Mutuality and Financial Innovation

The New Deal and the Origins of the Modern American Real Estate Loan Contract in the Building and Loan Industry

Jonathan D. Rose (Federal Reserve Board) (jonathan.d.rose@frb.gov)

Kenneth Snowden (University of North Carolina at Greensboro)(snowden@uncg.edu)

URL a href=’http://ideas.repec.org/p/ris/uncgec/2012_006.html

Abstract
We treat the direct reduction loan contract as an instance of financial innovation and describe its adoption within the building and loan (B&L) industry beginning in the 1880s and culminating in the 1930s. A long chain of complementary innovations at B&Ls gradually reduced the costs of adoption, leading to moderate use by the 1920s and potential for far greater use. In the 1930s, extreme dissatisfaction with other contracts radically altered the adoption calculus, as did new competition from FHA-insured lenders. Federal savings and loan charters built upon the accumulated innovations at B&Ls by emulating the small segment of the industry that had adopted direct reduction lending by the 1920s. Other policies helped restructure the liabilities of B&Ls to accommodate the loss of credit risk sharing and mutuality inherent to older contracts. New Deal policies therefore built upon and facilitated the ongoing process of financial innovation that brought the familiar modern loan contract to the conventional loan market.

Keywords: New Deal; Building and Loan

Review by Bernardo Bátiz-Lazo

When Mark Billings and I edited the special volume for Business History – Volume 54, Issue 3 (New perspectives on not-for-profit financial institutions: Organisational form, performance and governance), we were overwhelm with the response of proposals. The paper by Rose and Snowden is witness to this and the fact there are interesting questions to be answered when revisiting why, where and when mutuality and co-operativism offer superior corporate governance to deal with particular risk/reward transactions within retal finance.

Jonathan D. Rose

Their paper was circulated by NEP-HIS on 2012-05-22. Its stated aim is to explore the origins of the direct reduction loan contract (i.e., fully amortized loans with equal monthly payments) and why measures during the New Deal led to its widespread adoption. Rose and Snowden convincingly argue that even though it offered more certainty to borrowers, “widespread adoption of this contract did not follow immediately after its inception, nor did it necessarily appear inevitable ex ante“.

Rose and Snowden take us back to the origins of the building and loan (B&L) society in the USA circa 1830’s, a mutual retail financial institution which was imported from the UK (where it was born in the Midlans circa 1780). These offered share accumulation loans where a borrower committed to make monthly purchases of equity shares until them plus retained dividends equalled the value of the loans. All savers eventually became borrowers and the society was terminated when everyone had received/paid their monies.

Kenneth Snowden

The share accumulation contract was to dominate B&L well into 1893 and it was until the 1920s and 1930s when it was abandoned as its risks became more apparent. New Deal institutions strongly favoured direct reduction contracts and very much help for its widespread adoption. But to get to this stage there was a long process of transformation which included the emergence a sinking fund as well as the so-called “permanent societies” (which Rose and Snowden prefer to call “non serial”).

Rose and Snowden’s is a fascinating account of financial innovation which has touched on a point largely overlooked by the literature on mutuality and certainly by studies of British building societies. One is thus left wondering why share accumulation loans lasted so long in the UK as well as offers a framework to revisit the demutalization debate.

Who’s Who in Spanish Corporate Governance?

Corporate Structure and Interlocking Directorates in Spanish Firms, 1917 – 1970

By Juan Antonio Rubio-Mondéjar  and Josean Garrués-Irurzun (Universidad de Granada)

URL: http://d.repec.org/n?u=RePEc:gra:fegper:01/12&r=his

Abstract

This paper analyses some of the characteristics of Spanish capitalism between 1917 and 1970. For that purpose, we resort to the technique known as interlocking directorates and applies the methodology of social network analysis (SNA) to the board of directors of the 210 largest Spanish companies, in a benchmark dates (1917, 1930, 1948 and 1970). The results allow us to answer the questions of what has been the evolution of the Spanish business structure over the twentieth century and which sectors have been central to each of the moments analysed. At the same time, we identify the main groups of companies, and the links established among them, assessing the role of financial sector in the national economic structure. Based on the relationships between the members of the Board of Directors and social capital theory, the second objective identifies the circle of Spanish economic power, quantifies the degree of cohesion, and follow its evolution over time, confirming its continuity/ disappearance.

Review by Beatriz Rodríguez-Satizábal

This paper was distributed by NEP-HIS on 2012-05-22. Juan Antonio Rubio-Mondéjar and Josean Garrués-Irurzun offer a striking overview of the corporate structure in Spain during the twentieth century following up the work by Carreras and Tafunnel published in the early 1990s.  Using Social Network Analysis (SNA), the authors build the interlocking directorates of the 210 largest firms by assets (manufacture -200- and insurance -10-) based on information collected from the Anuarios Financieros de Bilbao and Anuario Financiero y de Sociedades Anónimas de España. The examination of the characteristics of the corporate governance seems to be now one of the issues that require a long-term view, this paper offers a general approach to the Spanish case.

The paper is divided in four sections. The first presents a review of the theoretical literature on corporate governance and economic entrenchment, including an overview of the literature on Spanish capitalism. The next two sections discuss the methodological approach and the results of building the interlocking directorates for 1917, 1930, 1948, and 1970. The final section is a short conclusion that opens a discussion regarding the proliferation of business groups and the role of the board members.

Firms network in 1917 (p. 49)

The paper strikes the reader in two ways. First, the discussion on the theoretical approach to interlocking directorates presents the importance of identifying the networks in order to prove the existence of a traditional business elite. This follows the sociological approach on the role of the elites, but do not include the recently findings on the rise of business groups as an organizational form to increase the entrenchment of the business people. It is shown that between 1917 and 1970 the members of the boards in the largest Spanish firms were related and share common professions and family names. Moreover, the names collected proved that there have been only small changes in the corporate governance among the twentieth century. The old families remained and only a few new names appeared after 1948. However, there is no discussion in regards to the family businesses, an issue that has been well studied in the last decade by the likes of Paloma Fernández, Jesús Valdaliso, Eugenio Torres, Nuria Puig and others.

Secondly, Rubio-Mondéjar and Garrués-Irurzun introduce a hypothesis on the importance of the interlocking directorates among the largest firms as an answer to the close relationship between the industry and the banks. The result is that the interlocking directorates affected more than 80 per cent of the firms studied, with the majority of the members linked in both the manufacture industry and the banks. This brings back the discussion on the role of banks in development started by Alexander Gerschenkron, but also poses into discussion the relationship between politicians and businessmen. There is a novelty approach to the former, the results show that there is no a unique network that linked all the firms together and the banks did not used a collusive strategy; could this mean that the firms used other ways to increase their market power and keep their ownership control; or, maybe, there are some regional differences. In the case of the later, the results are a surprise for those who use Spain as a comparative case with the Latin American countries: differently from what is expected, a politician usually became a member of the board, but not the other way around. This gives a new meaning to the professional lobbying and poses a question on the links between the political and business elites, traditionally assumed as the same.

This paper brings a discussion on the literature on Spanish corporate governance that could be useful for those studying other countries. The methodological approach combines the use of historical data with the social network analysis, bringing the question of who is who to the understanding of the economic development of a late development country. Moreover, it leaves questions open for future research such as the relation between the changes in the economic and social environment with the interlocking directorates.