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Among the errors of omission are the following: (1) No limitation is put upon the area or maximum number of members embraced within a group. This, together with unlimited capital and dividends, leaves large opportunity for loose, profit-seeking operations. (2) The law might well be more specific in the matter of qualifications for membership. No emphasis is laid upon character and integrity. (3) It is not specified that loans should be made for production purposes. (4) No provision for borrowing by the association is made, and no relation is established between reserve and loans. The latter point is of capital importance; the purpose of a reserve ("guaranty fund”) is to serve as a security for loans, and it should be fixed in proportion to liabilities. I believe that all profits should be carried to reserve until the desired proportion to liabilities is attained. (5) No central organization is provided.

However well it may work in Massachusetts, this law is not designed to meet the most urgent needs of Texas. In adopting the limited-liability-share principle it establishes a system which can be effective only among well-to-do farmers of some business experience. It limits loans to short periods, as must be the case where limited-liability shares exist, and the security is more fluctuating than that furnished by unlimited liability. Personal securitywhich is best in all credit business-is not encouraged, whereas a chief service of coöperation should be to educate and build up personal credit. It is doubtful if share capital will enable sufficient borrowing, while no special inducements seem to be provided for depositors.

The greatest need is working capital with which to make crops, with a less immediately urgent need of farm animals. This need exists more urgently among a large mass of poor tenant farmers. Therefore, the most desirable credit agency is one which can best supplement existing agencies in developing such credit as these farmers have. These facts indicate an organization of the personal credit type, confined to as small areas as is practicable, and operating with a liability that is greater than that of corporation stockholders. The object of coöperative credit is not so much to increase directly the money security as to improve integrity and, indirectly, income and ability to pay.

Recognition of the local situation, however, would seem to indicate some modification of the personal credit idea in making loans to members, temporarily, at least. The chattel and crop mortgage

system is well developed and thoroughly understood, and the existing banking machinery is adjusted to it. It does not lock the money up for too long a time, as is the case with land; and the security if seized is more readily salable. Close local supervision by interested fellow members would insure the best care for cattle, crops, etc. A use of the chattel mortgage would facilitate the securing of funds from commercial banks. Say there are twenty-five members, each of whom borrows $300; their aggregate notes secured by chattel mortgage amount to $7,500. Instead of going to the storekeeper, who now acts as credit middleman between bank and farms (at a rate of over 20 per cent), these twenty-five farmers give their notes to their credit unions, which deal with the bank for them. With unlimited liability, which we are supposing, it is likely that a bank would lend the association the full $7,500 at the lowest commercial rate of interest-and angels could do no more. Even if limited liability prevailed, the association would merely make its note for enough less than $7,500 of mortgages to allow a safe margin, and so, by risking $7,500 for, say, $6,000, the lowest rates might be secured.13

Such utilization of chattel mortgage security would make it possible to gain the most from existing banking agencies, which is highly desirable. The country banks of Texas at present extend a wide range of service to farmers and desire their business. The best attitude to take toward coöperative associations is to regard them as feeders for commercial banks. The great source of funds is the same under any credit system. What coöperative organization should seek is to become an effective credit middleman between latent or ill-used bases of credit among farmers and the funds held in commercial banks. To replace the storekeeper in the existing system would be a large part of its service.

That a strong central organization is needed under such conditions as prevail in Texas has already been indicated. The law should provide for a central bank to be set up in a modest way as soon as more than one local association arises. An executive committee elected by the locals would be in charge. It should be a joint-stock organization, its shares being held by locals. (Perhaps the state might temporarily make a subscription to its stocks or a deposit of state funds.) The locals, as members,

1 Evidently this is merely a cross between limited and unlimited liability; for the members assume a liability 20 per cent in excess of the amount borrowed.

should be required to make small regular deposits. Thus, capital would be derived both from stock subscriptions and deposits, though deposits should ultimately be the larger source. The requirement of deposits would incidentally promote thrift among the locals. This central bank through its executive committee would pass on the affiliation of locals, decide the credit to be allowed to locals, and in general serve as a clearing house to accomplish a virtual pooling of the funds of the whole system. It would also audit accounts. Each local, however, should be absolutely free to apply loans in such ways as its members might approve.1 Real coöperation is essential to coöperative credit.


University of Texas.

14 Those who are informed on coöperative credit organizations will recognize the similarity of this plan to the one used successfully in India. The chief differences are the chattel mortgage security feature and the use of existing banks instead of specially created joint-stock "district banks."

Abstract theory, always of fundamental importance, has, as truly as practical policy, its "topics of the day," and just now discussion of the interest problem is especially active. Notable among recent articles are those by Professors H. R. Seager, Irving Fisher, and H. G. Brown.' Mere individual differences of opinion. concern us little; but certain impersonal equities which other students of economics have in the interest problem, are involved; for in recent discussion is fairly presented the issue between the old and the new conception of the interest problem. And yet the case for the newer view might seem to be on the point of being lost before the bar of economic opinion. It is a duty, therefore, to attempt a more adequate statement of the neglected truths.

The rival views may be characterized as the technological3 and the psychological interest theories. For more than a decade, the psychological theory has been gaining adherents in America. There has not been lacking adverse criticism in scattered book reviews and in occasional footnotes; but in the main, the opposition has been of a merely negative sort, in that most economists have failed to reckon with it and have adhered to the older theory.

I. Professor Irving Fisher as a productivity theorist.

Seager's paper, just cited, is the first systematic attempt that has been made to disprove any version of the newer theory (for Fisher's "impatience theory," which Seager attacks, has been generally supposed to be a psychological theory). The discussion started by Seager necessarily follows in large part the lines determined by Fisher's treatment. Let us first, therefore, try to get our bearings as to that. My own position on the general question

1 AMERICAN ECONOMIC REVIEW, Dec., 1912, H. R. Seager, (critique of) "The Impatience Theory of Interest"; Sept., 1913, Irving Fisher (reply), and H. R. Seager (comment) "The Impatience Theory of Interest."

Quarterly Journal of Economics, Aug., 1913, Harry G. Brown, "The Marginal Productivity versus The Impatience Theory of Interest."

2 To prevent misunderstanding, let us say that Böhm-Bawerk is here classed among those holding to the old theory, for his "roundabout process" explanation is technological, though united with strong psychological features in the explanation of consumption loans.


This somewhat unusual word is here employed in the sense of physically productive, a technological interest theory being one which finds the explanation of the rate of interest in the actual, practical performances, or uses, of agents in producing other goods.

involved in this discussion has in the past been with Fisher so far and so long as he adhered to a psychological explanation. And yet, I must recognize the merit of Seager's argument in several respects, and, as a psychological theorist, I find myself more disquieted by Fisher's reply than by Seager's direct attack. Particularly regrettable is the impression of confession and avoidance which Fisher gives. He seems to capitulate on the main issue. To the charge that he failed "to take account of the elements of productivity or the technique of production," Fisher enters a denial1 in terms which seem to imply that he is a good productivity theorist. This reply comes as a surprise even to those who were aware of certain ambiguous expressions on this point in Fisher's writings. For if he has not meant to deny, in his previous writings, the validity of productivity theories, one knows not what to believe. Here are some significant passages:

There are many who, consciously or unconsciously, ascribe the phenomena of interest to the productivity of capital in general. . . . Yet a very slight examination will suffice to show the inadequacy of this explanation."

To raise the rate of interest by raising the productivity of capital is, therefore, like trying to raise oneself by one's boot-straps."

Absence of interest is quite compatible with the presence of physicalproductivity, and . . . therefore whatever element is responsible for the existence of interest in the actual world, that element cannot be physical-productivity.


The conclusion, therefore, from our study of the various forms of the productivity theory is that physical-productivity, of itself, has no such direct relation to the rate of interest as is usually ascribed to it; and in the theories which we have examined, the rate of interest is always surreptitiously introduced.8

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"Interest is due to the productivity of capital" This proposition looks attractive, but it is superficial ... the superior productiveness of roundabout processes of production . . . has no power whatever to create interest.9

Now, however, instead of meeting the question directly, and reaffirming his disbelief in the productivity theory, he seems to surrender his position as the easiest way of ridding himself of

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“The Impatience Theory of Interest," Scientia, vol. IX, 1911, pp. 383, 384,

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