sponsor , have a diversified portfolio and avoid control of portfolio companies and short-term trading .
The first step in the development of this strong mutual fund brand was the decision by fund leaders to seek provisions in a tax law , the Revenue Act of 1936 .
Revolutionizing the Mutual Fund Industry : Section 11 of the Glass-Steagall Act of 1933
Mutual funds enjoyed steady growth following enactment of the Investment Company Act . In 1944 , for the first time , mutual fund assets exceeded those of closed-end funds , a situation that has prevailed ever since . Total mutual fund assets went from $ 450 million in 1940 to $ 48 billion in 1970 . The vast majority of funds invested in stocks , with some bond funds and balanced stock and bond funds .
Most Americans did not invest in mutual funds or in other securities . Instead , they placed their savings in savings accounts offered by banks and savings and loan associations . Congress had been concerned that if banks could set the interest rates on their deposits they would engage in risky activities in an attempt to pay higher rates . Therefore , Section 11 of the Glass-Steagall Act of 1933 mandated that the Federal Reserve Board impose
interest rate ceilings on bank savings accounts . In 1966 , Federal Reserve Board Regulation Q was extended to accounts at savings and loan associations . In 1970 , certificates of deposit of $ 100,000 or more were exempted from Regulation Q .
The system worked fairly well until the late 1960s ushered in extremely high inflation . Americans had to pay 10 % or more on their borrowings , but due to interest rate ceilings , most Americans earned less than 5 % on their savings . Institutional investors and wealthy individuals could earn market rates of interest by purchasing large bank certificates of deposit or Treasury bills of $ 10,000 or more . But most Americans were stuck .
In 1972 , individuals in New York and California came up with the same idea — create a mutual fund that would invest in large certificates of deposit and Treasury bills , earn high interest on these instruments and pay out that interest less expenses to fund shareholders . There were favorable stories about these funds in the media , and money began flowing to them .
Seeing the success of these first two “ money market funds ,” traditional mutual fund firms brought out their own money market funds . Money market fund assets increased at a rapid pace , growing from less than $ 2 billion in 1974 , to $ 76 billion in 1980 , to $ 1 trillion in 1997 , to over $ 6 trillion today .
Money market funds expanded the size and diversity of the mutual fund industry . Millions of Americans who had never invested in mutual funds or other securities put money into money market funds . Many of them went on to invest in stock and bond funds . Today , mutual fund assets are spread among stock funds ( 54 %), money market funds ( 22 %), bond funds ( 18 %) and balanced funds ( 6 %).
Money market funds revolutionized the fund industry . This was made possible because mutual fund firms took advantage of interest rate ceilings established pursuant to a banking law , the Glass-Steagall Act .
Revolutionizing the Private Retirement System : The Revenue Act of 1978
For decades after World War II , the retirement system was dominated by defined benefit ( DB ) plans — plans under which employers promise employees fixed benefits after they retire . Defined contribution ( DC ) plans — plans under which employers contribute fixed amounts to employees ’ retirement accounts — were far less common . In 1979 , more than 80 % of individuals who participated in private plans were in DB plans . In that year , assets of DB plans were roughly two-and-a-half times the size of the assets of DC plans . Many DB plans were managed by banks and insurance companies ; DB plans rarely invested
Assets in Money Market Funds
Billions of dollars
Year-end
Note : Data for funds that invest primarily in other mutual funds were excluded from the series Source : Investment Company Institute
30 FINANCIAL HISTORY | Fall 2024 | www . MoAF . org