As well as being eager lenders, the building societies were anxious to attract new funds to the detriment of other traditional savings institutions. Domestic savings had grown ten-fold between 1900 and 1938 and that by the societies twelve fold. Excluding industrial assurance companies, the life companies had assets of £1,322 million in 1938, compared with £274 millions in 1903. These funds were a little less than twice the assets of the building societies in 1938. Part of their funds flowing to insurance companies were in the form of savings linked to house purchase but they were actively disengaging themselves from the business of lending for the purposes of home ownership (30).
Local authorities were also providers of mortgages, and some authorities did use their powers to borrow from the money market and lend to potential owner occupiers. The Building Societies Gazette noted in March 1937 that the South Shields Town Council were borrowing at 3.25 per cent to lend at 3.5 per cent for thirty years. The editorial comment is that ‘it differs in important respects from the practice governing our own mortgage business’ (31). There might also have been a political realisation among the local authorities that they did not have a role in the provision of mortgages as this would compete with their more idealised notions of providing better accommodation on large council estates which would be under their direct control.
In the early 1930s the building societies could see that they were faced with a problem of dealing with the large amount of deposits they were attracting. The new situation required a complete change in building society policy. Some societies favoured a restriction on the in flow of investors money, whilst retaining interest rates at comparatively high levels. Others preferred the more orthodox method of reducing interest rates to both investor and borrower. Many of the smaller or medium sized societies refused to accept deposits from what they perceived as commercial lenders who they felt would move the funds if another society offered lenders better terms, but the larger societies had developed a scale of interest payments which reflected the size of the deposit made. The Halifax had seven classes of depositors when amounts over £500 were deposited. At each level the rate of interest increased slightly. Large deposits were only handled by head office. The smaller societies had generally not developed a range of rates to differentiate between small domestic depositors and larger commercial depositors.
From the accounts of the top five societies as shown in the Building Societies Gazette for the years 1932 to 1937, it would appear that the savers were continuing to allow funds to accumulate. Table B shows there was a significant difference between the interest rates which could be earned on gilts [2.5% Consols], about 3.5 per cent and those paid by building societies of 4.5 per cent, so it was natural that the deposits with the societies would continue to grow (32).
| TABLE B — COMPARATIVE YIELDS | |||
| Year | Gilts | Building Soc | Building Society Loan Rates |
| 1931 | 4.4 | 4.6 | 5.9 |
| 1932 | 3.7 | 4.5 | 5.9 |
| 1933 | 3.4 | 4.0 | 5.6 |
| 1934 | 3.1 | 3.4 | 5.4 |
Doubtless the small investor was attracted to the building societies as he had few choices as to where he could place his savings. The smaller the deposit placed, the smaller the interest rate paid was generally the rule. The societies had negotiated a composite tax rate with the Inland Revenue that they would deduct from the investment income before it was paid to the depositor. As the rate was less than the higher tax band this had the effect of making building society deposits more attractive to high wage or salary earners. The effect of personal tax on both borrowers and lenders will be considered later in this chapter. The comparative yields and borrowing cost shown in Table B for the period indicate how attractive it was to deposit funds with building societies. Table B also shows also how profitable lending could be if the societies could find the opportunities to do so.
(30) E. Cleary, The Building Society Movement (London, 1965), p. 275, Table XXVII
(31) B.S.G. (March 1937), p. 197
(32) E. Cleary, The Building Society Movement, (London,1965), p.190, table XVIII