The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 54. Money Markets

THERE WAS A TIME WHEN PEOPLE referred to cash and meant the coins jingling in their pockets or the bills squirreled away in the cookie jar. During the Great Depression of the 1930s, cash meant one thing: cold hard currency that you could count on, something you could spend in the next fifteen minutes to buy a cup of coffee and a doughnut. Even money in the bank wasn't cash in the 1930s. But after Franklin D. Roosevelt signed the Banking Act of 1933 and created the Federal Deposit Insurance Corporation (FDIC), which put a government guarantee behind bank deposits, Americans gradually began to accept banks. Then bank accounts, too, became "cash."

Our definition of cash continued to change, and it changed radically in the 1970s when "cash" as we know it today was actually invented by Bruce Bent, who was casting about for a business idea. Bent hit upon a plan to collect money from depositors and loan it out to corporations at a slightly higher rate than he paid depositors. Bent figured he could offer a higher rate than a bank because of lower overhead. Because he ran into an obstacle in bank regulation, he decided to use a mutual fund format. His mutual fund would accept money from depositors and use it to make short-term loans to government and big corporations in the money markets, just as a bank does. His profit would come from charging depositors a management fee.

In November 1971, the Securities and Exchange Commission (SEC) approved Bent's registration ...