From Chapter 4 of Local Dollars, Local Sense: How to Shift Your Money from Wall Street to Main Street and Achieve Real Prosperity (Chelsea Green Publishing, February 6, 2012) by Michael H. Shuman with Kate Poole (former Schumacher Center for a New Economics staff member).
Turbocharging Your Local Bank
The CEO of your local bank has many reasons to say “no” to more loans to local business. There’s not enough capital in the bank, not enough collateral for the loans, and the businesses are seen as too risky. But suppose you were to approach your banker with the following proposition: “How about a group of us place additional money in your bank. You use that money to process and service the loans that meet our social and ecological criteria. If a loan goes south, you take our money. If the deals go well, we’ll share the interest payments. Either way, you win. Deal?”
That’s essentially what the Schumacher Center for a New Economics did when it created the Self-Help Association for a Regional Economy (SHARE) in Great Barrington, Massachusetts. Influenced by the ideas of economist E. F. Schumacher, whose book Small Is Beautiful became a best-seller in the 1970s, the Schumacher Center has prototyped dozens of social experiments ranging from the first community-supported-agriculture (CSA) farm in this country at Indian Line Farm, to one of the most ambitious local money systems in the United States, the BerkShares, which has partnered with fourteen branches of six locally owned banks to put over three million dollars worth of local scrip into circulation since its launch in 2006.
The Schumacher Center for a New Economics is directed by Susan Witt, a brilliant, intense, sunny woman in her sixties. The late Robert Swann, her partner, was its founding President. In 1977, Witt began volunteering at the Institute for Community Economics in Cambridge, where Swann was pioneering the concept of community land trusts, taking land off the market and placing it into regionally organized trusts which then leased the land for housing and other productive uses. He and his colleagues were also trying to develop an investment fund to finance these land trusts, as well as alternative energy projects and worker cooperatives.
“Up until that point,” Witt recalls, “there were investment funds that had social purposes, but they were stated in the negative. No to investment in South Africa, which at that time was infamous for its apartheid policies, no to investment in alcohol, no to investment in weapons (that was Pax World Fund). But there weren’t investment funds focusing on the positive. We created three limited partnerships, in which sophisticated investors—that is, investors with substantial wealth—could put in certain levels of funding, with the Institute serving as the general partner.”
Witt was asked to be the staff person for these partnerships, which became known as the Community Investment Fund (CIFund). This entity had an extraordinary board of directors that included noted philanthropists like Charles Knight of the Haymarket People’s Fund, respected investment advisors like Bob Zevin (then with the U.S. Trust Company), the investment genius Wayne Silby (who had recently founded the Calvert Fund), co-op experts like Ed Kirshner, activists like Terry Mollner, and lawyers like Rochelle Kormen of Ms. magazine. The board created criteria for the Fund with specific social and ecological standards that are still being used in social investment circles today.
Board members were able to get Witt meetings with the investment liaisons at universities, foundations, and major church groups, but she consistently got the same response: “Our job is to make as much money as possible so that others can do good things with it. Don’t bother us about how we are investing.” After eighteen months, the CIFund had raised only $1 million—a third of the target. “We had done a lot of education, we had started a movement, but we had run out of operating funds to keep the door open.”
What stayed with Witt from this experience were the questions she consistently got asked about local investment. She realized that these new, socially motivated investors wanted to see exactly what their money was doing in their own backyards. “If they knew the people involved and could watch how the business was run, then they did not experience the loans as risky. They felt close enough to influence the success of the business. What we needed was a fund that would connect local investors directly with local projects. That’s why we created SHARE.”
Witt and Swann moved to Great Barrington, Massachusetts, in 1980 to put their ideas about community land trusts and local financing programs in practice and to found the E. F. Schumacher Society, the precursor of the Schumacher Center for a New Economics. They incorporated SHARE as a nonprofit, locally based, membership organization that provided residents in the Berkshires with an easy to manage way to provide needed, low-cost credit to small businesses in the region.
In her testimony before the House Select Committee of Hunger in 1988, Witt said: “We discovered that in rural areas, where many small businesses begin in the home as cottage industries, a very small amount of capital will go a long way in providing new jobs and encouraging the local production of goods formerly imported from outside the region. A knitting machine for a mother working in the home while caring for a family, a table saw for the carpenter, and a commercial-sized oven for the local baker are all low-cost technologies that are quickly repaid with the increase in productivity.”1
Witt went on to explain to the Committee the inherent barriers she saw facing small businesses seeking credit. “After all, from one point of view, it is more efficient [for a bank] to take on a $250,000 loan than it is to make one hundred $2,500 loans. The small rural borrower, often without established credit references, finds himself or herself competing with international corporations for financing. When the small loan is approved, it is at the penalty of a higher interest rate—a rate so high as often to make the emerging business unfeasible.”
Witt and her colleagues thought about creating a credit union, but worried about the expense of the overhead. She also observed that most credit unions, controlled by their consumer members, naturally prioritize personal loans for housing, cars, and college over business loans. Another mechanism was needed to bring needed capital to local entrepreneurs. So they decided to create a new mechanism but within an existing bank.
They approached the bank in town with the best CRA performance record, Great Barrington Savings (now Berkshire Bank). In a first meeting with the bank’s president and four vice presidents, the reaction was mixed. “’Too costly to manage,’ we heard from the vice presidents, ‘Small deposits and small loans. Just a lot of bookkeeping.’ Our hopes faded. But then the president spoke up. He had been raised in the area, had worked his way up in the bank from a position as teller, and could remember the time when loans were made on the character of the borrower, with little paperwork. He instructed his vice presidents to ‘work out all the details of the proposal with these people, so that we can have the SHARE program at this bank. They are planning to do what we should be doing and are no longer able to do.’ ”
The details were ironed out in a month. A Berkshire resident could open a passbook savings account at the bank as a joint account with SHARE. The account remained fully owned by the depositor who earned 6% per annum, below the then-standard rate of 7%. Each member also entered a contract with SHARE, agreeing that the passbook could be pooled with others as collateral for loans that met SHARE’s criteria. As deposits in SHARE accounts grew, the bank made more loans recommended by SHARE, charging 10% interest, well below the nearly 18% interest that was typical of small loans at the time. The 4% “spread,” between cost of the money and income from the loan, was the bank’s to keep to cover administrative costs.
By the time Witt testified to Congress, the program had 70 depositors and, through rapid turnover, had made 14 loans of $3,000 each. The first loan helped Rawson Brook Farm, which made a soft Chevre cheese from its goat herd, bring its milking parlor and cheese room up to state standards. Another loan enabled a home knitter to purchase yarn in bulk as well as a new knitting machine. An appliance repairman got a loan to buy extra parts for washers and dryers. In all, the program created 40 new jobs without any loan loss.2
“While in form SHARE was simply a loan collateralization program,” Witt explains, “in practice it proved to be much more. Members received quarterly letters describing which businesses received collateral support. They then took a personal interest in the business. They brought their grandchildren to see the new goat kids at Rawson Brook Farm; they rooted for Spike and Rosie at the local draft horse pulling event; they recommended Marty to a friend when a washing machine was in trouble; and they boasted that Terry, whose loan went to buy a piano, was the best music teacher in the area. They chose Monterey Chevre cheese before national brands and asked for it at shops where it was not yet available.”
Witt designed the program to tap the wealth of summer dwellers in the Berkshires, but she was surprised how many of the people opening up SHARE accounts were relatively poor: “People working for their living, not with a lot of excess cash, were just putting their whole savings into a SHARE account and that just flipped my mind. And then I realized that they perceived it as helping people like themselves. They were glad to do it. They weren’t thinking in terms of risk, they were thinking in terms of particular people and particular projects that they knew. It was a different way of thinking about investment.”
After a whirlwind run, Witt and her colleagues closed the program in the 1990s. New CRA regulations encouraged banks to do more neighborhood lending. Interest rates were lower. And SHARE had helped local banks become more familiar and comfortable with making small business loans—so much so that SHARE money was just sitting in accounts unused. (Anyone interesting in trying out this program in their own community can download SHARE’s legal documents).
In retrospect, Witt wishes SHARE had focused as much on nurturing entrepreneurship as it did on mobilizing capital. “It was not lack of capital, but lack of good business plans, that prevented the program from growing. Working people find it hard to take time to develop plans for a new import-replacement business. SHARE would have benefitted from a team of ‘social entrepreneurs,’ retired business persons, and other concerned citizens working together to create a library of business opportunities. We wished for great business plans focusing on basic necessities of food, clothing, shelter, and energy that met a high standard of social and ecological responsibility.”
SHARE laid the groundwork in the Berkshires for other local financing initiatives like the Deli Dollar and Berkshire Farm Preserve Note self-financing scrips, and later BerkShares. Meanwhile the story of SHARE circulated broadly in community banking circles, especially in a community several hours drive to the west.
Michael H. Shuman is the Director of Community Portals for Mission Markets and a Fellow at Cutting Edge Capital and Post-Carbon Institute. He is a founding board member of the Business Alliance for Local Living Economies (BALLE). He is also an adjunct instructor in community economic development for Simon Fraser University in Vancouver and is one … Continued