Shortfall

by Alice Echols

  Mutuality and cooperation reportedly defined the early building and loan movement, but those ideals began to lose traction as the popularity of B&Ls led to the first effort to subvert their original purpose. In the late 1880s businessmen began forming what were called “national” building and loan associations, which had headquarters in a city and a network of local branches, often in other states entirely. In contrast to traditional B&Ls, the new nationals were for-profit businesses that often were formed and run by wealthy industrialists and bankers. Whereas the traditional B&L had generally operated without salaried officers, the new nationals frequently paid out large salaries to organizers and officers, as well as to the promoters or agents who sold stock in places far from the national office. Gone, too, were the days of one-shareholder-one-vote democracy, as ordinary members were rendered effectively powerless.

  These new-style B&Ls proved popular, in no small part because they advertised a dividend rate three to four times higher than what was on offer from other financial institutions, including traditional B&Ls. For people looking to make fast money, the nationals were seductive. As for the operators of the new nationals, much of their money came from the hefty fees and fines they imposed on members and from payment requirements that were much more likely to result in borrowers’ foreclosure.36 By 1893 there were approximately 240 national associations with 400,000 members.37

  However, the nationals’ practices were so egregious that the courts, state officials, journalists, and old-style B&Ls began to weigh in against them. In one New York case of 1897 the judge, who ruled in favor of the aggrieved borrower, noted that the bloated expenses and large salaries of national associations meant that they functioned like “investment corporations pure and simple” rather than like old-fashioned associations that were meant to benefit their members. The state superintendent of banks was even blunter, saying that national companies were “in practice responsible to nobody, under the sole control of their organizers and officers and managed for their advantage.” He drew a stark contrast between the nationals and local associations, which met their few expenses with their profits and made sure that every dollar the subscriber paid in went toward his interest or reduced his principal. The New York Times article on the case emphasized the “vivid contrast” between local and national associations when it came to their methods, conduct, and costs to borrowers.38

  The depression of 1893, which reduced the numbers of new members and borrowers and also led to a collapse in real estate prices, proved to be the downfall of the nationals. Between 1893 and 1897, more than half of all nationals closed their doors, and by 1910 virtually every national association had folded. As a consequence, many of their working-class members lost their savings. One estimate puts the losses at a quarter of a billion dollars. For a few years the fallout from this first B&L crisis damaged the reputation of even traditional, local associations. In Colorado the B&L industry remained volatile for some time, with three new associations forming and thirteen dissolving between 1916 and 1918.39 One thrift leader declared that the “schemers” who ran these “bogus concerns” had so sullied the reputation of the industry that it would take years before genuine building and loans could operate successfully in some parts of the country.40

  In order to regain people’s trust, B&L heads renewed their commitment to the ideals of thrift and homeownership. They also took some steps toward self-regulation. Yet despite the enormous size of the nationals’ failure, the B&L industry successfully resisted any and all federal oversight.41 The laws governing B&Ls varied widely from state to state, and provided the skimpiest of regulations. Twenty-five states set no minimum for the amount of capital required of B&L organizers. Those states that did establish a minimum capital requirement more often than not set that amount in shares, not in dollars, or in a dollar sum that was negligible.42 B&L operators’ fateful decision to press for toothless regulations rather than push for effective and uniform regulation paved the way for the collapse of the industry some thirty years later.

  The late 1880s marked a turning point in the history of B&Ls, and not just because the nationals provided a road map for financial dubiousness down the line. It was during this period that the B&L ethos of cooperation began to fade. We know that nationals failed at an alarming rate, but did those small, democratically run associations go down with them or had they already begun to wither away when the nationals, with their lucrative dividend offers, appeared? Or is their decline attributable to the fading of the cooperative movement? Existing histories do not explain this shift, but from this point on the earlier B&L model seems to have been in decline. One measure is the creation in 1892 of a national trade organization, the United States League of Local Building and Loan Associations, which set about aggressively advancing the interests of what was now an industry rather than a movement. Increasingly, building and loan men were enmeshed in a web of business interests with title specialists, contractors, insurance agents, surveyors, lawyers, and suppliers of building material. These entanglements would introduce serious conflicts of interest.43

  The B&L league would become one of the country’s strongest and most influential trade groups. It became a public relations juggernaut, cranking out upbeat news stories about the surging thrift business.44 It lobbied Congress with great success. In 1894 it deployed old-school B&L rhetoric to win the thrift industry an exemption from a proposed national tax on corporations. A federal tax on what were effectively “semi-charitable” institutions was, the trade league argued, nothing short of an “injustice to the workingman.”45 And as states began to establish agencies charged with monitoring the thrift business, the League took to cozying up to the officials charged with regulating it.46

  The League also urged associations to put more effort into advertising and into cultivating a more professional image. It urged operators, who had traditionally rented unadorned, upper-floor space in bank buildings, to narrow the architectural distance between their businesses and banks. Buy your own space, the League urged, deploy classical architectural styles, dress it up with marble and brass fixtures, and install a teller’s cage. All of this was intended to convey financial solidity.47 It was also meant to fudge the difference between building and loan associations and banks.

  The effort to sell B&Ls as banks took many forms and further shifted the experience and meaning of homeownership for the working classes. According to the original B&L ethos, buying a home was not a private, individual matter; it was a community enterprise. Remember the famous bank run scene in It’s a Wonderful Life when George Bailey, besieged by desperate depositors, explains the way a B&L works: “Your money isn’t on the premises, it’s in each other’s houses. . . . You’re lending them the money to build and they’re going to pay it back to you as best they can. What are you going to do?” he asks. “Foreclose on them?” Bailey Brothers Building and Loan is several steps away from a Knights of Labor building and loan, but the screenwriters made sure that it retained vestiges of the older model of mutuality and reciprocity whereby self-advancement is community advancement. Yet by the 1890s homeownership was becoming more of a private enterprise even if it was achieved through a building and loan association.

  Developer S.E. Gross’s 1891 advertisement suggests that his new subdivision is located in tree-lined suburbia when it was actually just beyond the gates of Chicago’s stockyards. (Image courtesy of the Chicago History Museum, ICHi-003656)

  This shift in the experience and meaning of homeownership—from a more collectivist orientation to a more individualistic one—is crucial to understanding the relationship between capitalism, class, and conservatism. Long before the disastrous bursting of the housing bubble in 2008 and the ideology and policies behind the “ownership society” that helped to fuel that bubble, homeownership was the key element of the American dream. From the earliest days of the republic the idea took hold that what made America distinct from Europe, that is, what enabled “American exceptionalism,” was the independence and self
-sufficiency of its people. A nation of property-owning yeoman farmers was, for the founding fathers, vital to the success of the new republic. In their view, nothing would be more corrosive to the fragile republic than the development of a class whose dependence upon landlords or employers made its members politically malleable and easily manipulated. The elevation of homeownership and its rendering as quintessentially “American” united people across the political spectrum—from Walt Whitman, who wrote “a man is not really a whole and complete man until he owns his home,” to the Baptist minister and writer Russell Conwell, whose popular lecture “Acres of Diamonds” drew on the poet’s language.48

  By the time Conwell was delivering that lecture, America was no longer a country dominated by yeoman farmers. With industrialization came the pushbacks against it, first with the culture of cooperation advanced by the Knights of Labor, Populists, social reformers, and building and loans, and later, by the twentieth century, with the increasing number of adherents won by socialism.49 In response to the spread of radicalism, politicians, pundits, and real estate developers provided a different spin on white working-class homeownership. Once understood as promoting mutuality and collectivity in ways that put a brake on capitalism, it was now promoted as a way to save capitalism. What better way to defeat radicalism than through a property-owning working class? “Men who have roofs of their own do not go about scattering firebrands,” claimed the developers of one Los Angeles white working-class suburb.50

  In the early 1920s Herbert Hoover was among the country’s most effective evangelists for homeownership. As secretary of commerce, he created the government’s “Own Your Own Home Campaign.” Hoover’s enthusiasm for homeownership never slackened, even in the Depression, when he spoke at some length about the virtues of owning your own home. Drawing a distinction between homes and housing, he opined, “Those immortal ballads, ‘Home, Sweet Home,’ ‘My Old Kentucky Home’ and ‘The Little Gray Home in the West’ were not written about tenements or apartments.” For Hoover, these songs were nothing short of “expressions of racial longings” that reflected “a sentiment deep in the heart of our race and of American life.” Hoover did acknowledge the unfortunate fact that, even in the best of times, homeownership was out of reach for many Americans. Nonetheless, he maintained, “To own one’s own home is a physical expression of individualism, of enterprise, of independence, and of freedom of spirit.” The evidence? Americans, he said, “never sing songs about a pile of rent receipts.”51

  Hoover’s language—its emphasis on the “American race,” whose core values he identified as individualism, enterprise, independence, and freedom of spirit—spoke to many whites of the working classes. That it did suggests how much older values of mutuality, reciprocity, and collectivism had lost ground among these Americans. That they lost ground owes something to the decline in traditional building and loan associations. Real estate developers, such as those in Sinclair’s The Jungle, sold homeownership as the (white) “working-man’s reward,” a phrase that suggested that they might be compensated for their “dismal labor” with “pleasant leisure.”52 And in America, where race and class are such deeply enfolded categories, race brought some privileges for the white working classes, including homeownership.53 It is worth noting that despite innumerable obstacles to owning (and holding on to) their own homes, African Americans did pursue homeownership, and sometimes through black-owned building and loan associations.54 However, for people of color living in early twentieth-century America, a period of intense segregation and racist violence, values of rugged individualism and self-sufficiency may have made less sense than those values of community, congregation, and collectivism that had once been bedrock in some white working-class communities, too.

  The Loan Man acquired the City Savings Building and Loan Association sometime in 1914. Formed in 1911 by three Colorado Springs businessmen, including Merton Stubbs, the clerk at the county court downtown, the City was a tiny association. At the time that Walter Davis acquired it, it had fewer than thirty shares in force, and a reserve fund of $1.55 Its prospects seemed unpromising, particularly because Colorado Springs already had an established and respected association, Assurance Savings and Loan. Yet within just a few years the City was the leading B&L in Colorado Springs. By 1923 Walter had moved the business out of his third-story office and into a new ground-level space at the covetable corner of Cascade and Kiowa. He made sure it was designed to resemble a bank.

  The quickness with which he turned the City around suggests that Walter came to it with ideas about how to make it lucrative. Certainly the B&L business had its attractions. For one, Colorado Springs had never known a truly member-run building and loan of the sort that had operated in big cities such as Philadelphia. For another, loan sharks were coming under increasing attack, both nationally and locally. About the time he acquired the B&L, a group of businessmen in Colorado Springs formed the Farm Loan Company in order to extend credit at a reasonable rate to local farmers. They did so in order to prevent any more farmers from falling into the clutches of loan sharks. In testimony before Congress, one Colorado Springs businessman explained that although they had managed to pass laws against usury, local loan sharks had succeeded in evading them by refashioning their businesses as banks, which were explicitly not covered by the new law.56

  Tellingly, Harry Leven, who appears to have been the best-known and most cutthroat loan shark in Colorado Springs, went into the B&L business around the same time as my grandfather. Leven’s association failed after a few short years, perhaps because his reputation for ruthlessness preceded him. Nonetheless, both he and my grandfather likely calculated that they could evade prosecution by reorganizing their loan offices as B&Ls. They surely realized that much of what they were already doing could be done almost as easily under the cover of a building and loan because B&Ls operated largely outside of any state regulatory regime. Colorado did not even have a law on the books pertaining to the B&L business until 1897, and even then established no real mechanisms for supervision. According to that 1897 law, no reserves were required, and officers and directors were not prohibited from receiving commissions. The original statute presumed that all associations would be of the “mutual” type, that is, an old-style building and loan, which meant the statute was of no use when it came to businesses that called themselves B&Ls but departed from their standard practices.57 One auditor, stunned to discover that some associations were engaged in the business of chattel loans, pointed out that this was scandalously out of step with the purpose and intent of building and loan associations.58 Maybe that auditor had Harry Leven in mind. In 1915 Leven Savings, Building and Loan Association had only $350 loaned on real estate and $4,037 in chattel mortgages.59

  The state made no effort to regulate the industry until 1907 when it established a Bureau of Building and Loan Associations in the state auditor’s office. From the beginning, the state auditor’s biennial reports to the governor on the building and loan industry called for legislative action to develop an effective regulatory regimen. Reports routinely cited the lack of authority and the insufficiency of funds accorded to the B&L inspector. By the end of 1920, the salaries and expenses allotted to the state bank commissioner’s office amounted to $30,693, far outstripping the measly $4,997 appropriated for the B&L inspector’s office.60 Given the growth in building and loans in the state—by 1931 the aggregate assets of B&Ls were over 30 percent more than those of banks in Colorado—the disparity in funding made no sense. In most other states the office regulating building and loans relied almost exclusively upon field examinations to ascertain the actual condition of associations. But in Colorado the lack of money and the absence of trained officials meant that only a fraction of the state’s B&Ls were actually ever subjected to a field exam. Eventually the legislature did allot more money, but without qualified and motivated examiners, it made little difference.

  Also undermining state regulation was the coziness between building and loan officers and the m
en whose businesses they were meant to regulate. Colorado’s first commissioner of building and loan associations, Eli Gross, took direction from an unofficial cabinet of B&L men that included Walter Davis and other sharp operators. Gross’s predecessor actually received a $6,000 loan from my grandfather, who, uncharacteristically, requested no security for the loan. Moreover, there was sometimes a revolving door between B&L regulators and B&L operators. (In California Andrew E. Falch and John Franklin Johnson, respectively the state’s former building and loan commissioner and former superintendent of banks, together established a large building and loan association in the late 1920s.)61 Despite the fact that virtually every biennial report to the governor of Colorado cited numerous defects in the law, nothing changed.62

  Lax regulation characterized the B&L business in much of the country, especially the West. And as we shall see, the tendency to treat building and loans as self-regulating entities encouraged businessmen to once again take advantage of the state’s hands-off approach. In the case of my grandfather’s association there were few remnants of the old-style B&L about it. Walter appointed himself the president and treasurer and made his wife, Lula, the secretary of the association. An attorney with whom he had conducted business was the only non–family member on the association’s three-person board of directors. According to the bylaws, only two members of the board needed to be present for a meeting to have the necessary majority.63 The bylaws further mandated that for withdrawals of less than $100, members would have to file written requests thirty days in advance. For larger sums, sixty days’ written notice was required, just as it was at Bailey Brothers. The association could simply turn down requests for withdrawal if the demands of withdrawing shareholders amounted to more than one-half of the monthly receipts of the association. These were standard bylaws that were actually rooted in the cooperative character of the earliest B&Ls, and they stood in contrast to the rules governing commercial banks, whose depositors were legally able to demand immediate withdrawal of their deposited money.