Societies that were built to dissolve

A terminating building society is one of the neatest financial devices ever assembled by people with no financial training. A fixed group of members subscribed a fixed monthly sum. When the accumulated fund reached the cost of one house, it was advanced to one member, who then continued subscribing and additionally repaid the advance. The process repeated until every member had been advanced, at which point the society had done what it was formed to do and was wound up.

Why the design is so clean

Because it ends, a terminating society never has to answer the questions that make financial institutions complicated. There is no reserve to calculate, because there are no obligations beyond the last advance. There is no question of what a member's share is worth on exit, because in principle nobody exits. There is no maturity mismatch, because the liabilities and the assets run to the same horizon by construction. It is a closed system with a known end date, which is the financial equivalent of a problem with a clean solution.

It also distributes a specific and unavoidable unfairness in the open. Someone must be housed first and someone last, and the difference between those two positions is years of rent. Societies resolved this by ballot, by auction, by seniority, or by some combination, and the choice reveals a great deal about the group. A ballot treats the advantage as luck to be shared; an auction turns it into a price and returns the proceeds to the fund; seniority converts it into a reward for having joined early.

The break with the original design

The permanent society emerged when societies began accepting subscriptions from members who did not want a house at all, but wanted a return on their savings. That single change transforms the institution. It now has two distinct classes of member with opposed interests: borrowers, who want the rate charged to be low, and investors, who want the rate paid to be high. It acquires liabilities that may be withdrawn on notice, funding assets that run for decades. It needs a reserve, because it no longer has an end date at which everything nets to zero.

In other words, the permanent society is a bank in every respect that matters, arrived at by increments from something that was not a bank at all. Much of the later regulatory history of these bodies is an attempt to make that fact safe: rules about what proportion of funds may be borrowed rather than subscribed, what may be lent against, how much must be held back, and how quickly investors may take their money out.

What the local records show

Building society records are unusually legible because the transactions are large and few. A single society's advance book will name the streets it lent on, and the concentration is typically extreme: a society formed among the workers of one trade in one district lends almost entirely within walking distance of its meeting room. This is prudence rather than parochialism. The members could physically inspect the security, and knew whether the buyer was reliable.

It also produces the characteristic risk of the form, which is that the society's assets and its members' livelihoods depend on the same local economy. When the trade that supported the membership contracted, subscriptions and property values fell together, and the society discovered that its diversification was nominal. The permanent societies' later geographic spread was, among other things, a response to exactly this.