Building Societies, the name given to societies "for the purpose of raising, by the subscriptions of the members, a stock or fund for making advances to members out of the funds of the society upon freehold, copyhold, or leasehold estate by way of mortgage," may be "either terminating or permanent" (Building Societies Act 1874, § 13). A "terminating" society is one "which by its rules is to terminate at a fixed date, or when a result specified in its rules is attained"; a "permanent" society is one "which has not by its rules any such fixed date or specified result, at which it shall terminate" (§ 5). A more popular description of these societies would be - societies by means of which every man may become "his own landlord," their main purpose being to collect together the small periodical subscriptions of a number of members, until each in his turn has been able to receive a sum sufficient to aid him materially in buying his dwelling-house. The origin and early history of these societies is not very clearly traceable.
A mention of "building clubs" in Birmingham occurs in 1795; one is known to have been established by deed in the year 1809 at Greenwich; another is said to have been founded in 1825, under the auspices of the earl of Selkirk at Kirkcudbright in Scotland, and we learn (Scratchley, On Building Societies, p. 5) that similar societies in that kingdom adopted the title of "menages."
When the Friendly Societies Act of 1834 gave effect to the wise and liberal policy of extending its benefits to societies for frugal investment, and generally to all associations having a similar legal object, several building societies were certified under it, - so many, indeed, that in 1836 a short act was passed confirming to them the privileges granted by the Friendly Societies Act, and according to them the additional privileges (very valuable at that time) of exemption from the usury laws, simplicity in forms of conveyance, power to reconvey by a mere endorsement under the hands of the trustees for the time being, and exemption from stamp duty. This act remained unaltered until 1874, when an act was passed at the instance of the building societies conferring upon them several other privileges, and relieving them of some disabilities and doubts, which had grown up from the judicial expositions of the act of 1836. It made future building societies incorporated bodies, and extended the privilege of incorporation to existing societies upon application, so that members and all who derive title through them were relieved from having to trace that title through the successive trustees of a society.
It also gave a distinct declaration to the members of entire freedom from liability to pay anything beyond the arrears due from them at the time of winding up, or the amount actually secured by their mortgage deeds. Power to borrow money was also expressly given to the societies by the act, but upon two conditions: that the limitation of liability must be made known to the lender, by being printed on the acknowledgment for the loan, and that the borrowed money must not exceed two-thirds of the amount secured by mortgage from the members, or, in a terminating society, one year's income from subscriptions. Previous to the passing of the act (or rather to the judicial decision in Laing v. Read, which the clause of the act made statutory) there had been, on the one hand, grave doubts on high legal authority whether a society could borrow money at all; while, on the other hand, many societies in order to raise funds carried on the business of deposit banks to an extent far exceeding the amounts used by them for their legitimate purpose of investment on mortgage. It enacted, that if a society borrowed more than the statute authorizes, the directors accepting the loan should be personally responsible for the excess.
By an act passed in 1894 all the Benefit Building Societies established under the act of 1836 after the year 1856 were required to become incorporated under the act of 1874.
There are, therefore, three categories of building societies: - (1) Those established before 1856, which have not been incorporated under the act of 1874 and remain under the act of 1836. (2) Those established before 1874 under the act of 1836, which have been incorporated under the act of 1874. (3) Those which have been established since the act of 1874 was passed. The first class still act by means of trustees. Of these societies there are only 62 remaining in existence, and their number cannot be increased. The second and third classes exceed 2000 in number.
The early societies were all "terminating," - consisting of a limited number of members, and coming to an end as soon as every member had received the amount agreed upon as the value of his shares. Take, as a simple typical example of the working of such a society, one the shares of which are £120 each, realizable by subscriptions of 10s. a month during 14 years. Fourteen years happens to be nearly the time in which, at 5% compound interest, a sum of money becomes doubled. Hence the present value, at the commencement of the society, of the £120 to be realized at its conclusion, or (what is the same thing) of the subscriptions of 10s. a month by which that £120 is to be raised, is £60. If such a society had issued 120 shares, the aggregate subscriptions for the first month of its existence would amount to exactly the sum required to pay one member the present value of one share. One member would accordingly receive a sum down of £60, and in order to protect the other members from loss, would execute a mortgage of his dwelling-house for ensuring the payment of the future subscription of 10s. per month until every member had in like manner obtained an advance upon his shares, or accumulated the £120 per share.
As £60 is not of itself enough to buy a house, even of the most modest kind, every member desirous of using the society for its original purpose of obtaining a dwelling-house by its means would require to take more than one share. The act of 1836 limited the amount of each share to £150, and the amount of the monthly contributions on each share to £1, but did not limit the number of shares a member might hold.