§ 10. Building and loan associations. Building and loan association is the name applied to a cooperative organization having as its purpose the collecting regularly from members of small sums which are loaned to some members for the purpose of building or paying for homes.8 The first association of this type was organized in Frankford, Pennsylvania, in 1831. It and others of its kind have made Philadelphia notable among all the larger cities as "the city of homes." The number of such associations has almost steadily increased in the United States. Pennsylvania continues to rank first in respect to amount of total assets, with Ohio a close second, and New Jersey third (though ranking first in proportion to population). Associations of this type have been hardly second in importance in America to the savings banks as institutions for savings for persons of moderate means. The number of their members (in 1920) was 4,300,000, which is about one third of that of savings banks depositors, and the amount of their assets ($2,100,000,000) is nearly one third that of the reported savings banks. But they are growing more rapidly, and their relative influence in educating and encouraging to thrift is doubtless much greater than these figures indicate. There are nearly eight thousand of them, more than three times as many as savings banks; their management is much more democratic than is that of the banks; and many of their members attend and participate in the meetings and understand how they are conducted. Moreover, the savings made through these associations are constantly passing on into houses that are fully paid for, and that continue to yield their usances and rents to their owners. Each year these associations collect from their members as dues and in repayment of loans (made to build houses) the sum of more than half a billion dollars, which is twice as much as the annual increase in the deposits of the reported savings banks.

• See Vol. I, pp. 290, 297-298, 484, and 486.

These associations are properly made subject to supervision and examination by state officials, in the manner of that exercised over banks. They have been favored by exempting the shares of members and the mortgages held by the associations from all state and municipal taxation. As the houses built or paid for are taxed, this is of course just, but it is an exception to the rule of the illogical general property tax.3

The figures here given and the description of methods apply to the "local" building and loan associations. The success of this kind led to the organization of other associations which took the name "National" building and loan associations, to carry on a business in a larger field. The number of these has always been comparatively small, and their operation is less simple, democratic, and economical than the local associations. They have had more of the nature of ordinary profit-making enterprises. They should not be confused with the local associations.

§ 11. The main features. A building and loan association is organized by a group of persons in a neighborhood, uniting to form a corporation under the laws of the state, every member to subscribe for one or more shares. The officers elected all serve without pay, excepting the secretary-treasurer, who receives a small fee for his services. All official meetings are open to all members. The shares vary in denomination from $25 to $200; the larger figure being common under the serial plan and $100 being usual under the continuous (or permanent) plan, described below. Whenever there is a sufficient sum it is lent to one of the members for the purpose of building a house. The borrower must subscribe for shares to the par value of his loan. Usually the loans made are large enough to cover a large proportion of the cost of the house, but the land on which the house stands must be free from all encumbrance, and its value gives a margin of safety to the association. Then by the method of payment of dues the debt is, from the first month, steadily reduced and the security for the loan therefore grows constantly better.

• See ch. 18, § 4.

The receipts of the association are of several kinds.

(a)   Interest is received from borrowing members, usually at the rate of 6 per cent, and from banks at a lower rate on the small working cash balances kept on deposit.

(b)   Premiums may be charged, either in the form of a higher rate of interest bid by the applicant for a loan, or in the form of additional weekly dues. Dozens of premium plans are in effect or have been tried, but the practice of charging premiums has decreased so that the total premiums now constitute less than 1 per cent of all payments from members.

(c)   Fines for delinquency also are less commonly imposed now and constitute a small fraction of 1 per cent of total payments.

(d)   Deductions are made on account of withdrawal before the maturity of these shares; under these circumstances it is usual to pay a portion but not all of the accumulated profits, sometimes a proportion increasing as the shares approach maturity.

Different plans have been and still are followed in respect to the method of issuing the shares. Under the terminating plan all the shares begin and mature at the same time (for all members that continue to the end), whereupon the association dissolves or starts anew. The chief difficulty in this plan is that the association has too few funds to lend at the beginning of its career, and a surplus of unlendable funds as it nears the maturity of the series. It is therefore necessary to encourage or to compel the withdrawal of non-borrowing members on the payment of estimated profits to date.

The better to remedy this difficulty, the serial plan was devised, by which new series of stock are issued at intervals— yearly, half-yearly, quarterly, and even oftener.

§ 12. The continuous plan. A further development is the continuous plan (usually called the permanent or the Dayton plan), by which much greater flexibility is attained in the organization. Shares of stock may be subscribed for at any time, each man's separate subscription of shares being treated as a separate series, and maturing each at its own time. There is thus, after an association has been for some time in operation, a continuous stream of new members (or new subscriptions) flowing into the association, and a continuous outflow of shareholders whose shares have matured. The maturing shares of borrowing members discharge their indebtedness to the association; the maturing shares of non-borrowing members are paid in money, or may (if the association has use for the funds) be left as an interest-bearing loan.

Additional funds are obtained when needed by issuing paid-up stock to non-borrowers. This is convenient at the beginning of an association and when the movement in building is more active than usual. But if an association has funds that cannot be loaned, outstanding paid-up stock may be called in. In practice a large part of the paid-up stock as well as of the running stock is subscribed for and held, not by large capitalists, but by persons of small means, especially "the more frugal element in the working classes." Non-borrowing members desiring to withdraw may do so at any time under certain conditions; but the laws usually require that thirty days' notice of intention to withdraw shall be given, that not more than one half of the funds received in any one month shall be paid on withdrawals, and that withdrawing shareholders shall be paid in the order of the notices of intention to withdraw. These safeguards make impossible anything like a "run" on a bank or a forced liquidation of the association.

The most intelligent and prudent workers were formerly deterred from subscribing by the fear that sickness, unemployment, or other mishap might make it impossible to keep up regular payments. Now, however, fines for late payment have been almost entirely done away with. On the other hand, extra payments may be made at any time by borrowing members, to hasten the date when their shares mature and their debt will be discharged. These privileges are possible because of the method of distributing profits, which will now be described.