COA-PERATIVE LOAN SOCIETIES

Among the most characteristic examples of Chinese capacity for combination, are Loan Societies, which seem everywhere to abound. The object of these organizations is the same as that of similar associations elsewhere, but it may be doubted whether the Chinese methods of procedure are not unique. As in everything else Chinese, with a general similarity, there is such divergence in detail, that it is sometimes very difficult for natives of one district, even to comprehend the rules of the Loan Societies of other and perhaps adjoining counties.

The reasons for the extensive organization of these societies, are those to which attention has been repeatedly called. Every Chinese has constant occasion to use money in sums which it is very difficult for him to command. The rate of interest is always so high, that a man who is compelled to borrow a considerable amount, upon which he must pay interest at two and a half, three, or even four per cent. a month, will not improbably be swamped by the endeavour to keep up with his creditors, a fact of which everyday experience furnishes countless examples. By distributing the payments over a long period, and by the introduction of an element of friendship into a merely commercial transaction, the Chinese is able to achieve the happy result of uniting business with pleasure. Of the measure of success attained we may be better able to judge, after an examination of the processes pursued.

The simplest of the many plans by which mutual loans are effected, is the contribution of a definite sum by each of the members of the society in rotation to some other one of their number. When all the rest have paid their assessment to the last man on the list, each one will have received back all that he put in and no more. The association is called in some places the “Club of the Seven Worthies” (Ch’i hsien hui). The technical name for any association of the kind in which cooperation is most conspicuous, is She. The man who is in need of money (She-chu) invites certain of his friends to cooperate with him, and in turn to invite some of their friends to do the same. When the requisite number has been secured, the members (She-yu), assemble and fix the order in which each shall have the use of the common fund. This would probably be decided by lot. Unless the amount in question is a very trifling one, every meeting of the members for business purposes will be accompanied with a feast attended by all the partners, and paid for either by the one for whose benefit the association was organized, or by the person whose turn it is to use the common fund.

At the first feast, given by the organizer of the association, each of the members attends provided with the sum agreed upon, let us suppose 10,000 cash, which is paid over to the headman, 60,000 cash in all, to be used by him, for a certain fixed period, say a year. The next year, the feast is given by the person who drew the second lot; the headman puts 10,000 cash into the treasury, and each of five other members the same sum, all of which is paid over to number three, who in like manner employs it for a year, when in the same way the fourth takes his turn. At the end of six years each of the seven members will have had a turn, each will have received 60,000 cash without interest, and each will have paid out 60,000 cash for which he has likewise received no interest. Each one will have been accommodated with the handling of a larger sum than he could have otherwise obtained, at the end each one has lost nothing in money, but has had six more or less excellent feasts, a matter from a Chinese point of view of some practical importance, however lightly it might be esteemed by a Westerner.

It would seem that the simple form of cooperative borrowing here described, is by no means so common as some of the various societies in which interest is paid, and it is not perhaps surprising that this should be the case. The Chinese are so much in the habit of paying an extortionate sum for the use of the money of others, that it doubtless appears to the average borrower that if he has exacted a high interest, he has made a better bargain than if he had received no interest at all, although he must eventually pay out just as much interest as he receives, and is demonstrably no better off at the final payment than if he had borrowed and lent, disregarding interest altogether.

The methods of societies which exact interest for loans, differ greatly in every detail, and there is evidently no limit to the variations which local custom may adopt in any particular district. In some regions the ordinary number of members appears to be sixteen as in the case just supposed. In others, the number rises to thirty or even more. Sometimes the meetings are held annually, in other districts the usual rule is semiannual meetings, in the second and eighth moons. In societies where the rate of interest is fixed, the only thing to be decided by lot, or by throwing dice, will be the order in which the members draw out the common fund. This may not improbably be determined at the first meeting, each member taking his turn in accordance with the excellence or otherwise of his throws with the dice. But if, as often happens, the interest is left open to competition, this competition may take place by a kind of auction, each one announcing orally what he is willing to pay for the use of the capital for one term, the highest bidder taking the precedence, but no member ever has a second turn. If the oral method of competition is not used, a still better plan may be adopted. This consists of prepared slips, like ballots, noting an offer of interest, deposited by each member in a box, the highest bidder getting the precedence, and in case of like amounts offered by different bidders a second ballot to decide who will add the most to his previous offer. It is easy to see that in this way, the interest to be paid might not be the same for any two loans, in which case there would seem to be inevitable some complexity in the accounts. But for the most part, the Chinese appear to take involved computations of this nature with surprising facility, especially considering the limited practice in mathematics which most of them have enjoyed.

For the sake of greater simplicity, we will take a case in which the interest for each period is assumed to be one-fifth of the principal, in which the number of members is ten, besides the organizer of the society, and in which the amount loaned by each member is 10,000 cash. It is also assumed that in this case the headman for whose benefit the lending was begun, does not repay the loan in money, but only in spreading at each meeting a feast of specially good quality. The interest is of the nature of a “bank discount,” and is therefore collected in advance, the only certain way, it may be remarked, to collect it at all. Each man, it will be observed, with the exception of the first, actually receives only 8,000 cash, but repays to each one who follows him in drawing, a full 10,000. The result will be best seen in a tabulated form, as follows:

(The headman makes the feast only, but does not repay the loan.)

The headman receives from each member 10,000 cash (ten strings) 10 X 10 = 100.

Number   2 receives 9 X  8 =   ...     72
  "      3    "     8 X  8 = 64 + 10 = 74
  "      4    "     7 X  8 = 56 + 20 = 76
  "      5    "     6 X  8 = 48 + 30 = 78
  "      6    "     5 X  8 = 40 + 40 = 70
  "      7    "     4 X  8 = 32 + 50 = 82
  "      8    "     3 X  8 = 24 + 60 = 84
  "      9    "     2 X  8 = 16 + 70 = 86
  "     10    "     1 X  8 =  8 + 80 = 88
  "     11    "     9 X 10 =   ...     90

In the following modification of the plan of loan, the headman pays back his loan, like the other members, and also provides each feast, which is regarded as his interest.

       Headman receives 10 X 10 strings = 100
Number    2    "        9 X 8 = 72 + 10 = 82
  "       3    "        8 X 8 = 64 + 20 = 84
  "       4    "        7 X 8 = 56 + 30 = 86
  "       5    "        6 X 8 = 48 + 40 = 88
  "       6    "        5 X 8 = 40 + 50 = 90
  "       7    "        4 X 8 = 32 + 60 = 92
  "       8    "        3 X 8 = 24 + 70 = 94
  "       9    "        2 X 8 = 16 + 80 = 96
  "      10    "        1 X 8 = 8 + 90  = 98
  "      11    "       10 X 10 =        100

In these examples it will be observed that the earlier each member draws his money, the less he gets on his investment. In the case last supposed, the final recipient, who has no interest to pay, but who receives interest from all but the headman, gets back all his money in a lump, with interest upon it. As already remarked, for the sake of simplicity we have disregarded the actual time for which the money is loaned, and for convenience have assumed a rate of interest which would probably be below the real one. It is evident that so far as financial considerations go, taken by themselves, it is for the advantage of the partners to come as late in the drawing as possible. But it is far from being the case that financial considerations are the only matters to be taken into account. The man who needs money, and who can never be sure of getting as much as he needs upon any better terms than these, will gladly take it as soon as he can get it, arranging the wedding for which he perhaps wishes to employ it, to suit the time of the loan.

Like other human contrivances, Chinese loan societies are to be judged by their results. The practical operation of these organizations often presents an instructive view of many aspects of Chinese life. The man for whose benefit the society is got together does not find that others are hungering and thirsting to do him a good turn, unless they clearly see their way to recover what they put in, with liberal interest. It is therefore often necessary to use a great deal of persuasion, to induce one to join, and especially to persuade him to bring in others. No one is willing to enter into a society of this kind unless it is reasonably certain that every member will meet every assessment, for if any individual fails to pay, everything is at a deadlock. To guard against this, it is customary to have security, or bondsmen, in some instances the headman acting as bail for all the rest. In case of failure on the part of any member to meet his payment, the headman is then required to pay the amount lacking, and this he is of course very unwilling to do, however freely he has engaged to do so. Troubles of this nature lead to many fights, and if this extreme measure is not resorted to, it is not at all unlikely that the person technically responsible will try the familiar method of begging off, striving to induce a creditor to accept a k’o-t’ou in place of cash. If sufficient pressure can be brought to bear in favour of any defaulting member, this plan may succeed in its object, as well as in breaking up the loan society.

Where the number is enlarged to more than a score, as in some districts, the probability that some one will fail to meet his obligations is greatly increased. It is also a fatal objection to these long loans, that before the whole term of years elapses, it is morally certain that something will occur to disturb the very unstable financial equilibrium of the members. For instance, the T’ai-p’ing rebellion, with its long train of sorrows, and the continual famines and floods of later years in Northern China, have tended to bring loan societies into discredit, because experience has shown that thousands of persons have put into them what could never be recovered. It is the almost unanimous testimony of the Chinese whom the writer has consulted on the subject, that in these days such societies fail to accomplish their uses, and are little better than a fraud. Whether a man loses by them, or not, will depend, however, mainly on his own skill in keeping out of those which are unsafe, regardless of the pressure which may be brought to bear upon him. Some men will tell you that they have been partners several times and have never lost their capital, or only lost it once, while others have a totally different account to give.

A Chinese whose easy-going disposition made him a valuable neighbour to those who wished to borrow without being at the inconvenience of repaying, stated that he had been six times a member of a loan society, and while once the capital had been doubled by a fortunate speculation, on each of the five other occasions he had lost all, or nearly all, put in. That such experiences are far from being uncommon, is testified by a current adage, to the effect that if a man has been in a loan society with another three separate times, if he has not been cheated, he has at least been robbed!

After the foregoing account of Cooperative Loan Societies was written, a suit was reported in the Hong Kong papers, which well serves to illustrate the legal difficulties which seem to puzzle not only the lawyers, but apparently the Judges also, for the case which was first heard in July, came on for another hearing upon appeal the next January, and was not decided until the following March. There were four plaintiffs and four defendants. It appeared that twelve men decided to form a Money Loan Association, one of them being trustee, and taking up the subscriptions. Each member undertook to pay $50 per month, by which a sum of $600 would be made up. Each month the members were to meet at a dinner, paid for by each of the members in turn, and at these dinners tenders were received for the fund of $600, the member offering the highest interest getting the “pool,” less the amount of interest. After the association had run for eight months, the headman or trustee failed in business, disappeared, and the association came to an end.

The four persons who had paid money into the association for eight months, and who had received no benefit, sued the other four members who had ceased to pay their subscriptions after the failure in business of the trustee. The defence was that the only person responsible was this trustee, and that all the sums claimed had been paid to him by the defendants. The Acting Chief Justice, who heard the case, was of the opinion that the subscriptions not paid were due, and that the trustee had no authority from the other members to receive beforehand any contributions, and the Justice accordingly gave judgment for the plaintiffs.

The case was appealed, and counsel stated upon its coming up that it was appealed on a question of law. He related the circumstances of the case, and maintained that there was no contract between either of the plaintiffs and the four defendants jointly or severally, that they would pay a sum of $200. The only contract proved and shown, was a contract that each of the members would contribute to a common fund which he might not get in the first instance, but which he was certain to get some time. He therefore submitted that there was no contract at common law on which this action could be maintained, and that there was absolutely no means of deciding the issues in such a case.

To this statement, the opposing counsel replied by admitting that there was a certain amount of difficulty in working out the scheme as a whole, yet unless their Lordships held that these men were liable in this case, the prosecutors were practically deprived of any remedy at all. He submitted that this was against the whole intention of the association, which was in a certain sense for profit, for the mutual help of its members, and the common good of all. To hold that no action was maintainable individually, would be holding out a premium for dishonesty, because the man who got the first payment would then leave the Colony.

At this point the Justice remarked that this was what very often happened. In delivering his opinion, the Justice said that he thought the case was a claim for money lent, but it had been treated as a claim for the return of $50 from each of the defendants in respect of a money loan association. At the trial the defendants had denied that they had made any contract with the plaintiffs, and referred to the fact that certain meetings of the association had been held, and that the other meetings had not been regularly called in accordance with the articles of association. That being so, he held that there was no contract between the various members of the association, which would enable one member to sue another, and therefore he decided in favour of the appellants.

The Puisne Judge said that the contract entered into, was either one between the defendants and one of the plaintiffs, or else it was a mutual contract between the defendants, and the other members of the association. In the first case the plaintiffs could not recover, and if it was a mutual contract between all the members of the association, there ought to be a suit in equity to ascertain what were the various rights of the parties, and all the members of the association must be parties to that action. And so he also gave judgment in favour of the appellants, with costs. The money which had been paid into court, pending the appeal, would be paid out.

Whoever takes the trouble to follow these arguments, and the facts upon which they rest, ought to be convinced of several propositions: that it is very easy to make arrangements to pay out money to Chinese; that it is very easy not to get that money back again; that when there is a hitch in the intricate business of adjustment, it is not unlikely to take all the lawyers and Judges of a Crown Colony nine months to find out the law and equity, and that when the case has been decided it is difficult for an ordinary mortal to judge whether the decision was right or wrong!