Today we present part 2 from Co-operative Commonwealth: De-commodifying Land and Money a paper prepared by Pat Conaty for the 13th International Karl Polanyi Conference at Concordia University, Montreal on 6-8 November 2014. Pat is research associate of Co-operatives UK, a Fellow of New Economics Foundation and author with Mike Lewis of The Resilience Imperative Cooperative Transition to a Steady State Economy. We published Part 1 on Monday Dec 29th and will publish Part 3 on Friday Jan 2nd.
Co-operative Interest-free lending models – past and present
Adam Smith argued for the usury law in the UK to be tightened and the maximum rate lowered to 5%. He felt that higher rates encourage irresponsible lending and excessively reward investors.(1) Jeremy Bentham argued the opposite and for the abolition of usury laws and a free market rate of interest.(2) Usury is little discussed today but it is crucial in policy terms. Lenders work to the Rule of 72 which means that a loan at a compound rate of 24% will double in value in three years compared to a period of 36 years for a loan at 2%(3).
During the industrial revolution English working people were excluded from bank lending though pawnbroking was rife. Mutual aid savings clubs developed interest-free lending systems for housing. The most successful were the Terminating Building Societies for buying land and building houses.(4) The first was established in 1775 by Richard Ketley, a pub owner in Birmingham and this idea spread rapidly across the Midlands of England.(5) Members who saved for at least ten years received an equal chance to buy a plot of land to and build a house with a mixture of their savings (typically 40%) and an interest-free loan (typically 60%) from the mutual society. Loan allocation was by a draw organised periodically to distribute the pooled funds. A Terminating Building Society usually would operate for 20-25 years until all the member savers had secured a home. Then the society wound up.
By 1870 nearly a thousand Terminating Building Societies were active across the U.K. They had become the core provider of mortgage finance for the skilled working class.(6) However no new terminating building societies were allowed to form in the UK after 1910. By that time though the system had spread to many Commonwealth countries. The system was still legal in New Zealand until 1980.
There were other models that flourished. Dr. Thomas Bowkett introduced a mutual organization in the 1840s to provide housing and smaller loans interest-free.(7) Twenty years later, Richard Starr made some adjustments to the system, and the “Starr-Bowkett” societies spread fast. Each was a registered mutual society. New members selected the amount of the loan for which they wished to apply, were assigned a number and a set amount of time for paying a monthly subscription (generally 0.25% of the loan). Once sufficient funds accumulated from subscriptions, ballot meetings were held and loan recipients chosen by lottery.(8) The lottery feature of the system led to its abolition by regulators in England in the late 19th century. By then the societies had spread to Australia and this approach to lending remained popular for housing finance loans until the mid-20th century.
A system of rotational savings and lending almost identical to those of 19th-century England is active in Brazil today. CoopHab is a major housing federation of co-operative savings societies.(9) Each society is organized to sign up 1000 members. They each commit to save a particular percentage of their household income for ten years and in return are guaranteed an interest-free loan over a ten-year repayment term. One hundred interest-free mortgages are allocated annually by each society until every member is housed by Year 10 (or slightly later). Then the society terminates.(10)
Elsewhere, there are other models of mutual, interest-free lending. During the Great Depression, a group of Danish farmers faced repossession of their land by the commercial banks. Building upon earlier practices of interest-free systems in Germany, Christian Christiansen championed the founding of a number of rural savings and loan co-operatives that went by the acronym JAK, short for Jord Arbete Kapital (“Land Labour Capital”) that still operate.(11)
In 1965 the concept spread to Sweden, where it expanded rapidly in the late 1980s and secured a banking license in 1998. Today Sweden’s JAK Bank has 35,000 members, US$163 million in assets, and $147 million out on loan. About 80% of those loans are for home improvements or to refinance high interest loans (e.g., student and consumer loans) originally obtained from commercial banks. The other 20% is invested in ecological and social enterprises of various kinds.
Operationally, JAK is very similar to a credit union, except that members do not earn any interest on their savings or dividends on their shares. Like its Building Society and Starr-Bowkett forebears, JAK also has a compulsory savings element. For foregoing interest and dividend income, members are entitled to fee-based loans at no interest. The total cost of a JAK loan covers four things:(12)
loan appraisal and set-up cost at a fee that is 2-3% of the approved loan value.
an annual administration fee equal to 1% of the loan.
an annual fee of approximately $30 to support the JAK educational system and volunteer services.(13)
an equity deposit equal to a 6% of loan value to cover risk on any loan in the portfolio.(14)
Members are strongly encouraged to pre-save in order to qualify for a loan.(15) Members also contract to continue saving while they are repaying their loans. This is called post-saving and it is structured as a separate savings contract that runs alongside the loan contract. By committing to continued savings while the loan is paid down the member can negotiate a larger loan right from the outset.(16)
The diagram below depicts how post-savings are calculated and combined with pre-savings to match the overall sum that is to be borrowed. Pre-savings of $2,000 during a 12-month period prior to applying for a loan (the light green triangle) entitle a member to borrow only a maximum of $2,000 over a similar term (the light purple triangle). However, the member could borrow an additional $3,000 if s/he agreed to continue saving (“post-saving”) while repaying the loan over a 48-month term.
The implications of a $20,000 loan over 10 years make these benefits very clear. (See Table 1.) The JAK borrower enjoys net savings of $6,669 over someone who gets a loan from a conventional bank.
Table 1: Comparative Loan Costs
Charges on 10 year loan of $20,000
Bank loan 8.05 % over 10 yrs
JAK loan over 10 years
Loan financing fee
$22 per month over 10 years
6% loan equity deposit
Paid up front but repaid within 7-19 months of loan retirement
Annual membership fee
$33.90 per year
Annual Service fees
$40 per year
Interest coast on Loan
Total Cost of Loan
JAK borrower pays $6,669 less for the loan than the conventional borrower
While the JAK borrower saves a large amount of money in interest costs, the monthly payments are higher than those of a conventional bank customer (see Table 2). The reason is monthly loan payments have to be matched by a post-savings payment: the member pays $166.79 in the monthly loan payment, an amount that is matched by an additional $166.79 in compulsory savings.
Table 2: Comparative Loan Payments
Payments on 10 year loan
Conventional bank loan at 8.05%
JAK Bank (assuming no pre-savings)
Monthly Loan Payment
($2001 per year)
This would be less if a pre-savings balance has been accrued. $20,000 saved is recoverable 3 months after loan is paid off.
Loan fee payment
Monthly contribution to 2.5% loan fee
Total Monthly Payment
Monthly payments of $355.84 compared to $241.18 means the annual servicing of a JAK loan is about $2,000 more than a conventional bank loan, or about $20,000 over the 10-year loan term. However, it all comes back. It is the member’s money. Thus a 10-year loan of $20,000 saves $6,669 in interest and creates for the member $20,000 in savings. In addition the 6% equity deposit required at the front end of the loan is also returned, another $1200. Together they represent a nice little nest egg for the borrower.
JAK banking, CoopHab and Community Land Trusts work well but are below national policy radar. This is not entirely the case for co-operative commonwealth systems. The JAK founders in Denmark inspired the development of the Swiss WiR (the ring) in 1934 that today operates as a co-operative bank providing interest-free finance though a mutual credit currency for about one in four small and medium businesses in Switzerland.
How might the co-operative commons make a breakthrough more widely? This has happened in the past. Indeed the history in North America and Germany is insightful for how to implement a public-social partnership strategy between citizens and the state.
From Co-operative movement action to Public banking solutions
In 1862 during the Civil War, to prevent gold and silver from draining out of the Union and bringing about a banking collapse, President Lincoln took two emergency measures. He suspended the convertibility of banknotes to precious metals and then approved the issue in 1862 of what expanded to $450 million of interest-free Greenback dollars.(17) The administration relied upon borrowing to finance the war effort. But as debt levels soared, printing Greenbacks became a war measure.
Faced with a post war debt mountain, as well as the impending costs of reconstruction at the end of the civil war in 1865, Lincoln indicated his intent to expand the use of Greenbacks in peace time. As President he had led the introduction of a paper money not backed by gold or silver, and had shown that the government could create, issue, and circulate by fiat the currency and credit needed to satisfy the spending power of the government and the buying power of consumers. By issuing Greenbacks, Lincoln demonstrated that the privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government’s greatest creative opportunity. The taxpayers through a well managed fiat currency could be saved immense sums of interest.
Following Lincoln’s death, the Greenbacks were withdrawn.(18) The federal lenders of Wall Street secured a reintroduction of hard money policies linked to gold. This led to severe deflation causing business to fail and unemployment to soar. The Bank Panic of 1873 set in train a 20-year depression.
One feature of the Long Depression was falling prices for agricultural goods. Farmers got credit by using their crops as collateral. With merchants and bankers typically charging interest rates of 50-200%, this led to debt peonage. In 1887 the National Farmers Alliance (NFA) emerged as a rural agricultural co-operative movement to combat these practices. Co-operative solutions developed in Texas and Kansas attracted several million members across the USA.(19)
The traditional consumer co-operative model relied on cash purchase but most farmers under the crop lien system had no cash. To overcome this usurious credit monopoly, the National Farmers Alliance and Co-operative Union, led by Charles Macune, developed the Sub-Treasury Plan.(20) NFA branches offered votes to either Democratic or the Republican politicians in exchange for agreement to vote for a reintroduction of the Greenback. The Greenbacks would not be backed by gold, but by the farmers’ crops, which would be stored in sub-Treasury warehouses paid for by the government.(21)
So this was not simply a co-operative currency. It was a new national currency under a co-operative and state partnership to expunge the debt peonage imposed by merchants and bankers. Farmers under the sub-Treasury plan could draw down Greenbacks for up to 80% of the crops they pledged to produce and store in the sub-Treasury. Finance was to be secured at 2% interest plus a charge for storing, grading, and insuring their crops in the warehouses.(22) The established political parties withheld their support from the sub-Treasury Plan. Opposition from bankers, merchants and their lobbyists was just too great. Infuriated, farmers and workers created their own party in 1891 to carry forwardmonetary reform and a co-operative economy. The new Populist party won some local, state and Congressional elections before falling into decline after 1895.
A generation later the spirit for monetary reform resurged again in North Dakota with a determination to bring banking into public ownership and to abolish corporate land ownership. In 1915, the Socialist Party organiser A.C. Townley launched the Non-partisan League (NPL) to promote state control of flourmills, grain elevators and banks.(23) At the time, corporation interests based in Minneapolis, operating in collusion with the Northern Pacific railroad, dominated bank lending in North Dakota and the grain trade. The NPL campaign was so successful that its slate of independent Republicans swept the state elections of 1916 and won more seats in the legislature two years later.
Armed with this mandate the NPL set up three major state-run enterprises: North Dakota Mill and Elevator, a state railroad company, and the Bank of North Dakota as a public bank.(24) The benefits of the Bank of North Dakota for the farmers and citizens of the state are notable.(25)
In 2011, the BND [Bank of North Dakota] $5.3 billion in assets made it North Dakota’s second largest bank……. BND does plenty of bank business. Mostly, however, it makes loans – to students and small businesses, farmers and ranchers, affordable housing developers and disaster stricken farmers. The loans are designed to serve public need, so the terms of the loans are generally more favourable than private banks. BND loans aren’t a handout, they actually profit the state. The bank has been in the black every year since 1971, earning $70 million in 2011. More than half the profit goes back into the state’s General Fund offsetting North Dakotans’ taxes. The rest goes towards more loans, not CEO bonuses, because BND ‘execs’ are modestly paid public officials.
The public banking and other reforms of the NPL continue a century later to yield ongoing social dividends for both the public finances and for all North Dakotans.(26) Unfortunately only one US state has established this model. However there are other legacies and precedents for the common good.
100% money and Social credit arguments against debt-based money
In 1920 the US, Germany, Italy, France and the UK were saddled with huge levels of public debt. There was an urgent need to fund reconstruction, housing for the troops returning home and to change production over to civilian purposes. Henry Ford and Thomas Edison suggested a novel solution. To fund infrastructure projects that would generate an income stream, they proposed that new money be created by issuing interest-free government bonds. In 1921 they argued to Congress that the principal on the interest-free credit could be repaid from the income generated by say a hydro-electric dam or a toll bridge or from general taxation.(27) Thinking in the UK probed more deeply.
After an initial issue of debt-free treasury notes, the UK funded its war effort mostly through war bonds. The national debt grew eight-fold from 1914-1918.(28) The Nobel Prize chemist, Frederick Soddy pointed to the cumulative costs of debts in the economy and the instability this creates. In the 1920s he made the first case for an ecological economics free of debt. To achieve monetary reform, Soddy advanced the first case for what became known in the 1930s as “100% money.” He proposed an end to debt-based money by progressive increases towards a 100% reserve requirement. Thereby all money would be created debt-free by the government.(29) He showed that debt-based money runs counter to nature because it violates the laws of thermodynamics.(30)
Clifford H Douglas, a British engineer, made a direct link between monetary reform and a universal income.(31) He argued that economic instability was due to a gap between aggregate demand and supply, which in turn was caused by an insufficiency of money as the circulating medium. Debt money could close this gap only temporarily. More and more debt would mean higher and higher compound interest payments by households, businesses and government. This in turn would reduce national demand to meet goods and services in the real economy. He argued that a clear-cut and labour-saving solution would be for Government to create new money, interest-free as “Social Credit.”.(32)
The Douglas argument had two aspects. First all citizens would receive a National Dividend.(33) This would pre-distribute income without the need to tax and redistribute. It would also reduce debt by eliminating the growth of instalment credit that was being developed by corporations and banks. Second, Douglas proposed that publicly-owned producer banks be set up in each region of the UK to provide finance debt-free to industry and enterprises.
From 1929 monetary reform attracted a wide audience In the UK, Australia, New Zealand, the USA and Canada with growing grassroots calls ranging from public banking to universal basic income.(34) The New Deal of Franklin Roosevelt took inspiration from John Maynard Keynes.
1 Adam Smith (1776) The Wealth of Nations, Book 2, Chapter 4, Stock Lent and Interest.
2 Jeremy Bentham (1787) In Defense of Usury, Dodo Press, 2008.
3 Dividing the loan compound rate of interest into 72 indicates the time needed to double the loan capital advanced.
4 Johnston Birchall (1988) Building the Co-operative Way, Routledge & Kegan Paul, pages 91-92.
5 Glyn Davies (1994) A History of Money – From Ancient Times to the Present Day, University of Wales, pages 326-328.
6 These organisations are not to be confused with the modern building societies which grew up in the late nineteenth century. They catered to the growing middle class and charged interest. (Birchall 1988:).
8 Recipients paid back the loan and any amount still owing on their subscription. Once all members had the opportunity to receive a loan, the society closed and the capital was returned to its members.
9 International Co-operative Alliance, Annual Report, 2006.
10 CoopHab’s promotional slogan is: “‘Homes at cost with no interest and no surprises.’
11 Lewis and Conaty (2012) The history and operations of JAK banking is analysed on pages 74-83.
12 For purposes of illustration, figures have been converted from Swedish kroner to dollars. Lewis, Mike and Conaty, Pat. 2012:74-80.
13 Each of 30 JAK sub-branches relies heavily on the efforts of member volunteers who are trained in interest-free lending principles and practices by JAK staff. Volunteers also assume major duties in the recruitment of new members there has been no default, the deposit is then repaid in full to the member.
14 Equity deposits serve as the bank’s reserves and legally belong to the bank until the loan is fully repaid. Bad debt has been kept below 0.5%, which also helps to keep loan costs so low.
15 This used to be a requirement but in 2003 that was rescinded in order to enable lower income members to qualify for loans.
16 New members receive an account immediately. Savings flow into a common pool, but instead of receiving interest, each member earns savings points – one point per dollar saved each month. Savings points give a member the right to borrow without interest. The amount that a member can borrow is based on the number of savings points accumulated (pre-savings) or contracted (post-savings). Savings points are essential to JAK’s ability to maintain liquidity in the system, which in turn is essential to making interest-free loans available for a growing membership.
17 This was the first full national currency to be introduced by a US government. John Steele Gordon ‘The High Cost of War’,
Barron’s, 9 April 2011.
18 Lawrence Goodwyn (1978) The Populist Moment – A Short History of the Agrarian Revolt in America, Oxford University Press, pages 10-12.
19 Goodwyn (1978): pages 26-29: Services developed including bulk buying, co-operative warehouses and procurement agents in every state for securing lower cost farm supplies and promoting county and town level co-operatives. Each state aimed to set up a Farmers Alliance Exchange to unify the members in their dealings with sellers and buyers.
20 Goodwyn (1978): pages 67-93: In fact, Macune developed three plans. The first was to organize their members nationally to pledge their crops or their land to secure preferential rates of interest from bankers. The second was a national plan for a currency acceptable in co-operative stores and backed by 90% of the market value of crops. Both these plans (like the third one) foundered before the resistance of the bankers and their merchant allies.
21 This was not the first attempt to re-introduce Greenbacks. That was the primary purpose of the US Greenback Labor Party, founded in 1874. Over the next decade the party attracted a growing following of farmers and workers, at one point electing 22 members to Congress
22 Each sub-Treasury could withhold sale of its inventory until a favourable price could be obtained.
23 For All the People Uncovering the Hidden History of Cooperation,Co-operative Movements and Communalism in America
24 In 1932 the NPL governor, “Wild Bill” Langer enacted a state-wide initiative to prohibit corporate farming in North Dakota and any corporate ownership of farmland. These prohibitions are still in force in the state today.
25 Marshall Swearingen ‘State-run Banks: a Movement driven by unusual politics’, Public Banking Institute, News Alert, 28 November 2012.
26 Any profit from the North Dakota on loans to farmers, small businesses and to students is returned to the state. Over $300 million in dividends has been repaid to the state over the past ten years. Today North Dakota has the lowest level of public debt and unemployment of any US state.
27New York Times, 6 December 1921: http://query.nytimes.com/mem/archive-free/pdf?_r=3&res=9C04E0D7103EEE3ABC4E53DFB467838A639EDE
28 In 1914, faced with very low reserves in the Bank of England, Chancellor of the Exchequer David Lloyd George feared a bank panic. He declared an extended bank holiday, took Britain off the gold standard and issued £300 million in debt-free Treasury notes to fund the early stage of the war. There was only one issue of these so-called “Bradburys,” so-named after the Secretary of the Treasury.
29 Frederick Soddy (1926) Wealth, Virtual Wealth and Debt, George Allen & Unwin.
30 Soddy observed that: ’Debts are subject to the law of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well known mathematical laws of simple and compound interest…..For sufficient reason, the process of compound interest is physically impossible, though the process of compound decrement is physically common enough.’ (Soddy 1926:70)
31 C H Douglas (1919) Economic Democracy, Sudbury, Bloomfield (1974 reprint).
32 Douglas was in good company. In his book Roads to Freedom (1918), the philosopher Bertrand Russell argued for a universal basic income to provide economic security to all citizens. In the same year, Mabel Milner and Dennis Milner called for a ‘State Bonus’ as a percentage of UK national output – a form of social dividend.
33 Frances Hutchinson, Mary Mellor and Wendy Olsen (2002) The Politics of Money, Pluto Press, pages 134-137.
34. In England, GDH Cole argued for a “social dividend” as a universal “basic income” in 1935. In the same year, the Nobel economist James Meade, a colleague of both CH Douglas and GDH Cole, backed the ‘social dividend’ argument in a case he made to the Labour party. See About Basic Income: http://www.basicincome.org/bien/aboutbasicincome.html.