The Pamphlet Collection of Sir Robert Stout: Volume 81
The "democratisation" of credit would be incomplete without a system under which advances could be made on mortgage to owners of small properties—and on people's homes on terms equitably even with those commanded by the wealthier class of proprietors. The Credit Foncier, the principles of which, and its evolution on the European Continent, were lucidly explained by mm. Pinschof and Loprieno in their evidences before the Royal Commission of Banking in 1895—is admirably designed to meet this want, and the present time affords an exceptional opportunity for the adoption of the system in this State, so as to relieve the settlers who have severely suffered by the recent bush fires, in a manner not to injure the feelings of the most susceptible amongst them, or betray the wholesome principle of self-help. The money which has been subscribed by sympathisers could easily be converted into share capital in a Credit Foncier, of which the contributors, of course, would be the shareholding members, and loans granted to applicants on their merits, and on terms calculated to afford borrowers ample time to repay principal and interest out of the proceeds of their industries, without the acceptance of charity on the one hand, or the making of a money sacrifice on the other.
A Credit Foncier may consist of an association of property-owners for the purpose of securing loans on mortgage for its members, and of obtaining the necessary funds for that purpose from outside sources on their collective security; or it may be formed of members with share capital to act as an intermediary society between borrowers on mortgage and the investing public. The latter is the form in which the system has come to find favour, and in which it could be so easily page 61 and economically adopted by the sympathisers with agrarian distress amongst us at this time, and not for a mere temporary purpose, but as a permanent institution.
M. Pinschof, in his evidence before the Royal Commission, said:—"The first institutions were founded by the borrowers of money. This is the first development of the Credit Foncier—the German Landschafts Banken. After the seven years' war between Prussia and Austria, especially in Silesia, the distress was very great; money was very scarce, and the rate of interest very high. At that time Buring submitted to Frederick II. of Prussia his scheme for the formation of mutual associations of borrowers, who would be jointly responsible for the debts of each individual of the institution, and who would thus be a certain guarantee to the lenders of the money that they would only admit good people to get advances." It was some years before Frederick the Great gave his support to the scheme, but finally did so by investing a considerable amount in the Credit Foncier bonds. At a later time, as M. Pinschof informed the Royal Commission, "Napoleon III. took up 10 million francs (equal to £400,000) of mortgage bonds to give the Credit Foncier de France a start."
Here we have two notable and instructive instances of how Governments may aid a self-help people's movement by statesmanlike acts, and without a taint of State socialism. The funds supplied in each case were so economically utilised as to make the investment amply remunerative, and an enormous benefit to a class of borrowers whose emancipation from the extortions of usurers was a vast gain to the State itself. Credit Foncier institutions became self-going concerns, and their bonds favourite stock in which to invest people's savings so as to administer to the needs of the great body of small producers, and the purchasers of their own homes, without the intervention of middlemen bankers and money-lenders of any other kind. The system was established by law in France in 1852, under regulations which rendered their operations subject to State surveillance, which found general page 62 acceptance on Continental Europe, where the popular welfare may be better measured by the magnitude of the widely-diffused and equitable operations carried on under this system, and their immunity from losses, than by the ordinary statistics of national exports and imports. Valuations of securities are based upon the net incomes from the properties, averaging over a series of years, and advances are limited to 50 per cent, of values thus arrived at, if made on properties devoted to rural industries, so as to have a margin against losses incurred through unfavourable seasons, ravages by pests, and other risks to which persons engaged in such industries are liable. On the other hand, societies formed for lending upon people's homes, apart from land under cultivation, advance close up to the full value of the securities. Experience upon an extensive scale has proved that this can be done with perfect safety, and many millions of money are employed in the operations. The character of the borrower is taken carefully into account, and terms are given to suit his ability to meet repayments. Loans—principal and interest—are repaid by terminable annuities extending over periods of time varying from a few years to over fifty. The longer the period the greater the facility with which a borrower, with a small annual income, can meet his engagements. This is what really makes the system "democratic." Without it, notwithstanding that the interest charged for advances might be unexceptionally favourable, borrowing would still be a monopoly for the comparatively well-to-do, but, with a low rate of interest and repayments extending over a long term of years, an occupant may become the owner of his own home at an annual rate of redemption which a landlord might hesitate, probably decline, to accept for rent alone. This may appear a daring kind of business, but we have good authority for accepting the statement that experience has pronounced entirely in its favour, and thousands upon thousands of families have been helped in this way who, under conditions which prevail with us, could have no chance whatsoever. Besides, the public conscience which page 63 the working of the system creates would expose a defaulting borrower to the contumely of his class, and to people trained under the system it becomes a matter of common understanding and feeling that, from the start, the long term of a loan enables a borrower to be the owner of his own home without having to make a monetary sacrifice for the privilege as against rent paying—an ownership which descends in a family, with its diminishing liability, free from landlord's interferences, like any other real estate. This gives it stability and vogue.
The borrowing power of a Credit Foncier is limited to a certain multiple of its capital, a principle with which we are familiar, and no moneys are accepted on deposit in the way usual with ordinary money-lending institutions. Loan funds are provided for—(1) by share capital, and (2) by sale of bonds. After the investment of share capital, bonds are issued from time to time as funds are required for actual business, and not before. In this way the indebtedness of borrowers to a society, on the one hand, is exactly equal to the indebtedness of the society to its own shareholders and the public on the other, and provision is made for maintaining this equilibrium throughout by using a power conserved to the institution of calling in bonds at any time by ballot, to be paid off and cancelled. Loan repayments, instead of being placed to a sinking fund, are disposed of in this way, and the equilibrium, which is disturbed as repayments come in, is again restored when the accumulations are employed to cancel their equivalent in bonds. Thus, no interest is wasted by Credit Foncier institutions on idle money, and no unwholesome pressure is put upon managers to stimulate the loan market to find employment for unused funds.
M. F. Loprieno, in a very informing little pamphlet published in 1894, entitled "Notes on the Credit Foncier, "points out that the liability of bonds to be called in and cancelled at any time is a check upon extreme variations in their market values. A purchaser would not give much premium for a bond that is liable to be called in and paid off at short page 64 notice, nor would a seller be likely to accept much less than par for the same reason. To make bonds more readily marketable it would seem advisable that they should be issued at such a rate of interest as would enable an investor to purchase them at a slight discount, if any, so as to be in a position to avoid loss if suddenly called upon to surrender his purchase at par. A corollary from this is that Credit Foncier advances are always made in bonds, to be sold at the risk of borrowers, and not in cash, the institution acting as broker to effect sales, for which a small commission is charged.
There are other features belonging to the system which enables the stock to find a ready market at par values, even at times when other forms of investment are suffering from depression. The design being to accommodate the small land and house owners with cheap money, it naturally follows that the stock itself should be so "democraticised" as to come within the ability of the smallest investor to deal in it, and the transfer of bonds from hand to hand made as free from formalities as possible. Some institutions accomplish this by making their bonds transferable by indorsement, but the most acceptable, because the most convenient, form is to issue bonds with interest coupons attached, made payable to "Bearer," and of such low denominations so as to be as easily transferable from hand to hand as a £5 note. In this way they form an acceptable addition to the currency, whilst offering inducements to the working classes and small traders to exercise thrift beyond any advantages offered by Savings Bank institutions as conducted, and it is the duty of a Government to encourage in every conceivable way, and even to stimulate thrift, by opening up avenues for the profitable investment of public savings. In France, when Government loans are placed upon the market, the people can invest their small savings in the stock as free citizens without having the opportunity closed against them in the interests of high financiers and big brokers—a principle which the Bent Government have wisely adopted in the local flotation of the late Government loan—whilst in Great Britain, under Mr. page 65 Goschen's conversion scheme of some years ago, the people's Savings Bank deposits have been used as "enforced loans" to raise the price of consols and lower interest—a sure way to discourage thrift. In an article on "The Housing Question and the Savings Banks," contributed to the "Co-operative News" of 25th May, 1901, and in articles contributed about the same time to the "Westminster" and "Contemporary" Reviews, Mr. Wolff calls attention to this important question, and contends, as he says, "with the sanction of a good many influential people, including the powerful financial journal 'The Statist/ that Savings Banks funds should be administered for the good of the Savings Banks, and not of the Treasury, and that the area of investment should be enlarged." He says:—"In France, in Belgium, in Germany, co-operative societies have been formed to set up dwellings for their working-men members, with the use (they could not have done it otherwise) of the public money advisedly placed at their disposal. Co-operative societies formed for this purpose have proved so safe that public bodies have found it practicable to lend them up to 97 per cent, of the money required by them, and the pioneer of this movement—Dr. Liebricht, of Hanover—has publicly declared, in one of his official reports, that the full 100 per cent, might be advanced without hesitation or misgiving. The Belgian National Savings Bank lends to them gladly—offering purchasers life insurances at a low rate at the same time, which protects it more effectually, and secures the purchaser's family against loss of their home in the case of his death. In Germany the Old-age Pension Fund began the practice. It has now become general among such funds. Public Savings Banks have taken it up, and quite recently the Prussian Government has by official circular enjoined provincial authorities to stimulate to the utmost its extension by the agency of the public Savings Banks, on the ground of the admirable results obtained. A spokesman of the Government recently went so far as to publicly declare that the Government hope page 66 to solve the whole housing difficulty with the aid of Savings Bank money."
It is with capital as with water. It is necessary that streams formed of people's savings should be collected in financial reservoirs and placed under State supervision and regulations, but equally necessary that channels should be formed for its distribution, so that the class who make the savings should themselves reap the full benefit to be derived from their employment, instead of forming a capitalistic store for only Governments and big operators and speculators to draw upon. On the Continent of Europe this has been accomplished to such an extent that Credit Foncier institutions and people's credit banks have come to be as much regarded as agencies for providing safe and profitable employment for people's savings as they are for performing the special functions for which they were designed.
These sentiments are well expressed in a resolution carried at the British Co-operative Congress which met at Middles-borough in 1901, respecting