GROWTH OF THE BUILDING SOCIETIES
Financing the New Home.The building societies were a uniquely English institution (1). The roots of the building societies within local communities were deep, and they had the confidence of their investors and depositors. The majority
of them were named after the towns where they had started. (2)
Building societies survived the Great War and the Depression without any failures. The Halifax placed a large advertisement in the Daily Telegraph of 18 April 1931 to make an announcement on behalf of a satisfied customer to the effect that 'I have not lost a Penny of my capital invested three years ago'. There had been setbacks to the movement, or rather to the name of the building societies which were caused by the demise of the Liberator and the Birkbeck societies in 1892 and 1911 respectively.(3) These were not true societies in the traditional manner, and it is doubtful if the building society name suffered much as a result. Members of the senior management of the Liberator and the Birkbeck went to prison, and it was clear that it had been fraud and not mismanagement which had caused the demise of these societies. In the 19th century several Sheffield building societies and freehold land societies had failed in the years between 1878 and 1888 and working class members were estimated to have lost £2 million.(4)
The societies were to grow and the larger ones consolidate their position and become the main suppliers of funds for the purposes of home buying (5). The significant rise in financial acceptability and the loss of the provincial attitudes, which many of the societies had before they moved out of head offices in their founding town into branch and agent networks, caused a social change. In the later part of the 1920s and the early 1930s, large sections of the public used the societies as a bank for deposits and as a source of finance for home ownership (6). The building societies allowed opportunities for home ownership to percolate further down the social scale, and at the same time they captured a huge position for themselves within the private and business communities. As The Economist commented in 1939, 'it is needful to carry still further the marked trend towards catering for poorer people which is already evident in the record of private building and building society finance' (7). The societies were needed by developers and their banks and by the public for house buying and more importantly as a place for their deposits.
What were the strengths of the building societies that allowed them to be seen as a safe repository for funds and a flexible source of long-term borrowing for housing purposes? The provision of finance for private housing had two aspects. On the one side the builder had to find the money to enable him to buy land and to finance work in progress. Buying the land and financing the work in progress was the role which the clearing banks were happy to undertake. It was a process which was easy to define in cash flows, and the lending and subsequent return of monies to the bank could be shown to be of a short-term nature. Building societies did sometimes grant mortgages to builders in the form of loans on work in progress; in effect they granted a mortgage to the builder on the several houses he was building as if he was an owner occupier. The Committee on the Working of the Monetary System were later to comment that 'The view of the Council of the Building Societies was that societies should confine themselves mainly to house property, and it considers ( though it is clear that some societies disagree) that loans to builders engaged in creating large numbers of houses are the business of the banks, not of the societies' (8). Those societies which did lend to builders for the development of estates justified it on the basis that it was not illegal and there was no reason why they should not do so as long as they had proper security. It also meant that they were in a good position, better than any other building society, to advance a mortgage to the purchasers of the houses when the builder had completed the development and was effecting sales (10).
On the other hand, the prospective purchaser had to find money to buy their house. This was a function the building societies could perform to a substantial degree. A variety of agencies including building societies, local authorities, the Public Works Loan Board, insurance offices, trades unions, industrial and provident societies, friendly societies, co-operative societies, private mortgagees and financiers all did play a part in lending money for buying houses in the 1920s and 1930s. Between 1919 and 1939 their total advances for housing purposes amounted to £1,575 million. Although some of these advances were for the purchase of previously-owned houses, the majority were used for the purchase of new homes (10).
Private mortgages from solicitors had been the usual way of financing the purchase of a house in Victorian times. For instance when George Cadbury developed Bournville in the 1890's he ' insisted that the undertaking should be made to pay a fair return on the capital invested' (11). In the offices of the Trust there are framed original posters which declare that Cadbury's solicitors would be willing to find up to £40,000 on mortgage at 2.5 per cent to those who would be prepared to build houses on the estate. On the smaller house Mr Cadbury would be prepared to erect the house and take a mortgage. The interest would be 3 per cent.
The schedule below illustrates how the building societies grew at the expense of the other lenders (12). Why they grew so quickly and decisively, needs to be explained.
* The Public Works Loan Board (PWLB) figure for 1926 was £1.415 million compared with £172,000 in 1931. The figures relate only to England and Wales.
Edward J. Cleary, The Building Society Movement (London, 1965), p. 282.
In the 1930s building societies acted like 'housing banks' but were mainly owned on a mutual basis for the benefit of the investors and not the shareholders. They had severe restrictions on what security they could take and on which types of property could form the basis of security for a mortgage. For example, it was difficult for them to lend on leasehold properties unless there was a long lease in existence. The loan-to-value ratios to be adopted were also conservative, and even though there was no standard set of terms and conditions under which societies could make advances it was the custom to lend no more than 70 per cent of the valuation of the property. Depositors' funds could only be deposited in approved banks or used to purchase British government securities or the equivalent. Good investments were difficult to find and the situation of the Co-operative Permanent Society was typical of the problems facing the societies at the time in that during the 1930s it was 'hard-pressed to find a suitable home for its burgeoning funds and its investments began to spread to include a range of stock which a few years before would have been unimaginable. Holdings included India 3.5 per cent and... loans to the Bedwelty Urban District Council' (13).
More importantly, the societies could only react to situations and could not instigate housing schemes or promote ones with developers except if they were one of the few terminating building societies. They could not develop houses for letting. They could not buy and sell land. Against all financial good management, they borrowed short to lend long as the majority of building society deposits are repayable on demand and the remainder within say, a three month period. It had been the custom for societies to lend at fixed rates of interest, 'this was fortunate because changes were done by hand and could be a lengthy and expensive process' (14). It was therefore easier for both parties to fix the rate of interest even though there had been one hundred interest rate changes in Treasury Bills issued between 1892 and the outbreak of war in 1914 (15). The changes were of a modest level and the societies did not feel any pressure to shadow the increases or decreases in rates. In any event Treasury Bill rates affected the money market rates rather than the domestic rate paid to small depositors. Therefore the societies accepted a position where most mortgages up to 1930 were at fixed interest rates which did not allow for the increase in rates of interest (16). The banks would have been unwilling to accept the inflexibility of such a situation even though it would have been seen as common practice within the market place for home loans.
For all their inefficiencies the building society movement, the friendly societies and other lenders on property made it possible for just under three million houses to be built for sale in the period between the two great wars. This enabled the re-housing in good modern accommodation of probably nine to ten million people. Of the houses built by private enterprise, 79% were smaller houses with a ratable value of under ,26 and a purchase price of £500 to £700, well within the capacity of the lower-paid worker to buy if his income was regular (17). The P.E.P.(Political and Economic Planning) Industries Group thought that 'their contribution has been mainly in the artisan and lower middle-class type of accommodation' (18). Bellman said 'of those who made the boom possible I should judge that about half the purchasers were black-coated workers and the other half better paid artisans, for the boom was essentially in houses of moderate size largely within the price range of £500 to £700. The average monthly payments in a large London building society were £3 16s 8p for clerks and £3 4s 10p for artisans, these figures relate to advances made in 1936.' (19)
If there had not have been bitter regional and personal rivalry between various societies, the housing boom and the availability of mortgages to a very wide range of people might not have been possible. The unusual operating nature of the societies is important. They were not joint-stock companies nor trading companies in the accepted sense. None was required to show a profit or make a distribution to its shareholders; the societies accounts for the period would reflect their low operating costs and substantial reserves. They believed that what they were doing was for the general good. As many of the societies had their roots in the free church and Methodist movements there was a crusading atmosphere within the building societies movement itself. Without exception those people whom the writer interviewed in 1993 and 1994, and who had worked in the industry contrasted the prevailing social responsibility in the 1930s when there was the perceived need to serve the public, with the excesses and the profit motive of the building societies today. What the societies saw as social responsibility was also social paternalism.
The societies were well respected locally in the communities which bore their names but they were not as close to the government as the banks. It was only in September 1957 that the Governor of the Bank of England first invited the Chairman of the Building Societies' Association to the Bank to discuss the circumstances which led to the increase in the bank rate. Since that time a representative from the building societies and the Bank of England have met informally once a month (20).
At the beginning of the 1930s there was no tradition of commercial management, active publicity or keen competition within the movement. Each building society was an independent economic unit responsible for the conduct of its own affairs. Bellman said that the societies had an ' individualistic approach to business...each society having regard only to what it may be pleased to call its own interest' (21).
The societies operated within the framework of the existing law, mainly the Building Societies' Act of 1874 as amended by the Building Societies' Act of 1894 (22). Corporate status was provided by the Act of 1874, drawn on the recommendations of a Royal Commission which had reported in 1872. Under this Act members gained limited liability while the society itself rather than its trustees could now hold deeds and stand security for loans. Permanent societies were permitted to allocate and issue shares like modern ordinary shares rather than subscription shares which were issued as a result of long-term savings in the building societies. Investment of surplus funds was restricted to government securities. No direct investment was allowed in land or buildings except for business use. Fuller accounts from the societies were required and the government was given regulatory powers. The sound basis of the Acts is illustrated not only by the survival of the building society from that time but by the undoubted confidence the societies have been able to inspire. The Chief Registrar of Friendly Societies in his annual report in 1974 said 'The recent Financial Services Act had the effect of deregulating building societies, it was only then that serious mistakes were made by the societies' (23).
The excesses of the building boom and the unease expressed in Parliament about the close relationship between the builders and the building societies led to the passing of the Building Societies' Act of 1939 (24). This would regulate matters and put into statute many of the provisions of the Building Societies' Association code of conduct which the societies themselves had been unable to enforce. It also made other changes to the manner in which the societies operated. For example, it became impossible for one solicitor to represent both sides. The common practice was that the building society's solicitor would be used by the society and the buyer and often the seller too, enabling the speedy processing of the building society application forms and the issue of a Land Registry certificate. More importantly the 1939 Act made it very difficult for the societies to accept collateral security, and therefore the builders' 'pool' method of arranging addition security for the purchaser was ended. The operation of the builders' 'pool' will be discussed later. The main debate on the second reading of the Bill concentrated on the standards to which houses were being built and whether or not there should be some guarantee of quality given to the purchaser by the builder or the building society (25).
Before 1931 the rates paid to depositors and borrowers varied very little between one society and another. The building societies did not show any signs of competing with each other. They had operated in a cosy world since their formation and especially in the period after 1919 before the housing boom of the 1930s. They had interlinking relationships with landowners and builders/developers through common directors. They distributed largesse to local accountants, solicitors, bank managers and surveyors in the form of instructions and commissions on deposits received and clients introduced. It was almost impossible for an outside shareholder or depositor to have any say in the management of the society. As the Committee on the Working of the Monetary System was to say in 1959; ' The societies are corporate bodies...are "mutual" rather than "commercial" in their nature. The word "share" has in this movement a different meaning from ordinary usage in the context of a joint stock company'. The Committee described a building society as 'primarily a promoter of thrift and of home ownership...they have social and economic importance' (26).
The close relationship at board level between the building societies and the builders was seen to be normal business practice at the time (27). After the war Aneurin Bevan attacked the societies as '"voracious money-lenders", supporting speculative house builders and encouraging people to take on mortgages that would turn into "gravestones(sic) around their necks"' (28). That this cosy relationship operated against the best interests of the house buyer was a view widely held; in the second reading of the Building Societies' Bill in 1939, Sir John Simon on behalf of the Conservative Government said that 'Clause 6 of the Bill is to guard against the danger of a society and a builder operating in league with one and other (Hon Members, they often do) which must be undesirable from the borrowers point of view' (29).
It was the usual practice for the directors of the societies to be paid 'valuation' fees in respect of the advances to be made by the society. Major J.Milner a Labour MP said in the debate on the second reading of the Building Societies' Bill, 'that I do not think it is really the function of directors of a lending institution to make valuations of property in respect of which in another capacity they will have to decide in regard to a loan' (30). These fees would have been in the region of ten shillings per property, plus expenses in addition to the low director's fees of say ,50 to ,100 per year. All that was required from the directors was to mark the application forms either "OK" or "A1". No further information was required. It was not considered necessary for the directors to have had any valuation experience when they performed such a role for the society (32). Often the directors were the only persons within the society to have cars and who therefore could carry out site visits and inspections (33). Where surveyors were used by the building society they too were under some pressure to conduct their business as quickly as possible so that the society might conclude the transaction. In the debate on the second reading of the Building Societies Bill, Miss Ellen Wilkinson a Labour MP said, quoting from an architect that 'The trouble is that many surveyors employed by building societies are not specialists in house construction;...as they are dependent as a class on the builder rather than the purchaser. Their tendency is to help the builder to sell his house and not to help the purchaser to get a good well-built house' (34).
In spite of their short-comings what the building societies achieved in the 1930s was significant, for they persuaded several millions of people who were hourly paid and who perhaps thought, financially, no longer than a week ahead, to undertake a regular commitment for up to twenty-five or even thirty years. Speaking in 1937 Sir Enoch Hill estimated that since 1919, ten million people had been helped by the building societies to provide accommodation for themselves (35). There was a further declaration of the good works carried out by the building societies in helping to re-house people in the message of congratulation in 1939 to the Minister of Housing by George V on the completion of the four millionth house built in England and Wales since 1918 (36). More significantly,the building societies 'got down to the business of housing the low-paid classes' (37).
The building societies mobilised and canalised the money of all classes, merged it with the surplus funds of solicitors, societies, churches, clubs and companies and made it available to wage and salary earners who were willing and sometimes not even able to undertake the purchase of a house. Most house buyers did manage to keep up their repayments and The Economist survey of the top 108 building societies shows that only 319 houses had been repossessed in 1938 as opposed to 317 for 1935 and 104 for 1925 (38).
During the 1930s larger depositors were not welcome as the societies did not wish to become commercial deposit takers. There was a realisation by the societies that some large commercial depositors were apt to treat deposits with the societies on a short term basis. Several societies, especially the smaller ones, would not accept deposits of a size considered substantial so as to protect against circumstances where the withdrawal might come at a time difficult for them to meet their obligations. The larger societies could afford to take larger deposits, owing to the size of their asset base (39).
(1) There were a few societies in Scotland and Wales and around Belfast but they were more for deposit taking than mortgage granting.
(2) A few building societies used general names, such as the National, Globe, Planet and Northern Rock.
(3)The Birkbeck was a building society in name only as its mortgage book was only ,750,000 out of ,12 million of assets. The Liberator had abandoned mortgage business long before its collapse and was functioning as a venture capital bank.
(4) S. Pollard, A History of Labour in Sheffield (Liverpool, 1959), p.104.
(5) There are many statistics to show the change in size, but the most impressive is the movement from 1910 to 1940 where the assets went from ,76 million to ,756 millions and the numbers of societies shrunk from, 952 to 723. See the annual reports of the Chief Registrar of Friendly Societies.
(6) Depositors have always exceeded borrowers by a ratio of two to one.
(7) The Economist (July 1 1939), p 8.
(8) Committee on the Working of the Monetary System. Cmnd 827, 1959, Vol XV11, para 289.
(9) From conversations with former society employees. The close relationship between builders and the societies made this form of financing possible. The writer was advised in January 1994 by Harvey Leonard a former chairman of the Brighton and Sussex Building Society that they had lent to a builder in respect of an estate in Nottingham. Work in progress had be financed against architects' certificates and when eventually the only director who had a car went to visit he found that no work had been put in hand.
(10) Figures do not distinguish between the amounts lent on new and on old homes.
(11) A Bournville Village Trust Publication,The Bournville Village Trust 1900-1955 (Birmingham, 1956), p.14.
(12) E. Cleary, The Building Society Movement (London,1965), p. 282.
(13) M. Cassell, Inside Nationwide: One Hundred Years of Co-operation (London, 1984), p. 46.
(14) Letter of 3 February 1994 from Charles Morgan to the writer. Morgan was a senior executive with the Bristol and West Building Society, which he joined in 1932.
(15) B. Mitchell and P. Deane, Abstract of British Historical Statistics (Cambridge,1962), pp. 458-59.
(16) It had been the custom of many northern societies to charge fixed rates; they also included a common clause in the mortgage document allowing them demand repayment upon six months notice. They could only in practice raise the rate of interest by threatening to demand the repayment of the loan. A situation brought about by local custom and the fact that for a period between 1859 and 1914 the spread of interest rates had been between 4 and 5 per cent.
(17) Marian Bowley, The British Building Industry: Four Studies in Response and Resistance to Change (Cambridge, 1966),p.366, Table VIII. Bowley shows that 2,877,000 houses were built by private enterprise, 702,000 under £13 RV and 1,584,000 between £14 and £26 RV.
(18) P.E.P.Housing England (London, 1934), p.70.
(19) H.Bellman,Capital, Confidence and the Community,(London, 1938), p. 60.
(20) Committee on the Working of the Monetary System, Cmnd 827,1959, Vol XV11, para 296.
(21) BSG (June 1934), p. 485.
(22) Building Societies Act 1894, 57 & 58 Vict, Ch 47.
(23) The Annual Report of the Chief Registrar of Friendly Societies, 1974, p. 5.
(24) The Building Societies Act 1939, 2 and 3 Geo 6, Ch 55.
(25) At one point the Attorney General had to remind the House that the points they were debating were outside the scope of the Building Societies' Bill. Bill. Hansard 346, col. 459 and 451.
(26) Committee on the Working of the Monetary System, 1959, Cmnd 827, paras, 285-286.
(27) The obituaries in the BSG and the Chartered Surveyor make interesting reading, as they record the interlinking directorships which existed between the societies and local businessmen. It is not unusual to find that builders, estate agents and developers were on the boards in prominent positions. The Halifax was an exception. Harold Bellman, the chairman of the Abbey was a director of Taylor Woodrow, and at the time of the flotation of Taylor Woodrow in 1935 Arthur Collins of the Abbey was the chairman. F. Taylor was an executive of John Laing and a director of the Woolwich, J. Stephens and R. Curring were estate agents who were on the board of the Leek and Westborne Grove and G. Clarke was an estate agent and director of the Temperance Building Society.
(28) R. Redden, Britannia Building Society (London, 1986), p. 51.
(29) Hansard 346, col. 404.
(30) Ibid., col. 403.
(31) From a letter to the writer of 19 January 1994 from A. Woolnough, former deputy chief surveyor of the Anglian and general manager of the Nationwide.
(32) From conversations in January 1994 between the writer and former directors of the Woolwich, notably Douglas Davenport and George Lee and Harry Tees from the Bristol and West. The Woolwich eventually employed their own qualified staff to carry out this work and made the loss of income up to the directors in other ways.
(33) In the early days and up to the 1920 inspections of property for the Eastern Counties Building Society were carried out by a director on a horse. From an interview in January 1994 with H. Farnish former deputy general manager of the society.
(34) Hansard 346, col.395.
(35) BSG (March 1939), p. 185.
(36) BSG (June 1939), p. 497. This would include local authority housing.
(37) From a speech in 1938 by William Hassall, vice-chairman of the Building Societies Federation to the national conference. R. Redden, The Britannia,1856-1985 (London,1986), p. 38.
(38) The Economist (July 1 1939), p.11.
(39) From conversations between the writer and Leonard Harvey in January 1994.