The Basque region is poor and mountainous agricultural land, but in the past it was rich in deposits of iron ore and coal both within its borders and nearby. Thus, an industrial tradition developed quite early. Iron, steel and related industries, metalworking of various kinds as well as shipbuilding, all prospered as early as the 16th and 17th centuries, and then expanded massively with western European industrialisation in the late 19th and first half of the 20th century. Basques benefited from a protected, in practice captive Spanish market and engaged besides in substantial trade with other parts of Europe, with England in particular. Industrial expansion continued through the 20th century until the 1970s when much of the West began to face both precipitous increases in fuel prices and heightened manufacturing competition from newly industrialising countries in Asia and elsewhere.
Mondragon itself was something of a microcosm of these economic trends. The town of Mondragon (now also known by its ancient Euskera name of Arrasate) had been home to Union Cerrajera de Mondragon, a large lock and allied product manufacturing company launched by local elites early in the 20th century. This company was one of the most important industrial firms in Guipuzcoa for many years. As early as 1920 it had over 800 employees. The existence of this firm naturally gave rise to a large number of metalworking and other related businesses in and around the town of Mondragon. By the time the first cooperative of what what was to become the Mondragon Group was founded in the 1950s, the population of the area had a large stock of metal labor skills and knowledge, and was accustomed to the rhythms and requirements of industrial life. These circumstances help to explain why the first cooperatives of the Mondragon Group were industrial firms, as opposed to agricultural, retail or consumer credit organisations, as it has been the case of many cooperative movements in different parts of the world. The group was dominated by industrial firms for its first 35-40 years. Important is the Group’s bank, or credit union, called Caja Laboral Popular (Lankide Aurrezkia in Euskera, the autochthonous Basque language). It was one of the early cooperatives in the group. While it has been operating increasingly as a retail consumer bank, it was initially established to serve first and foremost the financial needs of the and Group firms. In summary, the Basque Country generally and the Mondragon area in particular had a long and sound industrial tradition and this tradition was a key asset in the creation and development of the Mondragon Group. The Spanish Civil War (1936-1939) also played an important role in the history of the cooperative complex. The Basque provinces of Biscay and Guipuzcoa remained loyal to the Spanish Republic—which, although belatedly, had promised greater Basque autonomy—and fought against the Francoist forces. The Spanish Civil War was also a civil war between Basques. Those who supported the Franco side—and there were many of them—enjoyed the spoils of victory and those Basques nationalists and republicans who lost suffered the consequences of defeat.
In 1941, against a background of economic scarcity and anti-republican repression that characterised the aftermath of the Civil War—with the rest of the world immersed in the Second World War and oblivious therefore to the situation in Spain— the Archbishop of Vitoria sent to Mondragon a reform-oriented young priest, Father Jose Maria Arizmendiarrieta. While carrying out his parish duties, Arizmendiarrieta also began to do extra-educational pastoral work while continuing his studies of social science, philosophy and theology. He organised all types of local associations and informal groups of all ages, enjoying the protective umbrella of the Church—which at the time was a rather unconditional allied, if not a part of the Franco regime— and initiated and guided countless local development projects. In fact, he engaged in what can best be described as community development, though he never encouraged people to challenge directly the local or national political and economic power structures. He rarely if ever spoke of resistance, but rather of self-help and development, responsibility, local initiative, and commitment to the community.
Participation is another defining element of his activities in Mondragon. He encouraged local groups to be self-managing, to take initiatives, to set up autonomous formal or informal associations, to establish schedules of meetings, choose their own leadership and hold the leaders accountable.
He came to see education as one of his most fundamental community development tasks. Since there was virtually no secondary education in Mondragon at the time, in 1943, two years after his arrival and with the help of a number of local residents, he established a small vocational-technical school for adolescents. The school grew and expanded its activities, and gradually became a fairly substantial organisation for a small town, coming to serve several hundred students by the 1950s. It later graduated many of the first generation of cooperative leaders during more than a decade.
The priest became an increasingly outspoken and forceful proponent of Catholic Social doctrine in the economic sphere. This doctrine was critical of conventional capitalist economy, business practice and workplace relations, calling for greater cooperation, economic justice, commitment to the community, and opportunities for human development both in the economy in general, as well as in the structure and functioning of the enterprise in particular.
A core group of people, mostly youth, became followers and even disciples of Father Arizmendiarrieta. Five members of that core group, graduates of his technical school, went on to earn degrees in engineering through correspondence courses. Several of them went eventually to work in the Union Cerrajera. They offered suggestions to company leaders about worker participation and profit-sharing, but management wanted then to hear no part of it. The five soon grew frustrated and left Union Cerrajera to pursue their own project. In 1955-56, they formed a business called Ulgor making simple paraffin stoves. Ulgor had no formal cooperative structures when it was founded in 1955, but with the help of Arizmendiarriteta’s research and negotiations with government officials, a cooperative corporate structure was developed and formalised in the next few years.
By the late 1950s and early 1960s, the Spanish economy had substantially recovered from the devastation of the Civil War and with hindsight ill-advised policies implemented by the Franco regime after World War II. The population had significant pent-up savings and growing disposable incomes. New businesses found relatively good local and regional markets for their goods and Ulgor was no exception. Moreover, the Spanish market was highly tariff-protected during the Franco regime. It was then de facto a captive market for Basque and Catalan industrialists. Prohibitively high tariffs kept most foreign goods out of reach of the mass of consumers, but the largely based market economy existing within Spain did impose a significant measure of competitive discipline. Thus, the new Mondragon co-ops were able to establish themselves and grow to a certain level of business maturity in a moderately competitive domestic economic environment, fully protected from foreign competition.
Ulgor experienced substantial success, as did several other businesses that had been formed by friends, associates or others who wanted to imitate the Ulgor experience. The group, in effect, fairly quickly diversified from domestic appliances to forge and foundry products, electrical and industrial components and machine tools. This diversification helped enormously in later years. During troughs in the business cycle or when other problems arouse, share-holding workers the so-called cooperativists, could easily shift from company to company as needed.
Another phenomenon related to the historical context also seems to have contributed to facilitate the start-up of new enterprises. The prevailing economic conditions of Spain and the tolerance enjoyed by the Catholic Church within Franco’s regime help significantly to explain the success of the first Mondragon cooperatives during the late 1950’s and the 1960’s. Thus, a number of different forces contributed to the successful launching of the first of cooperative companies in Mondragon: a charismatic leader working in an area with a strong industrial tradition; a growing, but highly tariff-protected market economy; and, last but not least, a social reaction who sought to develop areas of socio economic autonomy outside Franco’s authoritarian regime. These things together with sound and effective business operations gave Mondragon firms healthy profit margins during the first decade and more. The enterprises were able to establish themselves; the group was able to finance a good portion of its growth out of earnings, and new firms and initiatives institutions had enough support to get off the ground.
Despite solid earnings in their first years, Father Arizmendiarrieta soon convinced the group that they should have a direct source of capital – their own cooperative bank – and in 1959 helped them establish the Caja Laboral Popular-Lankide Aurrezkia (Working People’s Bank). His followers were initially opposed, feeling enough overwhelmed with the work required to consolidate their new businesses, but the priest’s efforts to persuade them eventually won the day. Caja Laboral became crucially important to the development of the cooperatives over the next generation. Over the years, a considerable number of other support institutions were created with the encouragement, and frequently, at least in part, on the initiative of Arizmendiarrieta. He worked in the Polytechnic School and remained influential in the cooperative group until his death in 1976. His life and thoughts are regularly celebrated by the Mondragon network and many of its share-holding members, the so called “coperativistas”.
 Generational Perspectives on Employee Ownership: The Relationship between Age and Satisfaction with Cooperative ownership in Mondragón by Frederick M. Freundlich, 2009