The dividend as a savings account

The distinctive financial device of cooperative retailing is the dividend on purchases. The store sells at ordinary prices, and the surplus at the end of the trading period is returned to members in proportion to what each of them spent. It is not a discount at the till and the difference matters: the money accumulates as a recorded entitlement, arriving in a lump at a known date rather than disappearing pennies at a time into weekly spending.

Why that turned into saving

Because it was recorded rather than handed over, the dividend could be left where it was. Members who did not draw it accumulated a balance in the society's books, and societies encouraged this by paying interest on the balance, which converted a retail rebate into a deposit account for people who would not have opened one anywhere else. The society, in turn, acquired working capital from its own customers, on terms no bank would have offered it.

That arrangement has an obvious tension inside it. The society's depositors are its customers, and its capital is tied up in stock and premises that serve the same customers. A trading loss and a run on members' balances are the same event arriving from two directions. Cooperative societies that grew large enough to notice this were the ones that developed separate deposit rules, notice periods and, eventually, dedicated cooperative banking arrangements.

Funds that were not denominated in money

Not every cooperative fund was monetary. Grain funds, in which members deposited a measure of grain after harvest and could draw or borrow from the common store before the next one, solve the same timing problem in the commodity that actually mattered to the members. They have some real advantages: the unit of account cannot be inflated away and everybody can verify the balance by looking at it. They also have obvious limits — storage loss, quality disputes, and the fact that a bad harvest hits the fund and its members simultaneously.

Burial and clothing funds worked similarly at a domestic scale, accumulating towards a specific known future expense rather than a general reserve. The narrowness is the feature. A fund with one stated purpose is easy to govern, easy to explain and hard to raid, and members will contribute to it who would not contribute to something general.

Federating upwards

Individual societies buying separately had little purchasing power, so they federated, forming wholesale bodies owned by the retail societies themselves. Those wholesale bodies then needed credit, and the natural source was the members' own accumulated balances held by the retail societies. What results is a genuinely cooperative financial structure several layers deep, in which household savings fund wholesale trade, which supplies the store the household buys from, and the surplus returns to the household as dividend.

It is an elegant system and it carries a concentration risk that follows directly from its elegance: the member's employment, savings, credit and food supply may all rest on the same movement. Where the movement was strong this looked like resilience, and where it contracted the household discovered that its diversification had been nominal — the same discovery, in a different setting, that local building societies made.