By Terry Coxon from the pages of The Casey Report
Money market funds began as a bright and useful idea, became a habit, and recently have become a bad habit. Money market funds were invented in 1971 as an innovative end-run around Federal Reserve Regulation Q, which prohibited paying interest on demand deposits. The purpose of Reg Q was to stifle competition in the deposit-taking business in order to benefit commercial banks – at the expense, of course, of depositors.
The regulation had little effect until the late 1960s, when two factors converged. The first was consumer price inflation; it was mild compared to what was soon to follow, but it was still noticeable, and it fueled a general rise in interest rates. The second factor was the arrival of the IBM 360, which made computing much cheaper. Before that device, the administration of checking accounts was still labor intensive and little advanced from the days of green eye-shades. It was expensive for banks to maintain checking accounts, so they weren’t inclined to pay interest on them, Reg Q or no Reg Q….