The 'Code' and the Management of the Building Societies.
Both within and outside the building society movement many were critical of the manner in which the building societies acted. Looking back on the boom period in 1942, Walter Harvey said that 'They [the societies] had a greater regard for the builder-vendor than the buyer-borrower' (33). The societies were profitable organisations. They had an average levels of funds in the form of shareholders' funds/deposits and depositors' money running at a level of around £500 million during the 1930s (34). In the analytical survey in The Economist of the top 110 societies in April 1936, the post-tax profit was shown to be £16.8 million per annum after making payment of £22 million to general and number 2 reserves. The managing director of a large London society told the Committee who produced Private Enterprise Housing that 'The average income derived from the funds [the cost of interest payable, tax and management cost plus losses] employed in the societies business was equivalent to 4.455 per cent' (35). This would be around 1 per cent less than the average cost of new loans the older loans were at higher rates. The societies were very frugal with wages and expenses for staff. Branch managers were paid in the order of £450 to £500 per annum (36). Administration costs for the larger societies were comparatively low and those of the Woolwich Building Society were about 12/6 per £1,000 of assets (37). The Economist survey for 1936 shows costs were around 0.53 per cent or say 10/6 per £1,000 on average.
The societies were good profit-making organisations where the directors had very great powers. In the 1930s the Building Society Gazette did not report the resignation under strange circumstances of any director of a society (38). Given the nature of the business, fraud cannot have been unknown, but few examples are recorded in the Building Societies Gazette. Before the business was mechanised there could have been very few checks to compare the figures in the customers' passbooks, as they were kept by the depositors, and the societies' account books. This would have made fraud possible, especially as so much business was carried out through agents. But in the first eight years after 1945 the Halifax internal accounting department only found two cases of fraud, each of a minor nature (39).
The opportunities presented to the building societies to develop their businesses in the 1930s strained the building societies' relationships with each other. As early as 1930 several of the larger societies, the Metropolitan societies as they called themselves, felt it was necessary to regulate the manner in which business was conducted and a Code of Conduct was proposed. In April 1931 a delegation from the Yorkshire Association of Building Societies submitted a proposal to the National Association of Building Societies to enable 'varying practice among societies doing business with builders [to be regulated] and a uniformity of practice arrived at (40)'. These actions assisted in starting the drive for a Code of conduct. However, it proved difficult to reach agreement between the smaller societies who were serving local needs and the larger societies which were intent upon expanding throughout the country. After much discussion the final drafting of the Code, which had been worked out in a close session of the 1934 building society delegate conference at Harrogate, was agreed upon. It would contain clauses on minimum mortgage rates, maximum duration of mortgages and advances, minimum personal stakes for borrowers and restrictions on the payment of commission to agents. The delegates adopted them by an overwhelming majority 'amidst scenes of jubilation reminiscent of the signing of the Armistice in 1918' (41). It was immediately found that some of the smaller societies were losing business to some of the larger societies not conforming to certain aspects of the code. The code became binding in March 1935, after further amendment, but in April 1935 the Abbey Road and the other large London societies cut the lending rate to 4.5 per cent from the agreed rate in the code of 5 per cent on the grounds that unless they did so they would lose business to the provincial societies. Sir Harold Bellman was chairman of the Abbey Road and also chairman of the Building Societies Association, but these actions were taken without the council of the Association being advised. Bellman acted for the good of the Abbey Road rather than in the best interest of the movement (42). The resulting turmoil had the benefit of making the cost of home loans cheaper for most borrowers as the competition between the societies continued. This brought the possibility of widespread home ownership within the grasp of many sections of the working class.
The majority of the larger societies stayed in the Building Societies' Association while over two hundred of the smaller societies formed the National Association of Building Societies. The Code was seen by the smaller societies an as interference by the larger societies in the manner by which they could conduct business. These societies felt the Code was denying them the opportunity to expand by outlawing the very means by which some of the Codes sponsors had used to achieve their growth. William Hassall, the chairman of the Leek and Moorland Building Society, one of the two societies in the small town of Leek, said in his annual report in February 1937: 'Your directors felt the scheme, designed as it was to check the severe competition from the larger societies would be unworkable' (43). These differences in the movement were essentially over the amount of independence each society should have in setting its rates and levels of advances and the manner in which they could conduct their business.
The conflict would enable the consumer to benefit as societies competed for business. The different approaches to interest rates to be offered to investors led to tension between the societies in the north, particularly on the Tyneside area where there was much unemployment and distress and the where interest rates were low, and societies based in the south, especially the London ones. The southern societies were operating in comparatively prosperous areas where interest rates earned from mortgages were higher and they could draw funds away from the depressed north where rates paid were low. This poaching of depositors placed a further strain on some of the northern societies which had been effected by heavy withdrawals occasioned by unemployment. One result of this action was to put some of the smaller northern societies under pressure and make their operating costs too high as a proportion of assets. The Northern Rock Building Society amalgamated with 64 smaller societies in the northeast as a result (44). Cleary showed that an unweighed sample of societies in 1929 revealed that the average mortgage rate was 6.4 per cent for the London societies and 5.3 per cent for Northern ones. Return on shares were 4.8 per cent and 4.4 per cent (45).
Another difference between the northern and southern societies which the Code was meant to resolve was that the southern societies were accustomed to paying commissions to introducing agents, as a result they had many representatives acting on their behalf over large areas of the country. The payment of commissions by building societies was a subject which the Building Societies Act also sought to clarify. In the introduction to the Building Societies (No.2) Bill it was said by Sir James Simon the Liberal MP that, I believe that the existing practice of the building societies is to draw a sort of line across England from East to West. North of that line commissions are not paid for the introduction of mortgage business, but, South of that line a different practice prevails (46)
This Bill sought to prohibit the payment of commissions which would act as a link between the undesirable secret co-operation between a builder, not of the first class, and a building society which might be prepared to lend money to such a builder.
By comparison to the manner in which the southern societies operated, the northern societies relied more on branch offices, and could obtain funds without paying commissions as they had a loyal following in the towns which bore their names. They would pay lower amounts to depositors, and when those lenders became borrowers then they benefited also from the low rates. This discrepancy was to be one of the elements which started the bitterness and friction which was to dog the movement throughout the 1930s.
Lowering the weekly cost of meeting the purchase price of a new home was the challenge the building societies sought to tackle in order to create more business. Several societies such as the Abbey Road Building Society had been looking at the problem in the 1920s (47). The first society to formulate an acceptable solution would be able to lead the field and expand its customer base. Such expansion would help to pay for the costs of the new office buildings and mechanical administration which the societies were installing.
The Leek claims to have been the first society to install bookkeeping machines in 1926 (48). It was stated that the Burnley was the first society to completely modernise its accounting systems in 1932. The Building Society Gazette in August 1934 said that the Co-operative Building Society had installed many machines in 1933-34 so that they were able to handle 30 per cent more business with only two more clerks (49). By 1934 the Abbey Road Building Society had installed addressograph machines able to handle the task of sending dividend cheques to the 250,000 shareholders. Other machines were installed by them to assist calculating interest payments (50).
(33) ibid., p. 223.
(34) It was common practice to give a higher rate of interest on shareholders deposits as opposed to deposits funds on the basis that shareholders funds were unsecured whereas deposits from investors were secured on the assets of the society. The average rates in the mid-1930s were 2.75 per cent for deposits and 3.5 per cent for shares.
(35) p. 14, para 48.
(36) This information was gained from interviews between the writer and many former members of building societies staff. The salary depended upon the size of the branch.
(37) From an interview between the writer in January 1994 and Douglas Davenport, the former secretary of the Woolwich Building Society.
(38) A Jimmy Thomas did resign from the Co-op Permanent as President when they lost ,70,000 in 1931 on an investment in the North Eastern Railway stock. He had recommended that this share be bought by the society.
(39) Michael Cassell, Inside Nationwide:,100 Years of Co-operation (London, 1984), pp. 46-47.
(40) Fred Pay who was interviewed in February 1994 by the writer was the manager of this department.
(41) S. Price, Building Societies Their Origin and History (London, 1958), pp. 409-10.
(42) E.Cleary, The Building Society Movement (London, 1965), p. 211
(43) R. Redden, Britannia Building Society,1856-85, (London, 1986), p. 38.
(44) From an interview in January 1994 with R. Hughs, the company secretary of the Northern Rock.
(45) E.Cleary.,The Building Societies Movement (London, 1965) p.204
(46) Hansard vol. 346, col. 379.19 April 1939
(47) B.Ritchie, The Key to the Door: The Abbey National Story (London, 1990), p. 77.
(48) R. Redden, The Britannia,1856-85, (London, 1986), p. 33.
(49) B.S.G ( August 1934), p. 707.
(50) B. Ritchie, The Key to the Door: The Abbey National Story. (London, 1990), p. 79.
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