This document has been made available in electronic format by the International Co-operative Alliance (ICA) ---------------------------------------------------------- (Source: Report of the 23rd ICA Congress at Vienna 5-8 September, 1966, pp 160-180) September, 1986 --------------- Part I. Consideration of Co-operative Principles ************************************************* 1. Membership --------------- It has been usual in the past to describe the principle of co-operative membership by such words as `Open' and `Voluntary'. For several reasons the Commission felt that these brief descriptions do not bring out fully the characteristic features of the relationship between a co-operative institution and its individual constituents. One fundamental consideration, which corresponds fairly closely to the facts and normal practice of co-operative societies should and do become its members and, conversely, that the membership of a co-operative consists of persons with needs which its services can and do supply. Another fundamental consideration springs from the very nature of the Co- operative Movement which is at once a social movement seeking to increase the numbers of its adherents and economic organism capable of expanding and occupying wider fields of activity. Its attitude to persons eligible for membership is, therefore, normally to welcome them when they wish to join it and, even more, to encourage and assist them to join societies appropriate to their situation and needs. Obviously, the whole group of questions involved in membership can and must be studied from two complementary standpoints, that of the individual and that of the co-operative. The freedom of each - the individual and the co-operative - to consult its own interests and act accordingly - needs to be reconciled and blended with that of the other. On the one hand, the individual should be free to join a co-operative and share its economic and social advantages on an equal footing with other members. That implies that he must shoulder this due share of responsibility also. But he should not be coerced into joining, either directly, by legal or administrative compulsion, or indirectly, under social or, possibly, political pressure. His decision to apply for membership should normally be the result of his unfettered appreciation of co-operative values and consideration of his economic advantage, including that of his dependants. He should be free also to withdraw from a co- operative when he finds that he no longer has any need of its services or when the co-operative is unable to supply his needs. In the nature of things, this freedom can rarely, if at all, be absolute. It can be modified or overridden by other considerations of wider application and greater essential validity. A government which is assisting a farmer to reclaim land on which he is to settle may not unreasonably impose membership of a supply or marketing co-operative, at least for a limited time, as a condition of its assistance or support, in the interests of the farmer himself. A producer or group of producers may in effect sabotage the efforts of a voluntary co- operative to improve the marketing position and incomes of producers by refusing to join it and so giving a foothold to opposing, may be reactionary, economic interests. In order to counteract this government may intervene with legislation compelling all producers to join a co-operative or at least to market their products through it, if a prescribed majority of the producers vote in favour of such measures. Other examples may be cited, where the refusal of a small minority of individuals, after every effort has been made to persuade them to join a co- operative, say, for managing an irrigation scheme or for providing and using pesticides or adopting a new system of cropping with the prospect of much higher yields, may frustrate the whole plan of action. In such cases, refusal to join the co- operative is essentially anti-social and can be justifiably overridden in the interests of the whole community, provided that all the circumstances of the case are taken into account and safeguards adopted against the abuse of power through the extension of compulsion in circumstances where it is unnecessary or inappropriate. A co-operative, on the other hand, also needs freedom to modify its welcoming attitude to applicants for membership, even to the point of refusal, as well as to have in reserve powers to terminate membership if the interests of its members as a body so require. It is a mistake to interpret the rule of `open membership' in the sense that all co-operatives are obliged to enroll all persons who may apply to join them. Open membership has never meant that. The Rochdale Pioneers at no time attempted to apply such a rule, for one very good reason that their society, witness the celebrated `Law First', was conceived as something more than a retail distributive enterprise; it was a community in embryo; its growth and success would depend greatly on internal harmony which might easily turn to discord, as earlier experiments had shown, through the admission of bad characters, irresponsible individualists or trouble-makers. Nothing is to be gained and much may well be lost by bringing in a person who unsettles the cohesion of the membership. In the same order of ideas, the savings and loan bank or credit union may be justified in refusing to admit an applicant known to be creditworthy. Another kind of limiting condition, imposed for the sake of orderly and economical working or of avoidance of unhealthy competition, is the exclusion by one society of would-be members from the territory served by another. Several instances of similar obvious limitations on the unfettered admission of members may be cited by examples from all forms of co-operative societies. It may also be stated as a general proposition that persons or associations who desire to join, or to form, a co-operative for dealing in produce or labour other than their own or of their own members, cannot be said to act in pursuance of the basic co- operative principle - that of association among persons, considered as human beings with equal status, for mutual service. Taking into account of the preceding limitations, it would seem that `open membership' in a very broad sense can and should be the universal practice of consumers' co-operatives, if only because every man, woman and child must consume to sustain life. In the case of other organisations, however, there are further obvious limitations on the admission of members. For instance, the very specialisation of producers' co-operatives, whether promoted by artisans or wage-earners engaged in the same trade or industry or by farmers or cultivators, automatically limits their membership to persons interested in a given product or range of products and excludes others who have no such interest. For example, cultivators not interested in citrus-growing for the market have no place in a citrus-marketing society, but a citrus- marketing society would not be acting in a fully co-operative spirit, if it closed its membership against applicants for membership who were citrus-growers. In general terms, the essential consideration is that, if an individual has interests within some specific field of service for which a co-operative is formed, he should be regarded as eligible for membership and, if he applies, admitted, unless he is personally unacceptable on some obviously justifiable grounds similar to those indicated above. In the case of the workers' productive societies, the members of which find their daily employment in the society, limitation may justifiably be stricter. Not every worker who may seek employment or membership in such a society can or ought to be admitted, because the society's capacity to employ its membership and add to the number of workers who may be applicants to membership is itself limited. Again, a limitation adopted by some of these societies on prudential grounds is the fixing of a probationary period for candidates for membership, in order that those who are already members can make sure that the new entrants will possess the necessary degree of technical skill and have sufficient regard for the interests of the society. The fact that these limitations may be capable of abuse by some co- operative associations does not make them unreasonable in themselves, though continued employment of workers to whom membership is being denied would offend against open membership. Another important class of co-operative which may be obliged to limit their membership are the housing societies which are engaged in supplying a commodity which is naturally limited in supply and can therefore only cater for a limited number of persons. They cannot guarantee that all who may want to join them will obtain within a reasonable time the house or flat they may desire and the only fair course may therefore be to close their membership register until vacancies actually occur. In these cases, the essential question has to be posed in the converse way; has the society tenants who have been denied the right to become members? If the answer is no, the society is not acting in an un-co-operative spirit. The preceding examples, without being exhaustive, may serve to illustrate the natural limitations to which the admission of members to co-operative societies may be subject. These notwithstanding, co-operation can maintain its proper character as a voluntary movement offering to share its benefits with all who need them, only if co-operative societies of every type unreservedly accept their obligation to admit to membership any one who, in return for these benefits will undertake in good faith to fulfil the duties which membership implies. Regulations, policies and practices which are exclusive in their effects, reserving to a select few what should be open to all, are unacceptable restrictions. One kind of restriction may be called economic since it consists in the erection of barriers which some people eligible for membership may be unable, for economic or financial reasons to surmount. If a society requires new members to pay entrance fees or subscribe a minimum shareholding which are beyond the means of any appreciable number of possible applicants, so that they are deterred from applying for membership, it is acting restrictively. Stating the essential consideration positively, it would be correct to conclude that the entrance fee (if any) and the value of the minimum shareholding should be fixed at amounts which the poorest prospective member could pay without hardship. The general practice of co-operative societies for generations past has been in the direction of easing the conditions of admission by allowing shares to be paid up in instalments or out of accumulated savings on purchases or sales (patronage refunds) and by abolishing entrance fees, but there are limits set to these facilities by the capital requirements of the societies. Within the last 20 years or so, these limits have tended to be drawn tighter, partly by reason of monetary inflation, partly by reason of the greatly increased capital requirements in order to finance business expansion and structural re-organisation to meet competition of unprecedented severity. Certain national co-operative movements have thus been obliged to raise the nominal value of the share or the number of shares to be held as a minimum, a measure which would appear to be entirely justified, provided that the new figure does not have restrictive effects on the admission of new members. Under conditions of high and stable employment and rising wages the restriction may not be appreciable, but any proposals for raising minima may well be examined from this angle before they are adopted. A second kind of restriction may be indicated by the term `ideological' for lack of something more comprehensive which would include the most important matters which tend to divide people in society, irrespective of their economic situation and needs. The chief of these areas of conflict have been in the past and still tend to be in the present, politics and religion. Distinct from but partly overlapping these are race, colour, caste, nationality, culture, language any of which can provoke intense and sometimes chronic hostility. From the Co-operative Movement's earliest days wise co-operative leadership realised that if a co-operative society was to maximise the economic power of its membership, actual or potential, it would be a mistake to exclude any person of goodwill on account of political opinions or activities, religious creed or lack of creed, race, colour or any other consideration not relevant to the economic and social purpose of the co-operative. And with few exceptions, that rule is followed today even by co-operative organisations which may have always had close affiliations with political parties or religious institutions. The important consideration is that the society shall demand from its members no other allegiance or loyalty than what is owed to itself and its own democratic decisions and shall admit all who are prepared in good faith to give their allegiance. Before passing from the question of admission to other aspects of the relations of co-operative societies with their members, the Commission would point out that the consequence of restrictive policies in general is not simply to stunt a society's economic development, but to risk the deterioration of its character as a co-operative. The normal co-operative practice, as was indicated in a previous paragraph of this section, is that the members and the users of the services of any given co-operative society are one and the same body of people. Nevertheless in actual business life, it is extremely unlikely that many societies, especially those trading in highly developed industrial or agricultural areas, can avoid dealing with non- members. A non-member is a potential member. If he uses a society's services once and is satisfied, he may well do so again. Many far-sighted societies accumulate his patronage refunds for him and when they amount to a minimum share, offer him the opportunity of membership and so of regularising his relations with it. On the other hand, in a society which pursues a policy of restriction, the existing membership tends to form an exclusive and narrowing circle, whose democracy becomes sooner or later suspect and whose business practice tends more and more to resemble that of profit-seeking enterprise. If it be accepted that the co-operative system is one which the motive of mutual service rather than profit is dominant, then the rule of `open' membership, with all the qualifications and modifications in its application already mentioned, provides indispensable safeguards against degeneration into business of the ordinary type. Thanks to open membership, the shares of co-operative societies remain constantly at the nominal value fixed in the society's rules and can be acquired by any new member at that value. Trafficking and speculation in a co-operative shares are therefore rendered profitless and do not arise. Naturally the salutary effects of open membership are reduced if the distinction between members and non-members becomes blurred. Because they undertake the risks, it is members and no one else who are fairly entitled to share in the savings which a co-operative makes, but only in so far as these savings result from their own transactions with it. The society must itself be scrupulous in dealing with any revenue which accrues from dealings with non-members using its regular services; if it is not reserved for individual non-members as an inducement to them to apply for membership, then it should be devoted to some purpose of common benefit, preferably for the wider community beyond the society's membership. In no case, should it be added to the savings distributed to members, otherwise they would participate in profits in a manner that co-operation expressly abjures. The distinction between members and non-members becomes increasingly difficult to preserve with the necessary clarity under contemporary trading conditions. The stores of the great urban consumers' societies of the highly developed countries stand open to the general public and in some countries the national Co-operative Movement claims sale to the public as a right, or, at least, a condition necessary to the movement's growth and its effectiveness as a price-regulator. There is a disposition among a public pampered by advertising to take the benefits offered by the consumer co-operatives but to decline membership since that involves responsibility. Open membership as a means of keeping the door open to the younger generation and becoming effete may nowadays be less effective than formerly, but it still has a certain value, especially where it is supported by the right educational policy - a subject to be discussed under another heading. If an individual should be free to join a co-operative society, he should be in principle free to withdraw from it. But in doing so he does not or cannot immediately shed the responsibilities he undertook when he became a member. He has an obligation to consider the interests of the society and the management of the society has the duty of safeguarding those interests, especially as cessation of membership normally entails a claim to the withdrawal of share capital. In this way the resignation of a single member with a large capital holding or the simultaneous withdrawal of a number of members may seriously inconvenience a society or even jeopardise its financial position. Societies' rules therefore rightly include provisions governing the termination of membership, the withdrawal or transfer of share capital and sometimes the period of a member's liability after he has left it. No member should be given any excuse for ignorance of the conditions he must fulfil if he leaves. In an earlier stage of the movement's development considerations of financial stability and safety induced Co- operators to prescribe in their societies' rules that members should hold a minimum of transferable as well as withdrawable shares, but in the older and well-established co-operative movements today the tendency is to facilitate the withdrawal of capital because this facility is itself an inducement to members to take out shares above the minimum holding required by rule. The legislation of different countries regulates this situation in different ways, but, in general, while a member leaving a society cannot usually enforce the repayment of his share capital as a right, the management of a society, where society's liquidity or financial position are not impaired, would act fully in a co-operative spirit by avoiding the infliction of any hardship through standing strictly on the letter of the rules and in an emergency by doing everything possible to afford relief. Finally, a co-operative society, in the interests of the whole body of its members must have the right and must take power in its rules to terminate an individual's membership, given just cause. This is also a case in which the rules should lay down the conditions under which resort to expulsion is possible and the procedure to be followed before expulsion is finally decided, so that all members can be aware of them. It is not grounded in any specifically co-operative principle but in a natural principle, common to all incorporated associations, which permits them to eject elements acting against their interest or contrary to their objects. If the decision to expel is taken in a democratic manner by the elected authorities of the co-operative, that is to say, either the board of directors or the council of supervision or both, the member affected should have the right of appeal to his fellow-members, either in the general meeting or in a representative assembly, invested with the functions of the general meeting, before expulsion takes effect. Membership of Co-operative Organisations above the primary may consist of co-operatives or of co-operatives and individuals. With very few exceptions the rules and practice regulating the admission to and withdrawal from these organisations are similar to those of primary societies already discussed and raise no important questions of principle. Whereas however membership of primary societies may occasionally include, without impairing their co-operative character, a small minority of corporate bodies not forming part of the Co-operative Movement, the case of many organisations established for special services needs close examination because the conditions are not necessarily similar. A real possibility exists that co-operative organisations would be in a minority. In this case, they might not be able to assure the observance of co-operative principles by, and the retention of true co-operative characteristics of, such organisations. Where the co-operative membership is not in a position to ensure that co-operative principles will be maintained the organisation is in danger of losing its eligibility for recognition as a co-operative. The important consideration is not necessarily the legal constitution of the organisation but whether in fact the co- operative principles are observed. The same consideration governs the participation of co-operative societies in non-co-operative associations. Co-operative societies ought not to participate in and ought to withdraw from, an association if it involves them in practices for which there is no justification in terms of co- operative principle. In conclusion, the Commission, after reviewing the practice of many types of co-operative societies in varying social environments today, finds that voluntary membership without artificial restriction or discrimination, as this has been interpreted in the preceding discussion, should be maintained as a fundamental characteristic of the co-operative system of economic organisation because it is essential to the achievement of its immediate and ultimate aims. The individual who seeks to participate, along with his neighbours or fellow-workers, in a co-operative, must do so of his own free-will, not from external pressure or constraint, nor must the co-operative place any artificial or discriminatory obstacle in the way of his entry or impose, as a condition of admission, his adhesion to any organisation or doctrine not relevant to the society's economic and social purpose. The individual should be under no compulsion to remain a member any longer than his own interests dictate, nor should the society be obliged to retain him as a member if he acts in a manner detrimental to its interests and hostile to its aims. The conditions under which individual and society can terminate their association should be clearly laid down in advance and well known to both parties. 2. Democratic Administration ------------------------------ The primary and dominant purpose of a co-operative society is to promote the interest of its membership. What the members' interests are in any given situation only they can finally determine. A co-operative therefore will not in the long run work well and prosper without agreed and efficient methods of consulting the members as a body and enabling them to express their wishes. Moreover, since it is the members who bring a co- operative into existence and whose constant adhesion and support keep it alive, those who administer its affairs and, in particular, conduct its day-to-day business must be chosen directly or indirectly by the members and enjoy their confidence. It follows further that the administrators and managers are accountable to the members for their stewardship, report regularly in a business-like manner on their activities and submit the results to the members' judgement. If the members are not satisfied, they have the authority and the power to criticise, to object, and in extreme cases, to dismiss and replace their officers and officials. This is what is meant by saying that co-operatives are administered in a democratic manner. It is significant that amongst all the documentation placed before the Commission, there was not one serious challenge to the claim of democracy to be recognised as an essential element in Co-operation. What divergences of opinion or disagreement were revealed referred only to the different rules, conventions and practices necessary to achieve effective democracy in varying circumstances. It is not therefore that the principle is in any doubt, but that its implementation becomes more and more complicated with the growing size of Co-operative institutions and the scope of their economic commitments, as well as with the rapid and far- reaching changes now going on in the Movement's economic and social environment. The evolution of industry and of co-operative enterprises in particular makes continual modification inevitable. Refinements in the forms and machinery of administration are not, therefore, to be regarded as a departure from democratic principle. Development of the co-operative's administrative organs, if they are to embody the democratic principle, must remain anchored to certain fundamental rules and assumptions which the Co- operative Movement has accepted from its very beginnings. The co- operative society, unlike a joint-stock company, being primarily an association of human beings, the status of all its members should be equal and all should have equal opportunities of participating in decisions and expressing views on policy. There is no way of ensuring this save by giving each member one vote and one only. Further, since the Co-operative Movement exists in order to place the common people in effective control of the mechanism of modern economic life, it must give the individual (only too often reduced to the role of a cog in that mechanism) a chance tao express himself, a voice in the affairs and destinies of his co-operative and scope to exercise his judgement. It is a corollary of the principle of voluntary membership that the individual member should feel that he has a real responsibility for his society's good administration and achievements. Accordingly, there should be no exceptions to the rule of one member, one vote in primary co-operative societies, that is, in associations of individual persons. The right of every member to one vote and one only, enshrined in the rule-books of co-operative societies, is not in itself a guarantee of effective democratic administration, especially in the vast and widely-extended primary co-operatives, notably of the Consumers' Co-operative Movement, of today. Much depends on the circumstances in which members are called on to vote and in which their votes are given. In societies growing rapidly, whether by simple expansion or by amalgamation, the general meeting of members becomes less reliable and authoritative as a supreme democratic organ. It is therefore often replaced by a representative body legally invested with the powers of the general meeting and exercising its functions. The individual members no longer directly elect the administrative board but only the representatives who elect the board. Instead of one general meeting, the members are convened to a number of branch or district meetings, the agenda of which can cover, of course, the whole filed of the society's operations and not simply branch or district affairs. Moreover, personal knowledge of officers and candidates diminishes, giving place to impersonal relations between administration and membership, at the same time as the increasing scope and complexity of societies' operations outrun the ability, not merely of the ordinary members, but of their elected representatives also. to keep track of them. The tendency to evolve towards the creation of ever larger and more closely integrated operational units is not only characteristic of the economic world but also inherent in the co- operative form of association. The Co-operative Movement therefore must attempt to match it by a corresponding development of its democratic organs and a judicious balancing of centralisation by decentralisation. The more the affairs of primary societies have to be entrusted to trained and experienced professionals and the greater the extent to which vital decisions have to be taken by an official elite at the centre of their administrative systems, the greater the importance grows of consolidating the societies' local foundations and strengthening their influence on the minds of their members. To counterbalance the officials and their natural leanings towards bureaucracy, their responsibilities as guardians of the members' interests and spokesmen for their wishes. To make this possible the general body of members must themselves be well informed about the affairs of the society. It is not within the Commission's terms of reference to prescribe methods of constitution-building or systems of organisation, all of which are bound to require more or less adjustment to circumstances which vary from continent to continent, but it would fail in its duty if it did not call attention to the seriousness and urgency of the main problems involved in the preservation of the Co-operative Movement's essential democracy under contemporary economic and social conditions. In a period when precedent is becoming an ever less reliable guide, there is need for constant testing and experiment. In this connection may be cited the efforts being made in several countries to improve the quality and qualifications of elected officers and the attempts to train members of management committees and to devolve upon the members in their localities matters, even the appointment and dismissal of manager, in which the local interest is paramount. It is necessary at this stage to consider democracy in relation to another important aspect of the evolution towards larger operational units, and that is the enhanced role already played - and promising to be greater in the future - by unions and federations of co-operatives, as well as other secondary, even tertiary, organisations. The secondary organisations which are created by the co-operation of co-operative societies are themselves undoubtedly co-operative organisations, with the same obligation as the primary societies of conforming to the essential co-operative rules. The members of secondary organisations have equal rights. This equality gives them the proper basis for democratic management. It is, therefore, quite consistent to apply the rule of one member, one vote to secondary organisations, as well as primary societies. That, in fact, is what is done in a number of secondary organisations, including some of national dimensions. it would appear to work satisfactorily in organisations where there is no great disparity in size between their affiliated societies. Another method, which unquestionably pays proper respect to the human factor, is to base voting power upon the individual membership of societies. This is characteristic of the consumers' co-operative movements in which the national and regional unions may comprise village societies with a few hundred, as well as urban or district societies with scores or even hundreds of thousands of members. A variant of this system is found where voting power may be based on capital contributions which are themselves based on membership. On the other hand, a tendency is observable in some producers' co-operative movements to take account of the different degrees of interest displayed by the affiliated societies in their common organisation, as indicated for example, by their volume of purchases from it or of produce marketed through it. There are, of course, a number of consumers' wholesale federations whose member societies vote in elections and appoint representatives to general assemblies and congresses in proportion to their purchases. It does not appear, however, that these departures from the strict rule of equality of person shave yet led anywhere to a distribution of voting power radically different from that which would have been made on a membership basis, and, from a practical angle and in the light of experience, they may represent a necessary or desirable concession for the sake of unit, equity or efficiency or any combination of these. This case may be illustrated with special force by marketing or processing societies, operating without a binding rule that obliges their affiliates to deliver all their produce to them, which feel obliged to draw distinction in favour of those which make constant, compared with those which only make intermittent, use of their services. With hardly any exception however, whatever the basis of differential voting adopted, the largest constituents are not permitted to possess an unlimited number of votes. Normally the rules lay down a graduated scale and impose a ceiling which may not be exceeded, as in the rules of the International Co- operative Alliance. Such a method reduces the likelihood of undemocratic decisions resulting from the power of a small coalition of large organisations to outvote a much greater number of small ones. It is quite possible, however, that, as a result of the amalgamation of local primary societies into regional units, many of the present glaring inequalities of size among the affiliates of national unions will disappear. The present discussion of co-operative management has proceeded so far on the assumption that, given the proper democratic structure and a modicum of education, the members of co-operative organisations can, as a rule, manage their business in their own interests in a competent manner. This assumption agrees fairly well with the facts, otherwise the Co-operative Movements now well-established in the advanced industrial countries would not be able to boast of a century's or half- century's successful development. Nevertheless there are considerable areas of the globe where any such assumption is not justified and may be very much at variance with the facts. This is far from saying that it will not be possible some day to make the assumption and know it to be true. Meanwhile, the fact must be faced that, in a number of the newly-developing countries, people who are just beginning to learn co-operation are not always sufficiently well equipped by themselves to manage their societies successfully without advice and guidance from some friendly outside source. If they do not receive this help, co- operative development may not take place. The possible sources are, generally speaking, two, namely: government, or institutions and individuals in sympathy with co-operative methods and ideals. It can scarcely be contested that without the support of generous amounts of government finance, the development of co- operation in the newly-liberated countries will be painfully slow and uncertain. But if governments provide or guarantee large loans or take out large holdings of share capital they will insist on checking the use which is made of public money and on satisfying themselves that proper technical advice is being taken and due financial prudence exercised. Government may, therefore, ask that its representatives shall sit on boards of management for a time, not with power of veto, but to make sure that the aid provided is being utilised in the way in which it was originally intended. The important consideration is that the government representative shall continue to sit a day longer than is necessary. The more successful a society is, the more likely are the members to conceive the ambition of acquiring independence of government supervision and work to achieve it. There is no doubt in the minds of the Commission that democracy in the management of co-operative organisations necessarily implies autonomy in the sense of independence of external control, apart from the obvious obligation of co- operative societies to bow to the same general laws as all other business undertakings and accept the discipline imposed by the State or the planning authorities. In a fully developed co- operative unit, the management must rest in the hands of the members and all decisions be taken by the co-operators themselves, with no external interference. Autonomy is therefore a corollary of democracy. At the same time, it must be recognised that, in co-operatives which are themselves at the beginning of their development, their democratic organs also are very probably underdeveloped and, likewise, the capacity of their members for carrying out democratic procedures efficiently and for submitting readily to democratic discipline. The important thing is that they shall be continually advancing towards full and effective democracy, as they very well can if they are willing to learn from their experience as they gain it. If they are prepared to reflect on their experience and discuss their good and bad decisions with their fellow-members, they can make the knowledge of their rights and responsibilities the basis of a sound democratic technique. But there is no finality, as the co- operators of the older Co-operative Movements have been forced to realise in the last two decades. In a rapidly changing world democracy and democrats must learn to be dynamic. 3. Interest on Capital ------------------------- The Co-operative economic system has broken with the practice of ordinary profit-seeking enterprise, not only through its rules of association and democratic administration, already discussed, but also through the rules which determine the allocation and division of savings and other financial benefits successful co-operatives yield to their members. This has its origin notably in the resentment with which many working people regarding the distribution of property and income in 19th century society, because in their eyes it was both unequal and unjust. While the immediate goal of co-operative effort among them might be to cheapen the necessaries of life for consumers or to provide a decent living for producers, the ultimate aim was to establish a new social order characterised by what they called `Equity' in the distribution of wealth and income. The new industrial techniques, then as today, had an insatiable appetite for capital. People who possessed or commanded money for investment wielded a bargaining power which enabled them to obtain, at the expense of the other factors of production, high dividends and an accretion of capital values representing something much more than interest - the lion's share of the profits of industry as well. The Rochdale Pioneers realised that, for their immediate plan of opening a store and likewise for their ultimate plan of establishing a community, capital was indispensable. They recognised the added productivity which the use of capital gave to labour as a reason for remunerating those who supplied it. Their idea, however, was labour working with capital, not labour working for capital or its possessor. They therefore rejected the claim of the owners to any part of whatever surplus remained after the other factors of production had been remunerated at market rates, although admitting their claim to interest at fair rates. Here it is desired to emphasise that co-operative rules regarding interest and the division and use of surplus are the twofold result of a firm resolve to establish and extend a more equitable division of the product of economic organisation than is commonly found in the profit-dominated business world. The men of Rochdale, poor though some of them were, decided to provide the initial capital for their venture from their own personal savings. As the venture was successful they were able to add co-operative savings, notably in the forms of reserves and depreciation of their society's real property, to their individual contributions of capital. Self-financing by these two methods became customary and widespread among old Co-operative Movements, whether of producers or consumers, because of its obvious advantages of economy and security. Provided that capital is forthcoming in adequate amounts when required, self-financing is an added guarantee, in a competitive economy, of a co- operative society's independence and freedom to solve its problems of growth and development through the untrammelled application of co-operative principles. Moreover, individual savings in the form of share capital are a pledge of the members' support. The fact that their own money is risked gives powerful inducements to exercise prudence and foresight when playing their part in their society's administration. Naturally, self-financing is not so easy in the younger organisations of the newly- developing countries but it can be recognised as a desirable objective to work for and attain in time. Meanwhile the members ought to be obliged, as a matter of principle, to contribute at all times as much capital as they reasonably can, however little. In the old-established Co-operative Movements, with their powerful central institutions for trade, banking and insurance, the rule of self-finance must receive, under contemporary conditions, a broader formulation. Self-financing tends to become ever harder and may end by becoming impossible for primary societies. The time may even come when, under the stress of competition and the urgent need to extend their structures and renew their equipment, the national movements will be unable ti finance their operations without attracting capital from outside. Cases may even occur when the necessity of competing successfully for the favour of people with savings to invest against savings banks and the securities dealt in on the stock exchanges may tend to restrict the freedom of co-operative organisations to fix their interest rates according to their own principles. All the more reason, therefore, why Co-operators should clearly understand what their own principles require in this connection. The capital structures of the different national Co- operative Movements are not uniform. Three main categories may be distinguished in most of them, but in proportions which may vary widely from country to country and from one branch of the Movement to another. These are: the members' share capital; capital owned by the societies in the form of reserves and special funds on which the individual members have no claim; loan capital, which includes all external borrowings, as may be from banks or governments or other co-operative institutions, as well as all kinds of loans made or savings deposited by members over and above their share-holdings. Of these three categories, no interest is payable by the society on the second, although it may calculate interest for the purposes of internal accounting. On the third, the interest rates are not likely to exceed the rates prevailing in the external money and capital markets or fixed by authority in a centrally-planned economy for equivalent kinds of investment. Clearly then, it is the first category, the share capital - subscription of which is an attribute of membership and which is closely associated with risk-bearing - which is subject to fixed and limited rates of interest. Admittedly, Co-operators are by no means unanimous on the question whether any interest should be paid on share capital at all and the practice of different movements varies accordingly. The question, however, is not one of principle. There is no co- operative principle which obliges interest to be paid. The principle is that, if interest is paid on the share capital, the rate should be limited and fixed, on the ground that the supplier of capital is not equitably entitled to share in savings, surplus or profit, whatever the term employed to denote what remains of the value of the society's output of goods and services, after its costs, including the remuneration of labour, land and capital, have been met. There appear to be four different situations in which the policy of any co-operative regarding interest on share capital can be tested in the light of this principle. The first is that already mentioned, when no interest at all is paid on share capital. This practice does not conflict with any essential principle of co-operation. A second situation is that in which interest is paid, but at a figure which is deliberately held below the rate which would regarded as fair at any given time on the ordinary market. A limited rate of interest in this sense is not in conflict with co-operative principles. The third situation is the one in which a limit is applied but only for definite periods or raised and lowered in relation to the bank rate of discount or some other rate which is generally regarded as being kept at a fair level in the conditions prevailing on the ordinary market. This limit is equivalent to a fair return on capital regarded as capital and not specifically as share capital. This fair return is not indicated by the frequent and rather wide fluctuations of the short-term money market but by the long-term movements of interest rates over years or generations. If co-operative societies adjust the upward limits of their interest rates to the level set by these long- term tendencies once again there would not be any contravention of the true principle. There is, finally, the fourth situation, already alluded to, when co-operative organisations may feel obliged to include in the interest paid on shares an additional amount which resembles a premium to the lender, intended to induce him to invest his money in the co-operative rather than elsewhere. Such a practice is from a co-operative point of view, at least dubious. Nevertheless, it has to be regarded from a practical standpoint and the greatly increased capital needs of those branches of the Movement which have to make headway against capitalist enterprise on the largest scale equipped with every modern technical device. If then Co-operative Organisations have to convince their members that they will not lose appreciably by placing their capital in the co-operative, in preference to a profit-making enterprise from which they can ultimately expect not only dividends but increased capital values in time, it may be necessary to offer higher interest rates in order to ensure the continuance of the practice of self-financing, with all its advantages. The question is whether the additional interest is a tolerable or an excessive price to pay for adherence to a sound traditional method. If the addition is no more than marginal, in these circumstances, the departure from principle may have to be examined as a special case, but if the addition is considerable and is not to be explained away by a situation such as has been described above, it will be difficult, perhaps impossible to justify. The Commission is of the opinion that the limitation of interest should not apply only to the minimum share-holding which most societies' rules oblige members to hold in order to enjoy their full rights, but also to any share capital they subscribe above this minimum. In concluding this section of the report, the Commission is of the opinion that a word may be appropriately said on methods and machinery adopted for fixing rates of interest on share capital. In the Movement's early years, in an age of greater apparent stability than the present, when the quality of stability was essential in any co-operative society which intended to endure, rates of interest were often stated in societies' rules and remained constant for relatively long periods. They were thus subject to all the rather cumbrous and roundabout procedures required for the amendment of rules, such as a two-thirds majority vote in a special general meeting convened after so many weeks' notice. The members placed their savings in their society's care for the sake of security, much more than for any additional income in the form interest, and left them with it to accumulate through the automatic transfer to share account of dividends (patronage refunds). Contemporary conditions in the countries of advanced economic development demand some more elastic system of interest limitation. If the Movement is to be more than a mere camp-follower of the more progressive private sector and blaze new trails and lead the entire economic systems, the whole question of capital availability has to be studied in a much more mobile and dynamic manner than was possible in earlier days. This does not imply any departure from the principles hitherto accepted, only their application in a more flexible manner. If co-operatives adhere to the principle that nothing more than a legitimate rate of interest will be paid, one is no more and no less co-operative than another, whether it fixes its rate for long periods by rule or for short periods by reference to some standard rate prevailing in the market.