Savings and Loan Industry

Initial Growth of the Industry

The S&L industry began in Philadelphia with the formation of Oxford Provident Building Association. Patterned on the British building society movement of the late 18th century, early S&Ls (then called building and loans) were not-for-profit cooperatives that focused exclusively on helping their members become homeowners. They did this by instilling in their members the habits of systematic savings and the spirit of mutual cooperation. People joined an S&L by subscribing to shares in the association in an amount equal to what they needed to buy a home. Members then paid for these shares over time by making regular monthly installments to the S&L. As these share payments accumulated, the S&L would lend the funds back to the members as home loans. Because members could not borrow more than the face value of their subscribed shares, the loans were essentially advances on the unpaid shares. To repay the loans, members simply continued to make their same regular share payment, plus interest, on the advance.

The mortgages made by S&Ls were superior to all other forms of institutional credit available in the late 19th and early 20th centuries. Unlike bank loans, which were typically repaid interest only with the full principal due in just a few years, S&L mortgages were both fully amortizing and long term. Also, because S&Ls were mutually owned, operating expenses tended to be low, and any profits were shared equally by the members. Significantly, profits were not paid in cash but were given as credits to the share accounts. This allowed members to earn compound interest on their savings, or have their mortgage repaid faster.

Because S&Ls offered such an affordable path to homeownership, their numbers grew rapidly. By 1893 nearly 5,600 S&Ls were in operation, and on the eve of the Great Depression, the number had risen to more than 12,300. Notably, the typical association was very small, and it was common to form an S&L to serve specific neighborhoods or ethnic groups. The small size also made it possible for the creation of close personal connections between the members and managers. Similarly, because S&Ls encouraged thrift, cooperation, and homeowner-ship, industry leaders cultivated a public image of [Page 650]S&Ls as being part of a social movement committed to improving the lives of people and not the pursuit of financial gain.

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