The interwar period in Britain oversaw the boom in the housing sector which resulted in the construction of a significant three million houses. In my previous article I explained how it is this boom which, amongst other factors, has been crucially attributed to post Great Depression economic recovery in Britain. The boom in housing was supported by a macroeconomic climate of cheap money, falling construction costs, increasing real incomes, and demographic changes. Renowned economic historian Stephen Broadberry has deconstructed the relative importance of each of these factors empirically. His research suggests that cheap money supporting the boom accounted for almost half of the increase in housing investment. Moreover, building societies played a crucial role in the transmission mechanism of cheap money boosting housing investment, since they had an influence over both the supply and demand of mortgage loans.
The role of building societies towards the boom in housing during the interwar period can be evidenced from the fact that from 1922 when they advanced £22.7 million to mortgagors and had total mortgage assets worth £83.7 million, they grew phenomenally and by 1938 had advanced £400 million with total mortgage assets worth £759 million. Such was the capacity of building societies to lend that even allowing for their hidden reserves, they had approximately lent out 50% of depositor funds. An important question to explore here is: how did building societies originate and what made them so successful?
Figure 1: important events relating to building societies
Building societies were a uniquely English institution, a form of self-help organisation which were formed throughout Britain in the 18th and 19th centuries to improve the lives of working class people (see Figure 1). The precursor to the building society was the local building club, a cooperative association in which working class people pooled their savings to purchase land and materials for the construction of their own homes. Once every member had been housed, the club was wound up. The building club transformed into a building society with the realisation that the entire process could be expedited if the club could become a lending institution where people could purchase houses on the regular housing market.
This realisation was promoted by the growing purchasing power of the middle and working classes in Britain during the interwar period. Growing real incomes led to a demand for an institution to invest surplus incomes in, as well as a lending institution which would fund the construction of their homes. Commercial banks sourcing their funds through short term deposits were not suited to lend on long-term mortgages. Hence this void was filled by private individuals, insurance companies, trustee savings banks and building societies. Their success can be gauged from the fact that an Economist survey conducted in 1937 showed that between 1925 and 1936, building society advances witnessed a four-fold increase from £54 million to £194 million. Moreover, the annual number of borrowers attaining a loan under £500 increased by a significant 390% during the same time period. But what made building societies so popular during the interwar period?
What made building societies so successful?
Academics have pointed to some key factors which made building societies hugely successful during the interwar period. Firstly, the organisational structure of building society was very important. Being small and community-based made members monitor each other and ensure that subscriptions were duly paid and that borrowers were properly maintaining their houses. This is also reflected in the regular stream of repayments of building society loans.