How Giro-credit Worked
How Giro-credit Worked
Additional Information on the Giro-credit system
(Undated, from Shamcher’s archives)
INFORMATION FOR RECEIVERS OF GIRO-ORDERS (TRANSFER ORDERS)
Transfer-orders or giro-orders are national and international means of payment. Like crossed checks they are orders to a clearing-office acting as a bank or book-keeping central for the customers to transfer the amount from the buyer’s to the seller’s account. The amounts cannot be claimed in cash.
Giro-orders received in payment for good or services should be sent to the nearest giro-office, where the amount is credited to the seller’s account (less the charge, ½% of which the part not used for office expenses and funds is redistributed at the end of the year.) the amount can be used for any purchases either on the home market or on any foreign market, whether the giro-order originally comes from a customer at home or abroad. There is for instance no need to buy from the same party or from the same country to which the goods were sold. The giro-transactions are not to be confused with the bilateral clearing arrangements of some European countries.
In case no proper giro-office exists in a country where a giro-order is received, special arrangements will have to be made. In New York, for instance, the Norwegian American Chamber of Commerce will attend to such cases, and eventually arrange for discounting of giro-orders with American financial institutions, when conditions have been discussed in advance.
The object of giro-transactions is to increase the volume of trade by means of the special giro-credits, amortized and paid by a charge per item transferred instead of by a time unit interest and amortization. This form of credit will be stimulating to many kinds of businesses, and not susceptible to cause inflation. It will draw new businesses and new people into the trade volume, and increase the volume of trade for businesses already established. It will adjust consumption to production by increasing consumption instead of cutting down production.
GIRO-INSTITUTIONS
Giro-Institutions are executive offices for groups of businesses and individuals mutually exchanging goods, services and credits by clearing the amounts in books, mainly without recourse to cash.
Object: To increase consumption and production by drawing new people into business, and increasing the volume of already established businesses.
Start: Any group of businesses of different branches can start a common clearing office, serving as a credit pool for the associated businesses. Through this pool the members can trade mutually, as well as extend credits to customers. For the mutual trade it may be profitable to agree upon a certain initial credit which the pool, through a chosen board of directors, extends to the partaking businesses. Thus accounts have been opened, and mutual sales and purchases can take place. As for outside customers, the credits are granted on the same basis as ordinarily.
Method of Operation: The pool may run an office of its own, or operate through a bank or other financial institution. The operation through a bank would offer the advantages of handling joint giro and cash businesses under one administration.
All giro-credits, whether mutual pool credits or customer’s credits, can only be used for purchasing goods or services. They cannot be exacted in cash. (Though available cash will be at the disposal of members or customers). The pool, or company, then will have no cash obligations towards its members and customers, and can arrange its credit policy accordingly. The company does not lend out its own funds, or the savings of depositors. The company lends command of production before it has reached the stage of consumption or savings. This credit system is thereby capable of a great extension of credits and business activity without increasing the interest burden. As no one has given away his savings to the debtors there is no ordinary interest per time unit to pay. The producers, who have given their goods to the debtors, are immediately credited with the amount so that they can buy goods and services the moment they have sold their products.
Instead of a time unit interest, a charge is made for each item debited or credited. This charge will cover expenses and general funds and is also intended to cover the amortization of the credits. In some cases this charge will be sufficient to cover the whole amortization (in the case of many transactions per time unit). But in general each debtor will be obligated to amortize his credit in the course of a time fixed for each case. If in the course of this time the credit is not amortized through the fixed charge per transaction, nor through delivery of goods and services, the remainder will have to be paid in cash. This cash is not the property of the company, but serves as security toward the customer’s temporary credit with the company. The cash can be lent to customers against securities as in ordinary banking, but on the same conditions as the clearing credit: No time interest charge, but a charge per transaction.
The operation of the ordinary transaction charge is as follows: A charge of say ½% is made on each item debited or credited (this charge is used in Norway). At the end of the year, after deduction of the costs of administration, reserve funds, general funds and dividend to shareholders, the surplus is credited to the participants in proportion to the extent of their business through the company. For debtors this goes to amortization. For creditors, it goes to a savings fund.
To get an idea of the working of this system we may take an example the Postal Giro or postal check system as operated by the post offices in Sweden, in 1935. The year’s turnover was 14,000,000,000 kroner (3.5 Billion Dollars). The charge per transaction, at ½%, would amount to 70,000,000 Kroner. The expenses of the office, including all funds etc., were ca. 7,000,000 Kroner. There would be 63,000,000 Kroner to credit to the participants. In proportion to their capital deposited with the postal giro on an average during the year this would mean about 50%. The actual cost of the transaction would be about one per thousand of the turnover one way.
Risks: Like any other business this company would suffer loss by the failures of some debtors to pay their amortization. The losses would however in general be far easier to carry, and far less dangerous than by ordinary banking. As long as the credits extended are not too big in proportion to the company’s total turnover (and that the manager must see to) the consequences of a debtor failure would be as follows: The single participants who had delivered goods to the debtor would be credited at once with the corresponding amount and suffer no more loss than the other participants. Even if the loss were greater than the surplus, the making up of the loss might go on for years without vitally affecting any participant. No one could lose more than the charge he had paid in of ½% per transaction so long as the company continues to function. The company would never have to fear any depositors' rush on the cash reserve, it would have no interest obligations towards depositors, it would, practically speaking, be independent of time. Therefore, the company would also be in a position to render very valuable service to customers in difficulties, by postponing their payments, thus avoiding much mischief.
A risk of a special kind for this company is an insufficiency of goods and services against clearing-orders at the start. The undertaking ought therefore to be started by businesses of a sufficient power and magnitude to ensure a continuous circulation, and each participant should cooperate with the pool office in determining exactly the extent to which they should trade through the pool. Excessive sales or purchases through the pool by any individual member may hurt both member and the whole pool.
The smooth circulation will be facilitated by cooperation with banks, municipalities or governments.
THE ORGANIZATION OF THE NORWEGIAN COMPANY
Norsk Forening fo Giro-omsetning was formed as an independent association in December 1936. The president of the Board was the well known lawyer, Mr. Olaf Dahll, the vice-president the lawyer and financier, Mr. Eivind Eckbo, a man of great wealth and very extensive business activities. He is also known as a great philanthropist, who has given millions to humanitarian and social institutions. The other members of the Board were Mr. Jorgen Dahl, Lawyer; Mr. Finn Jacobsen, coal merchant; Mrs. Amalie Overgard, a business woman and president of the Haasewives Association of Norway; and Mr. B. Bjorset. Later Mr. K. F. Oppegard joined, owner of one of our leading electrical firms, and Mr. Rolf Stenersen, broker and director of a Dutch bank, a man of great means, a philanthropist and author.
According to the wish of the Board the organization started on a very modest scale, the capital being only 15,000 kr. at the start, increased to 50,000 inclusive of guarantees in the course of the year. The credits awarded were limited to about 45,000 kr. Because of this very modest start some participants found difficulty in obtaining the goods and services required, and it is now thought that it would have been better to start on a larger scale at once. In spite of this, the organization grew from some 40 participants at the start to 400 in the course of the year, and the turnover doubled from month to month at first, while the volume of credit was purposely kept constant.
In 1938 it was agreed to increase the activity, the volume of credit was gradually extended, and the public was informed through publicity and social arrangements, for instance through a dinner given by Mr. Eckbo, where politicians, bankers and leading business men were present.
The association has the valuable cooperation of some prominent individual bankers. A closer cooperation between banks and the association is being considered on both sides, but has not as yet been established. However, bankers individually are helping our work and in the application of our system.
In March 1938 the Norwegian Finance Minister was approached. He put the question before the other members of the cabinet, and it was decided to appoint a governmental committee to make proposals on the application of clearing transactions in the public business. It is for instance being considered to make a trial with 2 millions credit to farmers for completing their buildings and stocks.
Besides, a special committee for the farmers economic organizations is already at work on the application of clearing credits to the general transactions of farming. This committee consists of Mr. Andresen Reier, member of the Board of Ostlandske Melkecentral, our greatest milk producers' organization, who is at the same time president of the Board of Meieribrukets Innkjop, an organization for buying dairy machines, etc. for all the dairies - then Mr. Sollied, Managing Director of Norges Kjott og Fleskecentrall (The meat and pork central of Norway), then Mr. Ivarson, the Managing Director of Meierienes Exportlag, the sales organization of all dairies, and the Mr. Rolf Stenerson, for the Giro-organization. The purpose of the committee is gradually to apply clearing credits to the general transactions of farming.
In connection with the governmental committee some large purchases of state-supplies have been considered, especially for military purposes. The goods furnished to the military depots through clearing transactions would not otherwise have been ordered, and they are not sold in the market, so for this purpose eventual surplus\goods which the state would otherwise have destroyed, could be used. Negotiations are under way between American firms and the Norwegian Government concerning delivery of goods on this basis.
The Norwegian association has had practically no credit loss till now. The danger that some one might overdraw his account has often been suggested, but there seems to be no greater danger of this kind with the clearing organization than with ordinary banks. When properly developed, the clearing organization can give credits on very long terms. This fact, in connection with the absence of time unit interest, makes it specially well fit for farming, small handicraft, public works and other undertakings where there are now only small returns, or where there are factors of great uncertainty.
Through a proper credit arrangement for these branches of economic life other branches too will benefit, e.g. through larger and more stable purchasing power. The clearing organization would thereby form a very appropriate supplement to the existing credit organizations.
SIMILAR COMPANIES IN OTHER COUNTRIES
In Sweden (Stockholm and Eskilstuna) there is an organization of the same kind and about the same size as in Norway, which, cooperates with our company. For instance, Swedish firms have bought cheese and fish in Norway, and Norwegian firms have bought hardware in Sweden. These transactions are not of the same kind as the two-sided clearing f.inst. (sic.) between Germany and some countries. The selling firms need not wait for a corresponding purchase in the other country; it gets an account for buying at home or abroad the moment it has delivered its goods. So it is practically the same as cash payments.
Also in Sweden the government and the banks have been approached, and a member of the Board of the Riksbank is promoting the idea. Two of the largest banks have for some time been considering establishing clearing branches.
In Switzerland a similar organization exists since 1935 but this organization seems to be working in a direction not quite conforming with the ideas of the Scandinavian organizations, both as regards propaganda and technical organization. The same can be said about some American enterprises.
In France a very successful bank partly operating along these lines exists since 1847 - then called “Banque Bonnard” now: Comptoir Centrale de Credit. Its proprietor is now one of the directors of “Banque de France” and a very influential man.
In the course of history proper clearing-organizations have been working alongside with the ordinary banks at different intervals right from the time of Babylonia and ancient Greece. They seem to have furthered the balance and even functioning of the economic life - whereas in the countries and epochs where such organizations did not exist (as for instance in the later part of the Roman Empire) the economic life suffered from lack of purchasing power and severe economic crisis.
THE PREPARATORY WORK IN SCANDINAVIA
An inter-Scandinavian committee was formed in 1934, consisting of Minister Eric Ehrstrom (Finland) as president, Mr. Runnquist (Sweden, counselor at law, Lodens Advokatbyra), Mr. Skovboll (Denmark, counselor at law) and Mr. Olaf Dahll (Norway, counselor at law, the president of the present Norwegian organization). The Committee had constant, support and advice from such business and banking men as Dir. Dahlander, Stockholm, Dir. Dr. Fredrik Jahn, Stockholm, Dir. Utterstrom, Stockholm, some Oslo bankers and business men, and economists such as Mr. Myrdal, Stockholm and Mr. Frisoh, Oslo, who has written a treatise on similar organizations. Besides, Mr. H. H. Grell, an American citizen but for long years working in the steel and mining business in France has been constantly helping the organizations both in Sweden and Norway with his valuable advice.