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A “Friend and Advisor”: External Auditing and Confidence in Germany's Credit Cooperatives, 1889–1914

Published online by Cambridge University Press:  13 December 2011

Timothy W. Guinnane
Timothy W. Guinnane
Affiliation:
TIMOTHY W. GUINNANE is professor of economics and history at Yale University.
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Abstract

An economic enterprise faces two, related, problems: effectively managing its activities and communicating to outsiders that it is, in fact, well run. The credit cooperative movement that grew up in Germany in the second half of the nineteenth century had to wrestle with both. These cooperatives thrived, in part, because they adopted strategies first to obtain and then to harness the information they needed about the communities in which they were located, giving them an advantage over other lenders. Particularly effective was the tactic of using local people as managers, which helped to cement their ties with the community. Yet because few, if any, locals had banking experience and most were not even familiar with basic accounting methods, the managers created internal management problems, intensifying outside suspicion of the cooperatives as banking enterprises. The methods the cooperatives developed to overcome these problems drew on a combination of local initiative and regional assistance that was typical of the movement as a whole. The movement's ability to train its own talent suggests that it had a broader impact than has been captured by statistics on its membership or financial assets.

Type
Articles
Information
Business History Review , Volume 77 , Issue 2 , Summer 2003 , pp. 235 - 264
Copyright
Copyright © The President and Fellows of Harvard College 2003

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References

1 For an analysis of this type of lending institution, see Banerjee, Abhijit, Besley, Timothy, and Guinnane, Timothy W., “Thy Neighbor's Keeper: The Design of a Credit Cooperative, with Theory and a Test,” Quarterly Journal of Economics 1092 (May 1994): 491–515CrossRefGoogle Scholar; and Ghatak, Maitreesh and Guinnane, Timothy W., “The Economics of Lending with Joint Liability: Theory and Practice,” Journal of Development Economics 60 (Oct. 1999): 195–228CrossRefGoogle Scholar. A comparative perspective is offered in Guinnane, Timothy W., “A Failed Institutional Trans-plant: Raiffeisen's Credit Cooperatives in Ireland, 1894-1914,” Explorations in Economic History 31 (Jan. 1994): 38–61CrossRefGoogle Scholar, and Guinnane, Timothy W. and Henriksen, Ingrid, “Why Credit Cooperatives were Unimportant in Denmark,” Scandinavian Economic History Review 46, no. 2 (1998): 32–54CrossRefGoogle Scholar.

Hollis, Aidan and Sweetman, Arthur, in “Managerial Compensation and Monitoring in a Non-Profit Organization: Evidence from the Irish Loan Funds” (unpublished, 2002)Google Scholar, note correctly that little of the literature on microfinance has explicitly considered the issues at stake here. Their own study concerns the Irish Loan Funds in the nineteenth century, an institution that also made loans to poor people. They argue that the Loan Funds dealt with the problems described here in a very different way.

2 Guinnane, Timothy W., “Cooperatives as Information Machines: German Rural Credit Cooperatives, 1883-1914,” Journal of Economic History 61 (Mar. 2001): 366–89CrossRefGoogle Scholar, lays out and tests the local information argument, using manuscript business records from several rural cooperatives. Guinnane, Timothy W., “Delegated Monitors, Large and Small: Germany's Banking System, 1800-1914,” Journal of Economic Literature 40 (Mar. 2002): 73–124CrossRefGoogle Scholar, is an overview of the German banking system in this period.

3 One version of the critique is developed in Schulze-Delitzsch's, Die Raiffeiserischen Darlehnskassen in der Rheinprovinz und die Grundcreditfrage für den ländlichen Kleinbesitz (Leipzig, 1875)Google Scholar. This blast provoked an official investigation by the provincial government. For a discussion of this inquiry and a thoughtful defense of Raiffeisen's methods, see Barbier, Emmanuel Le, Le Crédit agricole en Allemagne, suivi de l'étude des comptabilités les plus précises et les plus claires usitees dans les associations rurales de crédit mutuel d'Allemagne et d'Autriche (Paris, 1890), ch. 8Google Scholar.

4 For a discussion of the differing aims of the several branches, see Kluge, Arnd Holger, Geschichte der deutschen Bankgenossenschaften (Frankfurt, 1991), 100–6Google Scholar.

5 For more examples of this type, see Guinnane, Timothy W., “Regional Organizations in the German Cooperative Banking System in the Late Nineteenth Century,” Ricerche Economiche, 51 (Fall 1997): 266-9.Google Scholar

6 Herrick, M. T. and Ingalls, R., Rural Credits: Land and Cooperative (New York, 1915), 267.Google Scholar

7 Wygodzinski, W., “Kreditgenossenschaftliche Fragen,” Jahrbücher für Nationalökonomie und Statistik (108): 478Google Scholar, from the yearbooks of the several associations. A fourth group of urban cooperatives outside the Schulze-Delitzsch association (Hauptverband deutscher gewerblicher Genossenschafteri) had 440 cooperatives with 120,000 members in 1914.

8 Germany's population in 1910 was about 65 million.

9 Some older English-language sources translate the German term Ptiifungsverband as “auditing union.” The translation I use, “auditing association,” appears in more recent English-language works.

10 The manuscript material is not held in formal archives. See my note on sources at the end of this paper.

11 The Aufsichtsrat was also a feature of some forms of large-scale corporations in Ger-many. The appendix to J. R. Cahill, Agricultural Credit and Cooperation in Germany (U.S. Senate, Document no. 17, 63rd Cong., 1st Sess., 1913) includes an English translation of the 1889 cooperatives law as amended by later acts.

12 For example, the Maulburg cooperative started paying the members of the management and supervision committees one Mark for every meeting they attended (PB Vor, Maulburg, 28.7.1902). In 1914 the Eifa (Hatzfeld) cooperative paid the head of the management committee forty-five Marks and the head of the supervision committee twenty-five Marks. The treasurer's income is discussed below.

13 These nine cooperatives are clearly not a random or even a very large sample. They consist of all cooperatives that gave a copy of their Festschrift to the Raiffeisenverband's library. Most such histories do not provide all the information needed to make these calculations.

14 Direct election of the treasurer by the members was not common practice in the cooperatives studied. PB Gen, Huttersdorf, 28.7.1912.

15 PB Vor, Aussen, 29.7.1906.

16 In some cases, the auditor would call attention to low attendance. For example, the 1914 meeting of the Geschwend (Maulburg) cooperative was attended by sixty-nine members. The auditor wrote “of 121” next to the figure “69” in the report. PB Gen, Geschwend (Maulburg) 8.6.1914; PB Gen, Aussen (Limbach) 26.8.1906.

17 PB Gen, Gersbach, 16.11.1880.

18 PB Gen, Adelhausen, 11.4.1905.

19 Raiffeisen, Freiderich W., Die Darlehnskassen-Vereine als Mittel zur Abhilfe der Noth der ländlichen Bevölkerung sowie auch der städtischen Handwerker und Arbeiter (Neuwied, 1866; reprinted Wiesbaden, 1951), 39Google Scholar.

20 The details underlying the salary calculation can be found in Guinnane, “Cooperatives,” 376.

21 Quabeck, Anton, Handbuch für die Spar- und Darlehnskassen-Vereine im Verbande ländlicher Genossenschaften der Provinz Westfalen (Münster, 1913), 128; PB Vor, Maulburg, 12.6.1882.Google Scholar

22 PB Vor, Maulburg, May 1899.

23 Blätter für Genossenschaftswesen, 1901, no. 40, p. 506; and 1902, no. 49, pp. 389, 423.

24 Genossenschaftspresse, 36 (1909): 483-7.

25 Under certain conditions the stockholders of German joint-stock corporations could demand external audits of apparently solvent corporations. Auditing was also the first step in any liquidation or bankruptcy proceeding. But German joint-stock firms did not have a comparable external auditing requirement until the “Aktiensrechtsnovelle” of September 19, 1931. See Schneider, Edgar, “Plichtprüfung,” in Lembcke, Rolf and Schöning, Hans, eds., Das Rechnungswesen: Handbuch der Buchführungsorganisation, Bilanzierung und Kostenrechnung (Gütersloh, 1950), 576Google Scholar; Beham, Peter, Das deutsche Pflichtprüfungswesen (Berlin, 1940), 21–34CrossRefGoogle Scholar; Henning, Friedrich-Wilhelm, “Die externe Unternehmensprüfung in Deutschland vom 16. Jahrhundert bis zum Jahre 1931,” Vierteljahrschrift für Sozial- und Wirtschaftsgeschichte, 77, no. 1 (1990): 1–28Google Scholar. For a comparative discussion of company law in this period, see Kuhn, Arthur K., A Comparative Study of the Law of Colorations with Particular Reference to the Protection of Creditors and Shareholders (Columbia University Studies in History, Economics, and Public Law, 1912)Google Scholar. As he notes, on pages 128-30, a large minority of stockholders in a German joint-stock firm had the right to demand an independent audit of the firm.

26 See Beham, Das deutsche Pflichtprüfungswesen, 16-18; Parisius, Ludolf and Crüger, Hans, eds., Das Reichsgesetz betreffend die Erwerbs- und Wirtschafts-Genossenschaften von 1. Mai 1889. Kommentar zum practischen Gebrauch für Juristen und Genossenschaften (Berlin, 1890), 57–8Google Scholar. Varying accounts suggest that the largest cooperative groups required regular audits as a condition of membership even before 1889. Kluge, in Geschichte, says that from 1881, “most” groups required auditing (p. 256). Another source specifically says that, in the Haas organization, audits were required as of 1882. See Brenning, Heinz, Entwicklung und Aufbau der Bezirksorganisationen im deutschen ländlichen Genossenschaftswesen (Göttingen, 1928), 27Google Scholar.

27 Edey, H. C. and Panitpakdi, Prot, “British Company Accounting and the Law, 1844 1900,” 356-79, in Littleton, A. C. and Yamey, B. S., eds., Studies in the History of Accounting (London, 1956)Google Scholar.

28 Wirsching, Heinrich, “Die Pflichtprüfung der ländlichen Kreditgenossenschaften in Deutschland” (Ph.D. diss., University of Neuchatel, 1969), 18–19Google Scholar.

29 Schulze-Delitzsch, Hermann, Schriften und Reden, Band I (Berlin, 1909), 427–34Google Scholar.

30 Crüger, Hans, “Die Verluste bei den Kreditgenossenschaften,” Jahrbücher fur Nationalökonomie und Statistik, Band 65 (1895): 754–63Google Scholar, to take just one example, asserts that cooperative bankruptcies were most common in German regions where “the advice and teaching of Schulze-Delitzsch was least noted.”

31 Beham, Das deutsche Pflichtprüfungswesen, 19.

32 Faustmund, Raimund, Die wirtschaftlichen Kämpfe des deutschen Bauernbestandes in den letzten 50 Jahren. Denkschrift zum 25 jährigen Jubiläum des Trierischen Bauernvereins 1884-1909 (Trier, 1909), 99Google Scholar.

33 Busche, Manfred, Öffentliche Förderung deutscher Genossenschaften vor 1914 (Berlin, 1963), 108Google Scholar.

34 Jahresbericht igo6 des Generalverbandes ländlicher Genossenschqften Raiffeisenscher Organisation für Deutschland, 9.

35 Cahill, Agricultural Credit, 277.

36 Jahresbericht 1906 des Generaluerbandes, 6-7.

37 Mose, Konrad, 100 Jahre genossenschaftliche Prüfung in Kurhessen (Neuwied, 1982), 33.Google Scholar

38 The long quotation is from Quabeck, Handbuch, 151: “friend an d advisor” appears on the next page. This phrase comes up repeatedly in cooperative publications. The Raiffeisen federation refers to the auditor as a “good advisor” who makes the unpaid positions of the managers easier. See, for example, Jahresbericht 1903 des Generalverbandes, 4.

39 The auditor's reports and related material are held by the Rheinbach Raiffeisenbank. The Miel cooperative was folded into the Rheinbach cooperative at a later date.

40 These figures are quoted in Cahill, Agricultural Credit, 275.

41 From the article “Fehler bei der Führung der Vereine,” Raiffeisenbote (1904): 37. Quoted in Mose, 100 Jahre.

42 Cahill, Agricultural Credit, 276.

43 Jahresbericht 1906 des Generalverbandes, 8.

44 Jahresbericht 1907 des Generalverbandes, 13.

45 Jahresbericht 1908 des Generalverbandes, 13-14.

46 This presents an interesting parallel to the literature on certification intermediaries today. Some entities, such as Underwriters Laboratory or any public auditor, are hired to provide independent information about a good or an institution. Lizzeri, Alessandro, “Information Revelation and Certification Intermediaries,” Rand Journal of Economics 30, no. 2 (1999): 214–31CrossRefGoogle Scholar, shows that the certification intermediary's optimal action is to say only whether the good in question meets a certain quality standard. That is, the intermediary does not give a grade; there is no attempt to distinguish passable goods from excellent ones. This, in effect, was what the auditing associations did.

47 Landwirtschqftliches Genossenschaftsblatt (1882), no. 4, 77-8.

48 Faust, Raimund, Anleitung zur Verwaltung von Spar- und Darlehnskassen-Vereinen (Trier, 1910), 71Google Scholar; Reichsverband der deutschen landwirtschaftlichen Genossenschaften, Taschenbuch für landwirtschafliche Genossenschaften (Darmstadt, 1904), 352–7Google Scholar.

49 The figures for the Schulze-Delitzsch auditing associations are 27 percent of cooperatives with 12 percent of members. This point should not be pushed very far. The rural cooperatives started later. What appears to be an age difference may be another artifact of the greater rural use of the auditing associations. The source is Zeitschrift des Königlichen Preussischen statistischen Bureaus. Mitteilungen zur deutschen Genossenschaftsstatistik, 1906, extracted from pp. 70-3*.

50 Crüger, “Die Verluste,” 759.

51 Beham, Das deutsche Pflichtprüfungswesen, 19-20, claims that wild cooperatives had higher bankruptcy rates than others. I do not know the empirical basis for his assertion.

52 Crüger's comments are in Blätter für Genossenschaftswesen, 1913, 808. Petersen's dissenting article is in Blätter für Genossenschaftswesen, 1914, 170-2.

53 Mose, 100 Jahre, 33, notes these complaints in Kurhessen.

54 Huge, Geschichte, 256.

55 Quabeck, Handbuch, 152.

56 Kluge, Geschichte, 172-3. There was no system of deposit insurance for banks in this period. The terminology here is potentially confusing. The literature on microcredit institutions like the Grameen bank uses the term “joint liability” to describe the practice that makes every member of a lending group liable for the loans of all members of the group. Liability in this situation is limited; it is just not limited to a single person's loans. Unlimited liability as used in the present context means something quite different: each member has unlimited liability for the cooperative's debts.