Part II -- Consideration of Co-operative Principles, Section 1 (1966)

     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.