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Published online by Cambridge University Press: 13 December 2011
In discussions of the history of real estate markets a key role clearly must be assigned to financial institutions, yet our knowledge of their various structures, particularly before the late nineteenth century, remains sketchy. One organization created to facilitate real estate purchases in the absence of other institutional sources of mortgage loans was the building society, either permanent or terminating. This article gathers together the information available about terminating building societies in mid-nineteenth century Quebec City. After an explanation of the societies' objectives and regulations, the article examines the difficulties that these societies faced as a result of general economic fluctuations and of the changing desires of members, who often wished to use the societies to place savings at interest rather than for home purchase.
1 Two studies discuss early building societies in Upper Canada (Ontario): Philip Creighton, “Terminating Building Societies; The First Cycle” (mimeographed, n.d.) provides a survey of early societies and interprets their accounting and aspects of their operations, based primarily on the Toronto Building Society; Neufeld, E., The Financial System of Canada: Its Growth and Development (Toronto, 1972)Google Scholar bases his brief discussion on histories of the Canada Permanent Mortgage Corporation and the Lambton Loan and Investment Company both of which began as terminating building societies in Upper Canada.
2 Data on port activity varies somewhat among sources, although the time-pattern is the same. The figures tor ships entering the port and timber shipped to the merchants of Quebec were privately compiled and published in an annual circular by Forsvth and Bell, leading timber merchants of Quebec City. The shipbuilding data are official data from various Canadian and British sources. We compiled the foreclosures data from the Canada Gazette.
3 These figures are the populations reported for the city and the county of Quebec. Canada, Census of Canada, 1870–71; Censuses of Canada, 1665 to 1871, vol. 4 (Ottawa, 1874).
4 “The Quebec Building Society,” Quebec Morning Chronicle, 21 Jan. 1863.
5 Price, S. J., building Societies: Their Origin and History (London, 1958).Google Scholar In November 1869 one authority listed fifty-two operating societies organized between 1859 and 1869. “Tabular View of the Position of Terminable Building Societies,” Building Societies Gazette, Nov. 1869, 170–71. By 1871 all of the societies in London were permanent, but the terminating form was preferred in small towns and some cities like Liverpool. United Kingdom, First Report of the Commissioners Appointed to Inquire into Friendly and Benefit Building Societies (London, 1871), 7, 85, 120. As late as 1894 an attempt was made to launch the Building Societies Review as the “Organ of Terminating Building Societies,” but apparently it published only two issues, February and March 1894.
6 The Port Sarnia Building Society was established in 1844, before relevant legislation was passed. Neufeld, Financial System of Canada, 176. The Montreal Building Society was established under its own act (8 Vic, c. 94), those in Canada West under an 1846 act (9 Vic, c. 90), and those in Canada East under an 1849 act (12 Vic c. 57). In 1868 the Canadian Monetary Times reported that “Some institutions still conduct their affairs on … (the terminating) … principle …,” but that this type of institution was “fading away.” “Building Societies,” 27 Feb. 1868, 250.
7 “The Chief Object of Building Societies,” Building Societies Gazette, June 1870, 1.
8 Some British evidence suggests that building societies considered house construction to be inherently speculative, preferring instead to finance the purchase of existing properties, the value of which could be more accurately ascertained. United Kingdom, First Report, 5, 9. The reasons for the Quebec preference for financial intermediation are not known. The construction of houses would have involved complex problems of land assembly, staffing, organization, and standardization if any scale economies were to be achieved. Operation as a financial intermediary, financing some construction but primarily the acquisition of existing properties, must have seemed much more cost effective. Moreover, some important members clearly had another agenda, emphasizing commercial rather than residential property.
9 Scratchley, A., Industrial Investment and Emigration, Being a Treatise on Benefit Building Societies and Tontines and on the General Principles of Associations for land Investment and Colonization (London, 1857), 60.Google Scholar
10 In Britain where the law specified a maximum share value of £150 and a maximum monthly installment of 20 shillings, 10 shillings on a £120 share appears to have been common. Canadian laws set maximums of £100 and 20 shillings. For Upper Canada Creighton reports a range similar to that among the Quebec Societies, with 10 shillings on £100 common. Cf. United Kingdom, 6&7 Wm. TV, c. 32, s. 1; Canada, 8 Vic, c. 94, s. 1; Canada 9 Vic. c. 90. s. 1; Canada, 12 Vic., c. 57, s. 1.
11 Cf. Sigma, “Fines,” Building Societies Gazette, Dec. 1869, 184–5.
12 Price, Building Societies, 34.
13 “Editorial,” Building Societies Review, Feb. 1894.
14 Scratchley, Industrial Investment and Emigration, 60.
15 British law prohibited investment “…in any Savings Bank or with the commissioners for the Reduction of the National Debt,” but Section 13 of the Friendly Societies Act of 1829, incorporated into the Building Societies Act by reference, permitted investments in a wide range of public securities. Cf. United Kingdom, 6 & 7 Wm. IV, c. 32, s. 6; Price, Building Societies, 90. Canadian legislation permitted the societies to invest “… for the time being, any surplus funds in the stocks of any of the Chartered Banks or other securities of the Province….” (Canada, 8 Vic, c. 94, s. 10; Canada, 9 Vic, c. 90, s. 10; Canada, 12 Vic, c. 57, s. 10). To solve their problems, the Quebec societies sought broader investment powers. See footnote 55.
16 One category of British Building Societies, the Starr-Bowkett Societies, made advances without interest or bonuses. Sigma was very critical of this concept, partly because of the disregard for the time value of money and partly because a secondary market developed in advances, with the profits going to the lucky members with early advances rather than to the society. The latter problem was said to be common to rotation and ballot systems whether interest was charged or not. Sigma, , “The Mutual Principle,” Building Societies Gazette, June 1869, 87–88Google Scholar; “The Gambling Element,” ibid., July 1869, 103–4.
17 British law exempted both bonuses and interest payments from the usury laws. The Montreal Building Society Act contained the British wording. The Acts governing other societies in Upper and Lower Canada explicitly exempted only bonuses but Neufeld reports that legal decisions effectively exempted “… installments, interest, bonuses, fines, and forfeitures.” Financial System of Canada, 187. In 1850 the maximum interest rate under the usury laws was 6 percent, although this was subsequently relaxed; the Quebec City socie ties used 6 percent in determining loan repayment terms.
18 See the series of articles in the Building Societies Gazette in 1869–70 by Sigma under the general heading “Ethics and Economics of Building Societies,” particularly “Losses—How They Arise,” Jan. 1870, 3–4; “Losses-How to Deal with Them,” Feb. 1870, 20; “Building Society Mortgages,” July 1870, 106–7.
19 “What is a Building Society?” Building Societies Gazette, Jan. 1869, 9–10.
20 Scratchley expressed deep concern and tried to persuade societies to adopt accounting practices that more clearly reflected their true asset and liability positions. He advocated balance sheets on a present value basis, showing the present value of members' claims on the funds as offsets to the present value of future subscription as well as mortgages and other tangible assets. However, given the uncertain life of a society and the lack of financial sophistication of members, accounting based on present values posed obvious problems. Scratchley, Industrial Investment and Emigration, 80–83.
21 These requirements for termination were specified in the law so, in principle, a society could not be wound up early without the unanimous agreement of members. This implied agreement on the method of sharing of any losses between borrowers and savers. In Britain some societies were organized for a fixed term to give certainty to borrowers. Investors received whatever was available at the end of the fixed period, which may have been substantially less than the paid-up value of a share. United Kingdom, First Report, 1–2, 13–14.
22 Scratchley, Industrial Investment and Emigration, 48.
23 Bonuses did not provide a larger cash flow but permitted the society to pay off its shares with smaller amounts of money (someone offering a 30 percent bonus accepted £70 in settlement of his £100 claim on the society while paying interest on the £100).
24 The effective interest rate on loans was a subject of intense questioning by the British Commissioner on Friendly Societies, but the answers were confused and confusing, covered a wide range, and generally reported nominal rather than effective rates. The subject was ignored in the Commission's reports. See United Kingdom, First Report, 1871; Second Report, 1872. The Monetary Times addressed the question in 1868, but in the context of permanent building societies. “Permanent Building Societies as a Borrowing Medium,” Canadian Monetary Times, 19 March 1868, 297–98. Creighton, “Terminating Building Societies,” found little informed discussion of effective interest rates in the newspapers of Upper Canada.
25 The 6 percent rate was adopted by all three societies. Some reports of the Quebec Building Society refer to “the principle of decreasing scale of interest to borrowers,” which had been “adopted and acted upon since the commencement of the society.” (Quebec Building Society, “Fourth Annual Report,” Quebec Mercury, 21 Jan. 1854; “Seventh Annual Report,” Quebec Mercury, 7 Feb. 1857; “Final Meeting of the Quebec Building Society,” Quebec Morning Chronicle, 20 Jan. 1863). The concept is not explained, but it is probable that the interest payments on advances declined slowly as time passed, as though the interest were paid on the declining balance of the loan. If so, this would reduce the effective cost of loans and the risks inherent in the extension of the life of a society but would not alter the principle that, while the loan was amortized, the terms of repayment were fixed independently of actuarial requirements for amortization.
26 Scratchley noted arrangements (which he said were impractical) under which payments on loans ceased if the life of the society extended beyond the original plan. Scratchley, Industrial Investment and Emigration, 48.
27 For the Quebec Building Society we have published reports and summary financial statements for each year, 1850–59, and the final report (1862). For the People's Building Society we have reports for 1852 through 1858, and for 1860, and very brief summaries for 1850 and 1851. We also have annual reports for the Union Building Society for 1850, 1855, and 1862. We do not have the final report for either the People's Building Society or the Union Building Society, but for all three we have a prospectus. At least three other building societies operated in Quebec City in this period. There is some documentation on the Quebec Permanent Building Society, established in 1856, but, because it operated on the permanent as opposed to the terminating principle, we do not consider it in this study. We have very little information on the City Building Society (1856) or the Stadacona Building Society (1860).
28 Quebec Building Society, “Prospectus,” Quebec Morning Chronicle, 23 Oct. 1849. In context, as part of a document designed to persuade uninformed people to join the society, this statement was misleading if technically accurate. At that time, no Canadian society had completed a life cycle; most were in their early stages when average bonuses tended to be very large. The prospectus offered no qualifications and no explanation of the probable decline in bonuses as the society matured. The table was attributed to Thomas Champion, a director of the Farmers and Mechanics Building Society of Toronto. The calculation were not explained and we are unable to reproduce them. Creighton reports that the table was very influential in Upper Canada.
29 Quebec Building Society, “Sixth Annual Report,” Quebec Mercury, 24 Jan. 1856.
30 Union Building Society, “Prospectus,” Quebec Morning Chronicle, 25 Jan. 1850.
31 People's Building Society, “Prospectus,” Quebec Morning Chronicle, 10 Aug. 1850. In order to reach the poorer strata of society, some British societies permitted subscriptions for fractional shares. We find no evidence of this in the Quebec societies. Creighton reports a society with a share value as low as £12 10s.
32 Foreclosure reports published in the Canada Gazette provide a small sample of the membership, but it may be biased if foreclosures did not occur uniformly across all classes of members. Self-employed tradesmen and merchants may be overrepresented and employees (clerks, mechanics, or labors) underrepresented, although this seems unlikely. Most of the foreclosures occurred in 1857–59, a period of severe depression when businesses suffered severely; but there was also widespread unemployment. The shipyards closed, the unemployed rioted, and there were intense discussions of possible unemployment relief programs. Employee-members were not sheltered from the brunt of economic conditions and probably assumed their proportional place in the default-foreclosure cycle.
33 Quebec Building Society, “First Annual Report,” Quebec Mercury, 21 Jan. 1851.
34 The Toronto Building Society reported the following composition of its membership in 1847: Professional, 25 percent; merchants and tradesmen, 25 percent; clerks, 15 percent; farmers, 10 percent; mechanics and manual laborers, 20 percent; independent means, 5 percent. Toronto Building Society, “Annual Report,” British Colonist, 9 March 1847. The pattern is similar to that in Table 1 but with a substantially higher proportion of laborers. An error in Creighton's transcription of these data has been corrected.
35 “Tabular View,” 170–71. The average is strongly affected by three very large societies (3,300–6,000 shares). If they are ignored, the average is 744 shares. However, it should be noted that the Quebec societies were near the peak of their memberships, whereas the British ones were at various stages, and because we do not know the value of shares in the British societies, we cannot be sure that we are comparing like institutions. Given the legal limits, however, the British societies were unlikely to have had very much larger share values.
36 “Quebec Building Society,” Quebec Morning Chronicle, 6 Feb. 1850.
37 Ibid., 6 March 1850.
38 “Quebec Building Society,” Quebec Mercury, 4 April 1850; Quebec Building Society, “First Annual Report”; Union Building Society, “First Annual Report,” Quebec Morning Chronicle, 30 Jan. 1851.
39 Stockholder, “Letter,” Quebec Mercury, Feb. 1851. In 1853 it was £1, but an 1854 proposal by the directors to raise it to £5 appears not to have been enacted. People's Building Society, “Fifth Annual Report,” Quebec Morning Chronicle, 13 Sept. 1855; “Sixth Annual Report,” Quebec Morning Chronicle, 30 Aug. 1856.
40 Quebec Building Society, “Seventh Annual Report.”
41 Union Building Society, “Thirteenth Annual Report,” Quebec Morning Chronicle, 27 Jan. 1863.
42 Curry & Co., “Annual Circular,” Liverpool Chronicle, 6 Jan. 1855, 5 Jan. 1856; Forsyth, Bell & Co., “Annual Circular of Timber, Deals & c.,” Quebec Morning Chronicle, 30 Dec. 1854, 22 Dec. 1855.
43 Temin, Peter, “The Panic of 1857” Intermountnin Economic Review 6 (Spring 1975): 1–12.Google Scholar
44 Curry, Kcllock & Co., “Annual Circular,” Liverpool Chronicle, 2 Jan. 1858; Liverpool Telegraph, 1 Jan. 1859; Forsyth, Bell & Co., “Annual Prices Current of Timber, Deals & c.,” Quebec Morning Chronicle, 17 Dec. 1858; “Annual Circular of Timber, Deals, & c.,” Quebec Morning Chronicle, 23 Dec. 1859.
45 Foreclosed property was offered for sale (usually at the door of the parish church) by the sheriff under a writ issued bv the court, but the properties often advanced through several types of writ until a sale was achieved. The initial writ was a claim for payment (cause to be made) called fieri facias. If the execution of the writ did not produce payment of the debt a subsequent writ (another cause to be made), alias fieri facias, could be issued, followed, if necessary, by a writ ofpluriesfieri facias (subsequent causes to be made). If the sheriff seized land or buildings under writs of fieri facias and the land or buildings remained unsold, the creditor could apply for a writ of venditioni exponas, which required the sheriff to undertake a sale. If the asset remained yet unsold—for, say, lack of bids at an auction—subsequent writs (another required sale) could be ordered, alias venditioni exponas. The execution of these writs was published in The Canada Gazette. See Vasan, R. S., ed., The Canadian Law Dictionary (Don Mills, Ont., 1980).Google Scholar
46 Scratchley, Industrial Investment and Emigration; Sigma, , “Terminable and Permanent Building Societies, Considered in Relation to Terms for Advances,” Building Societies Gazette, Sept. 1869, 135Google Scholar; Permanent, Canada, The Story of Canada Permanent Mortgage Corporation (Toronto, 1925), 12Google Scholar; Neufeld, Financial System of Canada, 186–91. It is also worth noting that at an auction in October 1857 by the new City Building Society, the average bonus was 41.5 percent. “City Building Society,” Morning Chronicle, 5 Oct. 1857.
47 Scratchley, Industrial Investment and Emigration, 41; Sigma, “Terminable and Permanent Building Societies,” 135.
48 Canada Permanent, Story of Canada Permanent, 12; Neufeld, Financial System of Canada, 191.
49 Canada Permanent, Story of Canada Permanent; Neufeld, Financial System of Canada.
50 Many transfers were to existing members. From 2.3 in January 1851 the number of shares per member increased to 2.7 in January 1854 and to 3.0 in January 1858; Quebec Building Society, “First Annual Report”; “Eighth Annual Report.”
51 For example, Austin, H. C., “For Sale,” Quebec Morning Chronicle, 25 March 1856Google Scholar; “Stocks and Shares,” Quebec Morning Chronicle, 25 Aug., 12 Sept., 2 Oct. 1857.
52 A broker's circular in the fall of 1857 lists shares in the Union Building Society at £60/£61.5 and in the People's Building Society at £25/£26. “Stocks and Shares,” Quebec Morning Chronicle, 25 Aug. 1857. This implied an interest rate on accumulated subscriptions of 7.3–7.9 percent for the Union and 4.8–5.8 percent for the People's.
53 Neufeld, Financial System of Canada, 186; United Kingdom, First Riport, 6, 161.
54 Quebec Building Society, “Seventh Annual Report.”
55 As they developed experience, the societies sought broader powers. In 1851 the law was amended to permit loans to members secured by real estate already in the member's possession “as well as the actual purchase of the same and for the erection of buildings thereon.” Canada, 14 & 15 Vic., c. 23. More important was an 1857 amendment that clarified the powers of building societies in lower Canada to make loans “to any member of members, or other persons” secured by real estate, and exempted such loans from the usury laws. Canada, 20 Vic., c. 54 (emphasis added).
56 On grounds that the shares were more numerous than originally contemplated, they began to redeem shares, paving out the installments accumulated at 6 percent per annum; Quebec Building Society, “Second Annual Report,” Quebec Mercury, 24 Jan. 1852.
57 Quebec Building Society, “Fifth Annual Report,” Quebec Mercury, 23 Jan. 1855. Once adopted, bylaws were very difficult to change. Amendments could be made only on the initiative of at least fifteen members at a general meeting, all members having been notified of the proposed amendments by mail at least fifteen days before the meeting. At least one-third of the shareholders had to attend the meeting and the amendment required an affirmative vote of at least three-quarters of the shareholders attending. Canada, 12 Vic. c. 57, s. vii. The 1854 act deleted the quorum rule for the Quebec Building Society, “Provided more than one half of Members … sign a requisition for a General Meeting….”Canada, 18 Vic. c. 19. Presumably the amendment would still have to be approved by three-quarters of those attending. An act passed later in the same session generalized this provision to all building societies in Lower Canada. Canada, 18 Vic. c. 116. The directors asserted that experience elsewhere demonstrated that “the redemption of shares after a lew years of existence was the most advantageous investment of money that could be made when there are few demands on the part of shareholders.” Quebec Building Society, “Fifth Annual Report.”
58 Quebec Building Society, “Notice,” Quebec Mercury, 16 Nov. 1858; “Special General Meeting,” Quebec Mercury, 30 Dec. 1858.
59 Quebec Building Society, “Special General Meeting,” Quebec Mercury, 30 Dec. 1858.
60 Quebec Building Society, “Tenth Annual Report,” Quebec Morning Chronicie, 24 Jan. 1860. The financial statements show the amount paid out but not the date on which the shares were redeemed. We have calculated the return to savers on the assumption that redemption occurred at mid-year, but to provide a range of possible returns we also calculated them for the beginning of the year (high return) and the end of the year (low return). As the society shrunk in size, the asset value per remaining member increased rapidly, indicating that the rate paid on withdrawals was below the rate earned on assets (see the unpublished appendix).
61 People's Building Society, “Seventh Annual Report.”
62 The commutation of mortgages also provided flexibility in the management of the societies. The amendments to the bylaws of the Quebec Building Society and the People's Building Society that gave the directors authority to redeem unborrowed shares also permitted them to commute mortgages, that is, accept a single lump-sum payment in lieu of continued monthly payments on advances. For a borrower in financial difficulties, sale of the property and commutation of the mortgage might be preferable to default and the measure proved popular. From the introduction of commutations in 1856–57 through 1859, 157 mortgages were commuted. There are no data on the number of commutations in 1859–60, but the financial statements show a total payment of about £1,211. If the average payment was in the same range as earlier (£20–£25), some 4,861 mortgages were commuted in 1859–60. Commutations were less important for the People's Building Society.
63 Quebec Building Society, “Tenth Annual Report”; “The Quebec Building Society,” Quebec Morning Chronicle, 21 Jan. 1863; “Quebec Building Society,” Quebec Morning Chronicle, 29 Oct. 1859.
64 Quebec Building Society, “Tenth Annual Report.”
65 “The Quebec Building Society,” Quebec Morning Chronicle, 21 Jan. 1863.
66 People's Building Society, “Notice,” Quebec Morning Chronicle, 21 Aug. 1862.
67 Union Building Society, “Thirteenth Annual Report.”
68 Scratchley, Industrial Investment and Emigration, 48, suggested that this result was common among terminating building societies because of the inevitable loading of final losses and termination costs on the few remaining shareholders. This was one of his major objections to the terminating form of organization.
69 The Quebec Permanent Building Society was an offshoot of the Quebec Building Society, designed to continue indefinitely, accepting new members at any time, without penalty. Organized in early 1856, it included the secretary-treasurer and five of the seven directors (including the president) of the Quebec Building Society among the twenty initiators. It shared quarters and the secretary-treasurer with the Quebec Building Society. The Stadacona Building Society had the same secretary-treasurer as the People's Building Society, so we assume it was a spin-off. The City Building Society was established by the Union Building Society “as an auxiliary” because of the “increased facility afforded for winding up the society.” Union Building Society, “Sixth Annual Report,” Quebec Morning Chronicle 31 Jan. 1856. Both the Stadacona and the Union appear to have been terminating societies.
70 The Monetary Times referred to amortized mortgages as being on “the Building Society or Sinking Fund principle.” By contrast, “where a mortgage is made in the usual way … the principal is rarely repaid, except with money borrowed, of course again on mort gage.” “Building Societies,” Canadian Monetary Times, 27 Feb. 1868, 250–51.