Why the UK needs to get more friendly on savings
WHEN he died almost 100 years ago, Samuel Smiles was described by The Scotsman as "The greatest Scotsman of the Nineteenth Century".
His funeral cortge was vast. People wept as much as at the death of Queen Victoria, it was reported. So who is he?
Haddington’s most famous son was the exponent of a highly subversive idea. His thoughts need to be revived and applied to convulse our sleepy and complacent establishment.
Smiles argued welfare, or benevolence, should be voluntary or private. He thought "nationalising" the poor or disadvantaged would be to institutionalise them and create bureaucracies that would derive salaries for administrators but do little to lift people out of penury.
During his life Samuel Smiles was outsold only by the Bible. He wrote prolifically, but his top title was Self Help. It asserted many virtues and was about far more than notions of self-improvement.
One theme dear to his heart was the notion of savings or provident clubs even for those on the most modest incomes. We have now almost forgotten the role of these friendly societies as offering all welfare functions for farthings.
A few survive. Yet they have atrophied into little more than tax-relieved vehicles that work well for savings within tight thresholds. Their "friendly" roles have evaporated.
The case for competitive markets or voluntary arrangements is triumphant on all fronts - except perhaps the most humane services - health, schooling and welfare.
It seems to me if capitalism has deeper virtues than mere efficiency or productivity then it has to show it is better at these "caring" functions.
Schooling is provided in the marketplace only for the rich. Health is a universal service with only minor market-derived top ups. Welfare is captured by the state.
We have all but lost the folk memory of the real past. The caricature is of a simple spectrum from high affluence to poor house. The truth was a highly sophisticated patchwork of savings clubs that sought out poor customers. The magic ingredient was this crucial strand of "Self Help".
If a member was unemployed it was far more sensible to get him a job than to pay out benefits. The so-called "moral hazard" of our bloated welfare system barely existed because members had this cushion and network of support.
We think of Victorian enthusiasm for temperance as prissy and a little comical. In fact drunks were an insurance risk to their fellow club members.
The City of Glasgow Friendly Society, now the Scottish Friendly Society, was a mighty financial force but also a body with intimate knowledge of all its members.
The notion of a collector picking up ha’penny subscriptions on doorsteps seems primitive but a collector would talk to the members and alert them to opportunities and report needs up the hierarchy. There was a rich network or cell structure of mutual support.
Friendly Societies have been expiring since the birth of the Welfare State in 1948 but we did not abandon them. They were strangulated by regulation. The British Medical Association fought tenaciously to stop para-medical services emerging through the societies.
Local authorities tried to close friendly societies’ sanatoriums. The tax treatment they enjoyed was closed off.
Lloyd George won a huge victory in 1906 on his compelling promise of "Ninepence for Fourpence" - the birth of National Insurance. It seemed almost magical. The government would more than double your savings... by taxing us all.
The 1911 National Insurance Act began the long process of culling friendly societies and provident clubs.
Nobody designed these admirable entities. They are creatures of evolution. They emerged through the common law experience rather than by any legislation or regulation. I’m amazed they were so timid at their own eclipse.
It seems to me they were both too sober and too timid. Under the huge Labour majority of 1945 the great delusion was the state’s competence.
We know now the government was hopeless at running steel mills, railways, docks, coal mines and all the other nationalised follies. We have forgotten voluntary provision of welfare, schooling and medicine was widespread before.
The Hearts of Oak Society lost one million members in 1948. National Deposit lost 1.25 million members. The Edinburgh Benevolent surrendered.
Since the wreckage of the post war settlement the friendly societies have been elbowed out by bolder rivals - life insurance, unit trusts, investment trusts, Tessas, ISAs and all the other savings industry products.
Friendly societies were clubs not corporations. They were mutual. Members knew each other. False claims could be laughed away rather than prosecuted. This is the elusive quality to be re-invented.
In April, National Insurance, the vast juggernaut that crushed the little friendly societies, goes up by a further 1p. It is a fraud. It is un-funded.
What you or I pay in is not credited to any personal account. Sir Keith Joseph termed National Insurance "Merely a chain letter across the generations". That is a perfect description.
The current government offers new savings wheezes for those on low incomes. I do not doubt Gordon Brown’s sincerity or kindness, but he seems to me to be blind to the possibilities of friendly societies resuming welfare roles. There may be exceptions. It seems our protracted old age with years of infirmity may be difficult to fund.
Psychiatric illnesses, barely recognised 100 years ago, represent heavy contingent costs.
So what is my proposal? Simply that we should all be free to elect to divert our current NI contributions into our own benevolent funds.
I’ll leave the details to the lawyers but the principle is crucial. Yes, we should save for the mishaps of life, but we can do it through a market of alternative agencies. I have a preference for the small-scale local ones but major undertakers could help customer bases of millions.
The analogy is perhaps motor insurance. Of course we need cover to protect ourselves or passengers but do we need a single state motor insurer? To pose the question is to get the answer. A market in provision will work best. The duty of the state is only to oblige sensible cover.
Friendly societies could lend to their members. Most small Victorian enterprises were funded through these sources rather than the banks or the stock brokers. The building societies were the first cousins of the friendly societies. They have converted to huge plcs but I think I detect a flickering flame of the notion we can help ourselves, our families or our friends and our neighbours without the tax man creaming off half our incomes.
Smiles may be forgotten and friendly societies near oblivion, but the raw material of human nature is unchanged. Philanthropy or benevolence or kindness cannot be nationalised.
John Blundell is general director of the Institute of Economic Affairs.
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