -
Cabbages 0.3 0.0 - -
Cucumbers 0.1 - - 11.0
Onions 1.3 0.0 1.0 -
vegetables 1.7 - - -
Vegetable oil 2.2 1.0 18.8 -
Mushrooms 4.1 - - -
Berries 2.3 - - -
pig feed - 3.6 - 4.5
Beef 3.9 1.2 - 6.0
Veal 1.8 - 20.0 -
Mutton 3.9 - - -
Pork 6.8 1.4 - 5.1
Eggs 5.2 0.0 0.5 -
dairy products 51.3 - 150.0 -
Poultry 0.2 - 0.5 -
Fish 2.1 4.5 - 10.0
Salt - 1.8 - 2.0
Seasoning - 0.6 - 16.8
Tea and sugar - 11.8 - 50.0
Tobacco - 0.3 - -
Alcohol 3.5 6.1 - 21.0
Hops 0.1 0.5 - -
Clothing 4.3 10.8 - 145.0
Cards 0.0 0.3 - 3.0
Table 16 Structure of the consumer budgets of households based on a natural economy and households which are market-oriented
(Expenditure in money and in kind in roubles)
Totem district Volokolamsk district
Amount In kind In money In kind In money
94 The Peasant Family's Money Economy and its Organization Table 16 continued
(Expenditure in money and in kind in roubles)
Totem district Volokolamsk district
Amount In kind In money In kind In money
flax 4,0 - - -
Wool 2.5 - - -
Sheepskin 1.2 - - -
Soap - 1.1 - 12.0
Lighting - 1.9 - 4.0
Firewood 8.6 3.6 20.0 50.0
Utensils 0.0 1.8 - 2.0
Spiritual needs - 4.8 - 4.5
Total 218.4 57.8 253.0 497.8
in percentages 79.1 20.9 33.7 66.3
the family (see Table 17). The remaining 60.4 per cent is offered for sale on the market and it provides for the family's consumption only in the sense of making it possible to acquire goods which are needed out of the proceeds of sale.
Households in other areas, for which budget data exist, show differing ratios of commodity output in relation to total output; and these households occupy an intermediate position between the extreme types examined above. Thus budgets for the Vologda province show a rate of dependence on money relationships of 34.6 per cent for the Vologda district; while for the Vel'sk district they show a corresponding rate of 10.7 per cent. An investigation of budgets in Starobelsk showed a rate of 21.1 per cent. For the Smolensk province the results which we obtained were from 24.3 per cent to 11.1 per cent.
We know of accounts of peasant households in other countries which have shown a higher degree of commodity output. Thus, the description given by E. Laur of Swiss households showed a rate of dependence on money relationships of 62 per cent. And we know of other monographs on the peasantry in the West, which give very
The Peasant Family's Money Economy and its Organization 95
Table 17 Receipts in money and in kind of households in Totem and Volokolamsk
Totem district Volokolamsk district
Consumed in Sold to Consumed in Sold to
kind the amount kind the amount
(roubles) of (roubles) (roubles) of (roubles)
Rye 74.4 6.5 27.0 -
Barley 21.7 - - -
Wheat 12.5 0.7 - -
Oats 59.5 19.4 55.0 -
Potatoes 7.5 - 18.0 -
Flax seed 2.1 0.8 25.0 140.0
Flax fibre 5.6 3.3 - 306.0
Peas 4.3 - - -
Cabbages 0.3 - - -
Cucumbers 0.1 - - -
Onions 1.2 - 1.0 -
vegetables 1.7 - - -
Beef 4.0 - - -
Veal 2.1 - 20.0 -
Mutton 3.9 - - -
Pork 6.8 - - -
products 52.1 7.6 150.0 -
wool 5.8 0.5 1.0 7.5
products 0.6 0.6 1.0 —
Total 266.1 39.4 298.0 453.5
and trades - 48.9 - 85.0
96 The Peasant Family's Money Economy and its Organization
similar figures. We know of no case where the rate of dependence on money relationships in peasant households exceeded 70 per cent. This evidently represented an upper limit since, owing to the very nature of agricultural production, even on purely capitalist farms, some of its products will be consumed within the farm, feeding the workers or the proprietor's family and providing fodder for cattle and seed for sowing. These products would not be replaced by those which have been bought because their cost within the household is considerably below the purchasing prices on the free market.
Households high up on the monetary scale differ from those based on a natural economy not only because their organizational plan is a good deal simpler, but also because of substantial differences in the way they make their economic calculations.
In the case of a household based on a natural economy, the activity of the person carrying on its economic management was directed towards satisfying particular consumer requirements; and to a great extent it had a qualitative emphasis. The family had to be provided with specific products - precisely those and no other. Quantity could be measured only in relation to the extent of each particular need which was being catered for: by reference to whether 'there was enough' or 'not enough' and in the latter case how acute was the shortage. And because of the elasticity of the needs themselves, there could be no great precision about any such measurement.
Therefore, in a household based on a natural economy, the question could not arise as to whether, for example, it was more profitable to sow rye or to mow hay; since these activities were not interchangeable and therefore lacked any common yardstick for comparison. The importance of the hay produced was measured by reference to the need for fodder, and the importance of rye by reference to the feeding of the family. It might even be asserted that the poorer the quality of the hay, and the greater the effort needed to produce a given quantity of hay, the greater was the importance attached to hay-making.
But as soon as a household becomes part of the commodity-money turnover, its aims assume an entirely different character. Economic activity abandons its qualitative emphasis. Needs can now be satisfied by means of products which have been bought. What comes into the foreground is the 'quantitative' interest - in producing the greatest possible quantity, which, once it has been exchanged, can assume whatever qualitative form is necessary for the purpose of buying goods. As the dependence on money relations progressively develops, the 'quantity' obtained becomes increasingly separated from 'quality'; and it begins to assume the abstract character of a value.
The Peasant Family's Money Economy and its Organization 97
Once the exchange of commodities has become widely developed, it becomes a matter of economic indifference to a household as to where it should concentrate its labour - provided only that its labour is fully utilized and is well rewarded by the market value of what it has produced. And since the level of remuneration for the labour invested in producing different goods is ultimately determined by the state of the market, it is therefore self-evident that, as commodity elements progressively develop within the economy, the organization of a household (which, in the context of a natural economy, is determined in all its details by the family's consumer requirements) will increasingly become subordinate to the influence of the market situation.
A fall in the price of any particular product will lead those engaged in farming to stop producing it and to sow the fields with another crop. If the price of milk improves in relation to the price of bran, this immediately leads to an expansion of milk production, and so forth. A household that has 'learned the meaning of weights and measures' will begin to play the market just like a dealer on the stock exchange.
Such is the basic organizational and economic significance of the transition from a household based on a natural economy to one based on commodity-money relations. The household becomes freed from the 'qualitative' influence of the requirements of consumption and by turning to the production of commodities, which are constantly adapted to the changing situation on the market, it gains the opportunity of acquiring a significantly greater number of valuable things and, consequently, of increasing the remuneration for its labour. However, this rise in income makes it necessary for the household - quite apart from the organization of its production - to carry out a further, complex, organization of its money economy: in other words, it has to organize its relationship with the market.
It must immediately be noted, however, that the money economy of a peasant homestead is in many ways the antithesis of the trading operations of a commercial firm. Trade has been described as 'the buying of commodities for the purpose of their subsequent resale'. Its operations centre on the difference between purchasing and reselling prices: therefore the absolute level of prices is of no importance to a trading organization. But a peasant household, like any other enterprise which produces raw material, has to organize the sale of the products of its labour in order to buy, out of its money receipts, its essential means of livelihood and its implements of production. A peasant household is therefore interested in the absolute level of prices of agricultural products; or it is, at all events, interested in a general rise in the market prices of agricultural
98 The Peasant Family's Money Economy and its Organization