The earlier formed societies (in London at least) did not usually adopt the title "Building Society"; or they added to it some further descriptive title, as "Accumulating Fund," "Savings Fund," or "Investment Association." Several are described as "Societies for obtaining freehold property," or simply as "Mutual Associations," or "Societies of Equality." The building societies in Scotland are mostly called "Property Investment," or "Economic." Although the term "Benefit Building Society" occurs in the title to the act of 1836, it was not till 1849 that it became in England the sole distinctive name of these societies; and it cannot be said to be a happy description of them, for as ordinarily constituted they undertake no building operations whatever, and merely advance money to their members to enable them to build or to buy dwelling-houses or land.
The name "Building Society," too, leaves wholly out of sight the important functions these societies fulfil as means of investment of small savings. The act of 1836 defined them as societies to enable every member to receive the amount or value of a share or shares to erect or purchase a dwelling-house, etc., but a member who did not desire to erect or purchase a dwelling-house might still receive out of the funds of the society the amount or value of his shares, improved by the payments of interest made by those to whom shares had been advanced.
About 1846 an important modification of the system of these societies was introduced, by the invention of the "permanent" plan, which was adopted by a great number of the societies established after that date. It was seen that these societies really consist of two classes of members; that those who do not care to have, or have not yet received, an advance upon mortgage security are mere investors, and that it matters little when they commence investing, or to what amount; while those to whom advances have been made are really debtors to the society, and arrangements for enabling them to pay off their debt in various terms of years, according to their convenience, would be of advantage both to themselves and the society. By permitting members to enter at any time without back-payment, and by granting advances for any term of years agreed upon, a continuous inflow of funds, and a continuous means of profitable investment of them, would be secured. The interest of each member in the society would terminate when his share was realized, or his advance paid off, but the society would continue with the accruing subscriptions of other members employed in making other advances.
Under this system building societies largely increased and developed. The royal commissioners who inquired into the subject in 1872 estimated the total assets of the societies in 1870 at 17 millions, and their annual income at 11 millions. The more complete returns, afterwards obtained, indicate that this was an under-estimate.
A variety of the terminating class of societies met at one time with considerable favour under the name of "Starr Bowkett" or "mutual" societies, of which more than a thousand were established. They differed from the typical society above described, in the contribution of a member who had not received an advance being much smaller, while the amount of the advance was much larger, and it was made without any calculation of interest. Thus a society issued, say, 500 shares, on which the contributions were to be 1s. 3d. per week, and, as soon as a sum of £300 accumulated allotted it by ballot to one of the shareholders, on condition that he was to repay it without interest by instalments in 10 or 12&FRAC12; years, and at the same time to keep up his share-contributions. The fortunate recipient of the appropriation was at liberty to sell it, and frequently did so at a profit; but (except from fines) no profit whatever was earned by those who did not succeed in getting an appropriation, and as the number of members successful in the ballot must necessarily be small in the earlier years of the society, the others frequently became discontented and retired. These societies could not borrow money, for as they received no interest they could not pay any.
The plan was afterwards modified by granting the appropriations alternately by ballot and sale, so that by the premiums paid on the sales (which are the same in effect as payments of interest on the amount actually advanced) profits might be earned for the investing members. The formation of societies of this class ceased on the passing of the act of 1894, by which balloting for advances was prohibited in societies thereafter established. A further modification of the "mutual" plan was to make all the appropriations by sale. The effect of this was to bring the mutual society back to the ordinary form; for it amounts to precisely the same thing for a man to pay 10s. a month on a loan of £60 for 14 years, as for him to borrow a nominal sum of £84 for the same period, repayable in the same manner, but to allow £24 off the loan as a "bidding" at the sale. The only difference between the two classes of societies is that the interest which the member pays who bids for his advance depends on the amount of competition at the bidding, and is not fixed by a rule of the society.
For several years the progress of building societies in general was steady, but there were not wanting signs that their prosperity was unsubstantial. A practice of receiving deposits repayable at call had sprung up, which must lead to embarrassment where the funds are invested in loans repayable during a long term of years. It was surmised, if not actually known, that many societies had large amounts of property on their hands, which had been reduced into possession in consequence of the default of borrowers in paying their instalments. A practice had also grown up of establishing mushroom societies, which did little more than pay fees to the promoters. The vicious system of trafficking in advances that had been awarded by ballot, near akin to gambling, prevailed in many societies. These signs of weakness had been observed by the well-informed, and the disastrous failure of a large society incorporated under the act of 1874, the Liberator, which had in fact long ceased to do any genuine building society business, hastened the crisis.