Courtesy of the Investment Company Institute.
Museum of American Finance.
(Left) Red herring prospectus from The Reserve Fund, the first money market mutual fund, 1971; (Right) Tennessee advertisement
first two money funds caused traditional
fund firms to sponsor similar funds.
Jack Donahue attended West Point, was
a pilot in the Army Air Corps, and sold
mutual funds. In 1955, he and a colleague
founded a fund firm, Federated Investors, in Pittsburgh. When money market
funds developed, many investors wanted
to invest in funds with fixed share prices.
Money funds utilized various accounting techniques to maintain a price of one
dollar per share. In 1977, the SEC issued
a release limiting use of these techniques.
Federated sought an exemption from the
SEC, which was initially opposed by the
SEC staff, permitting it to maintain a fixed
one dollar price. The SEC granted the
exemption, and other funds obtained similar exemptions, which have been codified
into an SEC rule. A fixed one dollar share
price is the hallmark of money funds.
Money funds posed a severe competitive
threat to banks and S&Ls, which launched
legislation in more than 20 states to outlaw money funds. Money funds faced an
extremely difficult situation. Banks and
S&Ls had offices in every town and lobbyists in every capital; mutual funds were
located in few states and had little political
clout.
David Silver attended Harvard Law
School, worked at the SEC, and joined the
mutual fund association, the Investment
Company Institute, in 1966, becoming president in 1977. Silver developed a strategy to
defeat the state legislation by having the fund
industry reach fund shareholders through
newspaper ads and radio spots urging them
to ask state legislators to oppose the bills.
This effort, the Institute’s “finest hour,” led
to defeat of anti-money fund legislation in
every state where it was introduced.
Money funds were the most important
innovation in fund history. They provided average investors with market rates
of return, led to the removal of interest
rate controls on bank and S&L deposits,
and introduced millions of Americans to
investing through mutual funds.
John C. Bogle
Low Cost Investing
and Index Funds
Jack Bogle wrote his thesis at Princeton on
mutual funds and joined a Philadelphia
58 Financial History | Spring/Summer 2011 | www.MoAF.org
fund company, Wellington Management,
in 1951. He later helped engineer a merger
with a Boston firm. There was a falling out
between Bogle and the Boston partners,
who gave him the option of resigning or
assuming an administrative role. He retaliated by urging the fund directors to have
the funds acquire Wellington. The Boston
partners saw Bogle’s suggestion as a way for
him to salvage his job; Bogle countered that
he had raised mutualization years before.
Whatever Bogle’s motivation, his work led
the funds to form and own a new company, Vanguard, that managed the funds.
This internalization of fund management
helped make the Vanguard funds the low
cost providers in the fund industry.
In the early 1970s, several money managers operated pension and trust accounts
that invested in the market as a whole,
rather than in securities selected by the
managers. A number of writers urged the
creation of mutual funds that would invest
this way. In 1976, Vanguard, led by Jack
Bogle, created the first indexed mutual
fund. Index funds now comprise a major
component of the stock and bond fund
universe, with assets of almost $1 trillion.