Private enterprise socialism

A few years ago I blogged about building societies and a comment from Ryan Peter has reminded me that there probably isn't anyone under 30 in South Africa who knows what building societies are (or were, since I don't think there are any left in South Africa). Building society eats building society | Khanya:

Being a 30 year old my exposure to building societies was only when I was considerably young, and they (Perm, Allied) just remind me of stale smoke and bad decor.

But in the past week or so I've started to do some research on distributism and building societies have come up. It's garnered my interest, the idea sounds brilliant. Am I right in saying there are NO building societies in SA or is there one you know of? Who do you bank with, if I may ask?

So perhaps I should explain.

Building Societies (along with mutual insurance societies) were a form of private-enterprise socialism that flourished in South Africa and elsewhere in the world until the 1980s, when the Reagan-Thatcher privatisation mania killed them off. And if people under 30 don't know what building societies were, most people under 40 probably don't know what socialism was (and is). All they have ever heard of is the Marxist-Leninist version of socialism, in which the state owns and operates the means of production, distribution and exchange. But not all socialism is Marxist, and building societies and mutual insurance societies were examples of non-Marxian socialism in action.

Today the only remnants of such things that we can see around us are stokvels, which operate on the same principle, though usually on a much smaller scale. The theory behind all socialism, state socialism and private enterprise socialism, is that cooperation is a better principle for ordering economic activity than competition.

The basic purpose of building societies was to provide affordable housing for the masses.

Originally there were two kinds of building societies: temporary and permanent.

A temporary building society would have a fixed number of members, and once it was established no one else could join.

If, say, there were 20 people who needed houses, but could not afford to build or buy them — it would take them 20 years to save enough money to buy a house, and by the time they had saved the necessary amounf, the price of houses would have risen beyond their reach. But if they pooled their savings, within a year they would have enough to build a house for one person, and that person could be chosen by lot, and so only one of the twenty would have to wait 20 years for a house.

But this was too much the luck of the draw, and so permanent building societies were established. They would have an indefinite number of members, and anyone could join. But there was the same principle: the pooled savings of a lot of people could enable people to build houses. And that's the same principle that lies behind stokvels too, though stokvels are not necessarily about houses but about other things as well.  You can read more about the theory of building societies here, and about stokvels here.

In the 1970s there were about five big building societies in South Africa, with branches in most parts of the country, and several smaller ones that were more local in scope. The big ones were the United Building Society (UBS), the South African Permanent Building Society (The Perm), the Natal Building Society (the NBS), the Allied Building Society and the Johannesburg Building Society. The last two combined, leaving four.

In many ways they operated like banks, in that they took deposits from the general public, on which they paid interest, and lent the money in the form of mortgage loans at higher interest. The difference in the rates of interest covered the cost of administration — staff salaries, offices and equipment etc.

Anyone could walk into a building society and open a savings account with R1.00. The interest rate was fairly low, though it fluctuated according to economic conditions, but at least you got your interest and it did accumulate at a rate of 2-3 percent. There were no bank charges. I repeat, there were no bank charges.

Then there were subscription shares. You could pay R1.00 (or more) a month into a subscription share account (the money could be transferred from your savings account free of charge), for a minimum period of 3 years. I think the maximum was 20 years. After 3 years you would have R36.00 plus interest. Or more, if you paid more. You could use that to save to buy something, or for a holiday or whatever.

Then there were paid-up shares, which came in two varieties: taxable and tax-free. One share cost R10.00, but you could buy more if you wanted more. Holding paid-up shares made you a member (and not just a depositor) and entitled you to attend and vote at the AGM of the Society. Paid up shares paid dividends, not just interest.

The effect of this was (or could be) that building societies enabled the poor to save.

Now the poor can't save — their money is eaten up in bank charges. The poor have no chance of becoming shareholders in commercial banks. But they could own paid-up shares in building societies. They could save their money and see it grow.

Buiolding societies also made it easy to manage your money.

When I got married my wife and I opened a joint savings account at a building society. We could both deposit in it, and either of us could sign withdrawal slips. The building societies were computerised in the 1960s, and each account had a savings passbook. When you went along to the branch and deposited or withdrew money, the teller stuck your passbook in a machine which printed the amount of the deposit or withdrawal and the resulting balance. There were none of these silly cards, which make it impossible for you to know how much money you have or where it went.

So we put our housekeeping money in there, and if we went shopping we would draw out what we needed.

In the church people sometimes gave me money for things. A donation, a gift, or, if there was a funeral, the undertakers would slip one a cheque (calculated as part of their fees, of course). I had another savings account for such things, so I could keep it separate from my own money. It didn't cost anything, but was a discretionary fund, which I could use to help poor people or various good causes. You can't do that these days. Opening a savings account for accumulating money for such purposes is just pouring money down the drain of the banking system to aid the rich, not the poor. I kept my discrtionary fund account at a different building society, so I wouldn't be tempted to make use of it when I went for my normal financial transactions.

So we had several savings accounts for various purposes, sometimes with automatic transfers from one to another, soch as regular monthly transfers to the joint housekeeping account.  Before I was married I lived in a commune and we did the same thing — had a savings account to which all members, temporary or permanent, contributed, and from which three of the permanent members could withdraw money for shopping.

I've gone into this kind of detail about how it worked for the benefit of those under 30 who, if they have ever seen a building society, can probably hardly remember it.

Oh, and one more thing. There were also special savings accounts. There was a basic one that paid higher interest, provided you kept a minimum balance in it. And there was another one for first-time home buyers. You could not withdraw from it except once. It was to enable people to save money for the deposit on a house. When you finally withdrew it, the government would add a 2% subsidy over and above the accumulated interest.

The building societies were very useful institutions, though they could have been even more useful, if it had not been for apartheid.

The building societies were basically savings and loan instiutions. They pooled the savings of people to enable people to have money to build houses. But black could benefit only from the savings side, not from the loan side. That was because in  most places black people could not own freehold houses. In the urban areas they could not own houses because, according to the aparheid theory, they were merely temporary sojourners there, and their permanent homes were in the "homelands", to which they could be sent back at any time by the apartheid bureaucracy. And in the homelands there was no freehold tenure either — people had "permission to occupy" that was granted by the chief.

So what happened to the building societies?

In part the were victims of the Zeitgeist of the Reagan-Thatcher years, the 1980s. The high-flying risk-taking entrepreneur became the hero of the age. And the dull as ditchwater Clark Kents who ran the building societies had a yen to become financial supermen.

But building societies didn't really lend themselves to that kind of activity. They were dull. It was one of their good points. They lent people money for one thing only — to build or buy houses, and the house itself was the security for the loan. Building societies didn't lend themselves to the kind of situation where wannabe financial high flyers could lose hundreds of millions of rands belonging to the poor.

So the building socity executives decided that the building societies must demutualise and become commercial banks, with no restrictions on what they could lend money for. They conned the members of the societies into voting for the scheme by saying that they would get a bonus of "free shares" — though the "free shares" was just their own money anyway. So in 1987 all the big building societies became commercial banks, or were absorbed by commercial banks, and introduced fat bank charges on savings accounts, so there isn't a hope of hell of saving things any more.

There was also another, and much less publicised, side to this.

Around the time that the building societies were demutualising and turning themselves into commercial loan companies the National Party government was beginning to take a few tentative steps in reforming the apartheid system. One of the steps in that reform process was allowing black people to have freehold in urban areas. So just at the point where black people might have been able to benefit from the loan side of the building society system, the financial wizards waved their magic wands to make the whole thing disappear, or at least to make it just as inaccessible as it was before.

So the poor can't use their savings to build houses. And they find it much harder to accumulate savings than ever before.

Ryan Peter also asked where I bank.

Well, that's a long story, but since I'm telling stories, I might as well tell that one.

When I was a student in the UK I had a post office savings account. But banks liked to woo students, and offered student accounts with low or no bank charges, so I opened one with Barclays Bank in Durham. It was convenient to be able to pay for some things by cheque. On returning to South Africa I did the same thing — opened an account with Barclays Bank, since it was part of the same group where I had my English account. Two weeks after I had opened it, I was summoned by the branch manager to go and see him. Or rather by his secretary, who was very rude about it, peremptorily demanded that I must drop everything and go and see him now. Tomorrow, or the next time I happened to be in town wouldn't do.

I got there and the manager was very rude, and said I had an unauthorised overdraft. I asked him to show me where it was overdrawn. He called for the statements, while I waited in his office. I hadn't seen a statement, since the account was too new. He showed me the statement, and I saw that every payment I had made had been doubled. Each withdrawal was dupicated. I pointed it out to him. It was their problem, they should have fixed it, and then they wouldn't have had to phone me and wasted my time in going to see them. I might have expected an apology for their wasting of my time, but no, he dismissed me with a lecture on the importance of not overdrawing my account (which I had not done).

I considered closing the account, but then moved to Windhoek, and thought that maybe the branch there would be better. But then they had a big campaign of collecting money for the "boys on the border" who were protecting us from the "terrorist threat". I didn't fancy my bank playing politics like that, so some friends and I decided to transfer our accounts. But we went to another bank, and they were doing something similar. The one bank that wasn't playing such a game was the French Bank in Southern Africa. So we transferred our accounts there. I was quite satisfied with their service, and so when I was forcibly removed back to Durban (my putative "homeland") by the government, I transferred my account to the local branch of the French Bank, and was satisfied with their service too. I didn't use it much (most of my money was in the building society) but it was convenient for the odd payment by cheque.

Then we moved to Utrecht, and there was no branch of the French Bank there, and not even in neighbouring Newcastle. There were just two bansk, Barclays and Standard. After my bad experiences with Barclays, I used the Standard Bank. There weren't any building societies in Utrecht either. It was Ok, until we had to go into the bank in Newcastle. The Standard Bank, for some reason known only to themselves and their architect, built their new branches on the mezzanine floor of  buildings, accessible only by escalator. Have you ever tried to get a baby in a pram or push chair up and down an escalator? Don't try. We'd ask one of the shopkeepers on the ground floor to babysit while we went to the bank. I think there are now laws about disabled access, but there weren't back then. Wheelchairs would be just as awkward as prams, if not more so.

When we bought our house we had a mortgage with the Allied Building Society. But then when the building societies went commercial, we transferred it to the Standard Bank. The Allied (now ABSA) asked why. We told them: we had taken the mortgage with them because they were a building society. Since they were now a commercial bank, and we already banked with another commercial bank, and there were no other building societies, we would transfer it to the bank we used for our other business. It was easier to do business with one bank than with two.

Everyone said you should pay off your mortgage as quickly as possible, to reduce the amount of interest you pay. But not the Standard Bank. They went on charging us an "administration fee" for the next seven years. Paying off your mortgage early was an incredibly difficult thing to do. Their sloghan claimed that they made banking "simpler, better, faster", but in fact they were inspired and motivated to make it more involved rather than simpler. When we were in Utrecht, we could go and see the manager of the branch and he would sort it out. Now you go and see a jobsworth who says its the responsibility of another jobsworth in the head office who remains perpetually incommunicado.

I much preferred the days of the building societies, when everything was simpler, better, faster.