Mutual Building Societies

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In the UK/USA, by Tony Bryant:

"In the UK the idea of mutuals, in the form of building societies, dates from the late 18th century when groups of people got together to pool assets so that between them they could eventually buy the land, materials and other resources needed to build a house for each of them. The earliest of these were all ‘terminating societies’; so once everyone had a house the organization was wound up, with any residual funds being distributed amongst the members.

The last example of this in the UK was the First Salisbury Society, which was only dissolved in 1980. By the late 19th century, however, other forms of building society were developed, permanent ones, as places where people could invest their savings with some degree of security. One of their key roles was to act as mortgage providers, balancing the funds they held as savings against the funds they provided to lenders financing their house purchases. Their financial position was constrained far more than was the case for traditional clearing and investment banks, and this also applied to account holders so that, for instance, savers could not overdraw their accounts as was the case for most bank customers. In the US the Savings & Loans movement was a direct off-shoot of the UK building societies, but it evolved differently and ended in large-scale disaster in the 1980s and 1990s.

Building societies were initially governed by legislation for what were termed ‘friendly societies’, which included burial societies and other forms of cooperative; but during the course of the 19th century specific legislation was brought in applying to the building societies, particularly when permanent societies began to emerge. In general there was strong government support for these organizations, since they encouraged people to save, and in general provided a very cost effective service: Although it is worth noting that some of the legislation was required to deter investors looking for a fast return, often based on questionable practices. This phenomenon of investors looking for a fast return recurred in the era of de-mutualization as investors sought to open accounts in building societies and then campaigned for a majority vote for demutualization which would result in lucrative financial returns to all account holders regardless of how long they had actually held any accounts.

This has clearly been a recurring and continual source of aggravation, as Amartya Sen points out in his recent New York Review of Books article, where he notes that Adam Smith already warned about the tendency for people to ‘overspeculate’ in their incessant search for profits. In the context of pressures for demutualization of 20th century UK building societies such people were termed ‘carpetbaggers’, for Smith they were ‘prodigals and projectors’. As Sen notes, Smith was keen to advocate state regulation to protect the capital of the country from those who promoted unsound loans leading to waste and destruction.

The distinction between banks and building societies in the UK came to an end in 1986 when a new Act came into effect that allowed de-mutualization. This was not widely taken up until the 1990s, but eventually by the time the Bradford and Bingley de-mutualized in 2000, most of the larger building societies had opted for this. Moreover, prior to this many of the smaller building societies had been taken over by those that later de-mutualized; the Bradford and Bingley being something of a predatory case in point. At present the size of the mutual sector is small, both in terms of the number of organizations and their overall funds; but in 2008 there was significant growth in lending by mutual funds; although the figure is still very small in comparison with the finance sector as a whole (see CDFA—Community Development Finance Association).

Until the recent liquidity crisis, it might have seemed as if the concept of mutuality was a remnant of a bygone era, superseded by the Reaganomics and Thatcherism of the 1980s, and the wider spread of de-regulation that followed under later administrations. But with the ever-worsening credit-crunch and general economic melt-down, it is perhaps time to dust off some of the old ideas and examine them as possible alternatives; or better still, look at ways in which potential alternatives can be developed by combining lessons from the past with new possibilities from the present.

The current position, particularly with regard to the banks is somewhat ambiguous. Following the various bail-outs and rescue packages, euphemistically termed ‘TARP’ [Troubled Assets Relief Program], there is a case to be made that the recipient banks and other financial institutions are already state-owned; in some cases with the state actually holding a majority of the shares. So it is not a major leap from this de-facto position to de-jure nationalization; something advocated by various economists and politicians of note. On the other hand, there are many who are bitterly opposed to this, and advocate a continuation of private ownership. This of course includes most of the pre-bail-out shareholders, although they severely weaken their position by clamouring for compensation while seeking to retain ownership in some form; it seems as if when the going gets tough, the free-marketeers get civic-minded, but only to a limited degree.

In the light of this, calls for a form of mutuality might seem to smack of something from the 19th century, but it might also be an alternative well worth pursuing. Moreover it is possible to glimpse mutuality in some far more recent manifestations that may themselves present ways of moving forward from the current morass. Most people have heard of, if not used, Wikipedia; many use packages such as Firefox, Apache or Open Office. Even those who don’t, probably use software that itself builds on these and other open source systems.

And it is the model upon which open source is based that presents an exemplar of 21st century mutuality. In fact most people familiar with the Web will have come across another manifestation of this – Web 2.0 ." (

More Information

  1. Mutuality 2.0