Money Market Mutual Fund Accounts

Money market mutual fund accounts (MMMFA) arose during the 1970s as a financial innovation designed to circumvent Regulation Q, a federal rule that limited the interest rate payable on checking and savings accounts to less than 6 percent.

The high inflation rates of the 1970s put unreasonably low government ceilings on checking and savings account interest rates. Ninety-day treasury bills were exempt from interest rate ceilings, but these bills were only available in denominations of $10,000, outside the reach of the small saver. Other large denomination financial instruments, such as commercial paper and banker’s acceptances, were also inaccessible to small savers.

Mutual funds raise capital by selling shares to investors, and invest the capital in an array of assets. They distribute the income from these investments to shareholders, minus management and other fees. Money market mutual funds sell shares to investors, but the value of shares is manipulated to remain at a fixed amount, such as $1 per share. The proceeds from the sale of shares are invested only in safe, short-term assets, such as U.S. treasury bills, giving small savers access to the high earnings of the high-denomination assets.

Small savers can often open a MMMFA with a small investment, maybe as little as $500 but usually between $2,000 and $4,000. As long as a minimum investment is maintained, the shareholder of a MMMFA enjoys limited check-writing privileges, generally in minimum amounts of $500 against their share holdings. A MMMFA is technically not a deposit subject to the regulations of a depository institution, but the accounts are managed to act as a deposit with check-writing privileges. Although an MMMFA cannot boast of the safety of deposits insured by the Federal Depository Insurance Corporation (FDIC), MMMFAs often invest a high proportion of their capital in U.S. treasury bills, giving them the same guarantee of the federal government as deposit insurance.

With check-writing privileges, MMMFAs began to serve same purposes as checking accounts, an important component of the money supply. Between 1976 and 1992 MMMFAs grew from $2.4 billion to $360 billion, due to the movement of deposits from checking and savings accounts. The Federal Reserve System includes MMMFA accounts in M2, a monetary aggregate economists often consider the best operational definition of the money supply.

On 14 December 1982 banks received authorization to offer money market deposit accounts (MMDAs), which offer depositors comparable interest rates on assets similar to MMMFAs and have the added advantage of protection from the FDIC. At first MMDAs grew rapidly at the expense of MMMFAs, and the depository institutions regained ground lost to MMMFAs. By the 1990s MMMFAs had established themselves as an important monetary asset, but the volume of MMMFAs remained below the volume of the MMDAs.