IN THE 1930s. 

The Effect of Cheap Money Policy on the Building Societies and the Banks.

The cheap money policy influenced the manner in which the building societies ran their affairs. The lowering of the rates at which the investors could deposit their funds affected the building societies, especially the bigger ones which held very large funds from depositors. Unless they could deposit their substantial surplus funds with approved borrowers, effectively the government or a local authority, at rates higher than they were paying depositors, they would not make a profit. The cheap money policy therefore put pressure on the societies to seek ways of lending out more money. Receiving in 1932 a rate of interest from Treasury Bills of 1.49 per cent when the deposit rate paid to investors was 2 per cent or so, was not a sound way for the societies to run their business in the long term. This was one positive effect of cheap money; it made the societies very anxious to lend money if they could find a way of getting the public to apply for loans.

The societies did not immediately cut their rates to shadow the fall in rates on the money markets. The societies in the 1930s acted in a cautious manner and did not wish to reduce their rates until they were sure that the effects of the cheap money policy would work. As will be shown later, the societies were very reluctant and unaccustomed to changing their rates because of the difficulties this caused. Few of the societies were mechanised, and in the event of a change in the rates they had to write to advise all their investors and depositors. In addition they were then required to follow through to see that the higher or lower rates were being paid by the mortgagees to their banks or directly to a branch or agency of the society. Coincidentally, in 1932 there were new arrangements with the Inland Revenue covering the composite tax rate the societies would pay to the Revenue on behalf of their investors and a clarification as to the basis on which the societies would pay tax in the future. In a movement as staid as that of the building societies it would have been difficult for them to respond quickly to both the introduction of lower rates following the cheap money policy and a change in the rates of tax affecting themselves and their depositors. Eventually by September 1932, the societies did reduce the rates charged to borrowers from around 5.5 per cent to a low point of 4.5 per cent in 1936 (18).

On an annual basis, assuming a mortgage of £500, the difference - the saving- to a borrower between a rate of 5.5 per cent and 4.5 per cent is £3.24 pounds a year- say £3.5s a year assuming a fifteen-year mortgage usual at the time. If the borrower had a twenty-year mortgage the reduction was £3.36- say £3.7s.3d per year (19). Such a reduction would not have been enough to have persuaded many people to buy a house.

The easing of credit and the lowering of the bank rate did not immediately have any effect upon the manner in which the London banks operated. The Treasury was concerned that the lower rates were not being passed on to industry and that bankers' advances were still declining while their investments in government securities were increasing (20). The Midland Bank, at the time the world's biggest bank, was situated opposite the Bank of England, and the chairman Reginald McKenna held views also opposite to those expressed by the Bank of England. McKenna did not believe in an artificial control of the bank rate and thought 'the Bank of England exercises a pernicious effect on industry by its artificial control of the bank rate; that its policy is directed by political and diplomatic considerations rather than with the welfare of British commerce and industry at heart'(21). The clearers were said 'to be holding huge deposits which, in contrast to the mobilization of bank finance in Europe, were of little use in the repair of British industry'...'By the late 1920s the complaint that the clearing banks were insufficiently courageous in their lending to the manufacturing industry had become almost compulsory in any discussion of the economy'(22). However, the banks were lending to builders/developers. Midland Bank's advances to this segment of industry increased substantially from 6.8 per cent to 9 per cent of advances in the period 1929 to 1933. Barclays Bank and Lloyds Bank's figures were similar, showing an increase from 2.9 per cent to 4.9 per cent between 1929 and 1936 (23). The copy letter from Barclays of 31 January 1936, shown after page 37, states that 20 per cent of their total advances were connected with the building boom. This figure of 20 per cent is four times higher than the amount shown in their annual returns which indicates that Barclays Bank, and possibly the other banks, were adjusting their figures to disguise just how large their advances were to the speculative builders.

But the annual figures for the construction of unsubsidized houses increased in 1929 and the weekly costs of buying a house were lowered in the late 1920s. Marian Bowley shows that from 1925 to 1930 the weekly cost of buying a house fell from 12s 1p to 9s 9p, and by 1935 it had fallen to 7s 8p. At the time the policy of cheap money was introduced the weekly cost was 8s 7p (24).

The availability of cheap money created a climate where the banks and the building societies felt they could lend with confidence and the purchasers of the new homes shared their feelings. The British economy overall might still be in a depressed state but those fortunate to be in employment were in a good position to meet the cost of the new houses.

Much more importantly, during the 1920s the building societies witnessed the emergence of several strong general managers in the movement who for reasons of ego or sense of social and historical responsibility or profit used the large deposits with the societies to enable those willing to buy their houses to do so. The strong managers who associated themselves with their societies had not been a feature of the building societies before this time. People such as Harold Bellman of the Abbey Road Building Society, Enoch Hill of the Halifax Building Society and Walter Harvey of the Burnley Building Society all had their names on many of the advertisements which appeared for the societies they represented and sometimes their photographs. They wrote articles and made many speeches, which although they were not widely reported outside the movement, would have increased in their own eyes, their own importance.

The building societies had not taken steps to harness their funds during the 1920s and use them to the degree that they would in the 1930s. The sum due on mortgages in 1925 was £121 million and in 1935 it was £456 million (25). It is important to determine what elements, either internal or external, caused the building societies to make available the funds for more home buying after 1933. Were the societies the cause of the building boom of the 1930s or one of the willing or unwilling beneficiaries? This thesis will explore the position in financing the building boom that was taken by the banks and the government.

Why were there not more houses built for renting, thus giving the lower paid a choice as to whether they should rent or buy? Partly the reason for the lack of houses built by private enterprise for letting was the desire for liquidity in investments. The habit of indirect investment through trusts, the growth of insurance funds and the much greater opportunity for investment in gilt-edged securities all contributed to altering the attractiveness of investment by individuals in houses to let. Rent control and higher standards of accommodation demanded by statute was also a factor making the letting of housing accommodation less attractive to the private sector. The public sector was constrained by the lack of funds from central government. This will be commented on in a later chapter.

It will be shown that the building boom was fuelled by private capital and that this capital, was mainly provided by the building societies. Therefore, the first part of this work is primarily a review of the manner in which the financial institutions in the 1930s, notably the building societies, assisted so many of the lower-paid members of the working classes to buy their own homes (26). It will also illustrate how the societies expanded from a position in 1912 when they, with a little help from the friendly societies, contributed 8.9 per cent of the mortgages granted in the United Kingdom between 1901 and 1912, amounting to some £9.3 millions per year, to 1939 when they provided 80 per cent of funds, running at £130 millions per year (27). Offer estimates that the insurance companies would have lent ,18 million in 1912, almost double the figure provided by the building societies. The 'insurance companies, which held a larger share, were in the process of reducing their commitment' (28). This policy move by the insurance companies allowed the building societies to increase their share of the lending market.

The building societies expanded their position for three principal reasons. The first was to increase their turnover and therefore their profits. Secondly, in expanding they were satisfying the egos of members of their management. But thirdly, the role of the societies in improving the conditions of the working people of the country was seen as a mission by many senior building society men (29). Such an attitude came from the roots and origins of the societies. They would profit both intellectually and financially from this enhancement of the social status of the working man. Home ownership was also thought to create stability. Sir Enoch Hill said at the annual dinner of the Building Trades Exchange Club in February 1936, 'a potent factor in the creation of social peace is house ownership among working people'. He believed 'that the short duration of the general strike was due to the fact that thousands of people owned their own houses and were not going to be led into a position of danger' (30).

As an example of the role which the societies saw they were fulfilling the opening paragraph of the first general meeting of the Northampton Town and Benefit Society declared that 'The grand objects of the society are to improve the social, promote the moral and exalt the political condition of the unenfranchised millions' (31). Almost a century later, the chairman of the Halifax Britain's largest building society, said in one of his speeches that 'We are banded together as co-workers or missionaries in a great and noble cause. We are striving to create and foster a spirit of self-help, expressed by home-ownership, by individual endeavour, combined with the will and power to give help to others. I think the movement today constitutes one of the greatest domestic romances in the history of our country' (32). Many of the editorials in the Building Societies' Gazette (BSG) of the 1930s echo this theme.

(18) From the Building Societies Year Book for the period 1931 to 1937.

(19) Calculations from mortgage repayment tables.

(20) P.R.O., T 175/70, note by Phillips to Hopkin (12 October 1932) and Hopkin to the Chancellor (13 October 1932).

(21) A.R. Holmes and E. Green, Midland: 150 Years of Banking Business (London, 1986), p. 176.

(22) ibid.,pp. 178-9.

(23) ibid., Appendix 5, p.338. For Lloyds Bank, J.R.Winton, Lloyds Bank 1918-1969 (Oxford, 1982), p. 77. For Barclays Bank, the Distribution of Advances shown in a letter from Barclays Record Services dated 21 December 1992, to the writer.

(24) Marian Bowley, Housing and the State, 1919-44 (London, 1945), table 6, p. 278. Her figures do not agree with calculations from the mortgage instalment tables in White's, Parry's Valuation Tables (London, 1958). These give a weekly repayment on the average price of a house as used by Bowley, ,371, at 4 1/2 per cent to be 10s 11p over twenty years and 9s 8p over twenty-five years. Only over thirty years does it get near to 8s 7p at 8s 9p. There were few mortgages of thirty years granted at that time.

(25) The Economist Survey (July 1 1939), p. 11.

(26) A definition of working class in relation to working-class dwellings is to be found in Schedule XI (11) of the Housing Act 1936. It first appeared in the Housing of the Working Class Act, 1903 and is as follows: 'The expression of working class includes mechanics, artisans, labourers and others working for wages, hawkers, costermongers, persons not working for wages but working at some trade or handicraft without employing others except members of their own family, persons other than domestic servants whose income does not exceed three pounds a week'. Whilst this is interesting as an attempt to define working class, for this particular purpose it has no relevance as a definition to the other provisions of the Housing Act 1936.

(27)A. Offer, Property and Politics, 1870-1914: Landownership, Law, Ideology and Urban Development in England (Cambridge, 1981), p. 143.

(28) ibid., p 143.

(29) Mission was the word used most often by Harvey Leonard, the retired chief executive of the Alliance who was also the former president of the Building Societies' Institute. The writer conducted three interviews with Mr Leonard in January and February 1994.

(30) Illustrated Carpenter and Builder (28 February 1936), p. 572.

(31) From a pamphlet, A Century of Service, Northampton Building Society 1848-1948, privately printed by the society in 1949.

(32) Sir Edwin Hill, the then chairman of the Halifax Building Society, to the annual conference of the Building Societies in 1930. Herbert Ashworth, The Building Society Story (London, 1980), pp. 117-118.