Why Co-ops? What Are They? How Do They Work?

Why Co-ops?By Joseph G. Knapp, Economist, U.S. Dept. of Agriculture
Revised by Edwin G. Nourse, VP, Brookings Institute
(Published September 1944)

Introduction

  • Early Experiments in Cooperation
  • Cooperative Pioneering in England
  • What Is Cooperative Business and How Is It Different?
  • How Are Cooperatives Classified?

How Has Cooperative Business Grown?

  • In the Twentieth Century
  • A New Departure in Cooperation
  • Mechanized Farming: Cooperative Purchasing
  • Consumers’ and Service Co-ops in Recent Years

What Is the Cooperative Picture Today?

  • Service Operations Now Extensive

How Are Cooperatives Organized?

  • Direct Membership Associations
  • Federated Associations
  • National Federations

How Do Cooperatives Function?

  • Marketing Pools
  • Co-ops in Action

How Are Cooperatives Managed?

How Are Cooperatives Financed?

What Is the Legal Standing of Cooperative Business?

  • Is Cooperative Business Tax-free?

What Are the Strengths and Weaknesses of Cooperative Business?

Some Achievements Claimed by Cooperative Business

How Efficient Is Cooperative Business?

What Is the Future of Cooperative Business?

To the Leader

  • Get Your Facts Across
  • Questions for the Discussion

Suggestions for Further Reading

 

Introduction

CooperationIs cooperative business a new idea? Are co-ops a cure-all for our economic problems? Do they stifle free enterprise? This is a hot question among farmers, merchants, and consumers. What are the facts? This pamphlet gives both sides of the question. Read it and have your say.

Back in early colonial days, and later on the western frontiers of this country, neighbors used to help each other on many kinds of jobs—building their cabins, raising the roofs of their barns, harvesting their crops, shucking their corn, and all kinds of things that needed many hands.

That kind of informal cooperation was part of pioneer life, and it continues to this day in such farm activities as threshing.

Cooperative business doesn’t go back quite so far, but it is nothing new in America. The first cooperative in this country began operations in 1752, twenty-four years before the American Revolution. A mutual insurance society, it was called the “Philadelphia Contributionship for the Insurance of Houses from Loss by Fire,” and Benjamin Franklin was one of its founders. It is still in business, and so are seven other mutual insurance companies that started before 1825.

Farmers’ mutual fire-insurance companies made their appearance about 1820. The members of these cooperative societies simply agreed in advance to split the costs of any fire loss that one of theta suffered. If any of their property burned, the members assessed themselves enough to cover the damage. No fires—no assessments. Nowadays most such mutual insurance companies don’t wait for the fire. They collect in advance from each member a fixed amount, called a premium, enough to cover all likely losses.

Early Experiments in Cooperation

Mutual irrigation companies were another early form of co-operative business. When the Mormons migrated to Utah in 1847, they soon found that they had to irrigate the land—and so farmers pooled their labor and shared the cost of bringing water to the crops.

By 1860 there were 83 mutual irrigation associations in Utah and 3 in California. Such companies are credited with having started “scientific irrigation” in this country.

Most American farmers in the early days were self-sufficient, living off the produce of their own land. But as they began to produce more cash crops for the markets, they also began to try out cooperative methods for selling their surpluses.

In 1820 a group of Ohio livestock producers made joint shipments to a terminal market.

In 1851 a cooperative cheese factory was established in New York State.

In 1856 a cooperative creamery, or “butter factory,” was formed, also in New York State.

In 1857 a cooperative grain elevator was started in Wisconsin.

The earliest consumers’ cooperative store in the United States was established in Boston in 1845—an outgrowth of a cooperative buying club formed a year earlier.

This store in Boston was the beginning of the New England Protective Union, which had “local divisions,” or stores, in many communities. The peak carne in 1851, when 151 “local divisions” reported sales of more than a million and a half dollars. Prices were fixed as near cost as possible. But the members did not have much business experience, there were squabbles among them, and gradually the capital stock passed into the hands of the well-to-do stockholders.

Rochdale England 1844

Cooperative Pioneering in England

Modern ideas of doing business cooperatively are often traced back to the founding of a tiny shop in the English town of Rochdale in 1844.

In that year a group of twenty-seven men and one woman, mostly textile workers, handed together to buy a few staple supplies for themselves. They called themselves the “Rochdale Society of Equitable Pioneers,” and before long both their membership and their business volume began to grow rapidly.

The Rochdale store wasn’t the first cooperative venture in England, but it was the first one to gain a permanent foothold. Its success has usually been credited to the soundness of the operating principles laid clown by the founders. This set of rules, worked out a hundred years ago, is followed by cooperatives throughout the world today:

  1. Goods to be sold at prevailing prices.
  2. Savings to be distributed in proportion to purchases.
  3. Interest on capital to be restricted to a fixed rate.
  4. Membership to be open to all—men and women—regardless of party or creed.
  5. Each member to have one vote and no more.
  6. Full information—based on proper accounts and audits—to be presented to members.
  7. All business to be transacted on a cash basis.
  8. High standards of commercial honesty to be maintained.

The Rochdale pioneers held that the return of savings in pro­portion to purchases was particularly important. That a method by which a cooperative organization, which outwardly seemed very much like other commercial establishments, could operate on a cost-of-service basis.

What Is Cooperative Business and How Is It Different?

Now, against this background of history, it is about time to define cooperative business. How is it carried on? What are its central principles? How does it differ from ordinary commercial business?

There are four main ways in which a cooperative business differs from a commercial business:

  1. A cooperative business is set up by a group of individuals to obtain services for themselves at cost—not to obtain profit from rendering services to others.
  2. A cooperative business tries to render the greatest possible benefit to its members—not to make the largest possible profit.
  3. A cooperative distributes any surplus income over the cost of doing business among those who are served by it, in proportion to their use of its services—not in proportion to their investment.
  4. A cooperative is controlled by its patron members, each of whom ordinarily is allowed a single vote—not by the owners of its capital stock, if any, in proportion to the number of shares they hold.

In other words, the chief aim of cooperative business, as contrasted with other kinds of business, is to provide goods and services to its members at cost. A cooperative does not engage in buying and selling in order to make a profit for its members. Although it may buy and sell from the general public in order to carry on its own business, this is incidental to its chief aim—serving its members. “Co-ops”—to use the familiar nickname—are private enterprises and therefore are part of our American system of private enterprise just the same as an individually owned business, a partnership, or a corporation.

How Are Cooperatives Classified?

Cooperatives can be grouped according to what they are set up to do

  1. Producing Cooperatives. In these cooperatives, members, as workers, extract, raise, or make goods. Such cooperatives may engage in mining, farming, manufacturing, or similar occupations. The self-help cooperatives which sprang up during the depression of the 1930’s to provide employment were primarily producing cooperatives.
  2. Marketing Cooperatives. These are cooperatives which undertake to market crops or other products of members. Often these associations, as a necessary part of their job, prepare products for the user. For instance, they churn butter, manufacture cheese, can fruits and vegetables, and so on.
  3. Purchasing Cooperatives. These cooperatives procure goods and services needed by members whether for consumption or production. Those that serve farmers are called “farm supply” associations. They may provide farmers with goods or services that they need in farm production or as consumers. Associations providing consumers with groceries, clothing, or other goods or services for general consumption are properly called “consumers’ cooperatives.” As a matter of fact, all types of purchasing cooperatives are often called “consumers’ cooperatives,” since these associations are organized by those who consume goods either as producers or consumers. Purchasing cooperatives often do much manufacturing or processing incidental to their purchasing job.
  4. Servicing Cooperative. Such cooperatives provide technical or professional service to their members. They may provide members with insurance, financial assistance, electrical power, hospitalization, or other needs.

Some cooperatives perform more than one kind of job at a time. For example, inane do both marketing and purchasing, or provide other services in addition to their plain activity. Most cooperatives, however, can be conveniently fitted into one of the four pigeonholes we have described—producing, marketing, purchasing, and servicing.