On the Money Let My Dollars Go!

By JOHN ROTHCHILD

Money liberation never got publicity like women's liberation, but it saved the average bankroll from a dull life of servitude. A new book tells how the people's dollars were led out of financial bondage and crossed the Hudson River onto Wall Street. A Piece of the Action it's called, written by Joe Nocera. Nocera and I go back a few years, but I'm trying to be objective and leave out buddy blurbs, such as "surefire Pulitzer." He is on to a great story, nonetheless.

As recently as 20 years ago, the average bankroll was trapped in a savings account, where it got shortchanged on interest, or in a checking account, which paid no interest at all. Paying a fair market rate to depositors was against the law, Regulation Q, which took effect during the Great Depression.

The idea behind Reg. Q was that bankers were a disadvantaged group who needed welfare benefits. By putting a lid on the interest rates paid to small savers, the government could foolproof the banking system. Bankers could lend the cheap money out at higher rates and make a nice living without trying too hard, which is how they became such good golfers.

You'd think that the millions of small savers who made this sacrifice to banker comfort could at least have got a loan from a bank, but no way. They got mortgages, and that was it. There were no home-equity loans, and stores didn't take credit cards. The only sources of quick cash were pawnshops, relatives, loan sharks and the local finance company.

Meanwhile, the fat-cat dollar was gallivanting about the bond and stock markets, having an enriching experience. This the average bankroll couldn't do: bonds came in large denominations; bond funds didn't exist. Stocks bought in small quantities were called odd lots, like they were some kind of defective merchandise. The odd-lotters were mystified by stocks, and with good reason: the brokerage houses informed their big clients about every important development, but the small clients were the last to know.

The stock market had its own version of Reg. Q. To spare Wall Street from the menace of competition, commissions on stock trades were fixed by the feds. Big buyers could haggle for a better rate, but the small investor paid in full.

And they called this free-market capitalism? The average dollar had no more rights than a ruble, until it was liberated by a handful of visionaries in pinstripes. Nocera tells their heroics in detail, but here are some of the highlights:

Joseph Williams, an employee of the Bank of America, invents the first all- purpose credit card in 1956. Several years later at the same bank, Dee Ward Hock devises the computer system that processes charges so credit cards can be used everywhere. What a perfect name for the father of the modern Visa card -- Hock.

Bruce Bent and Henry Brown, renegades from the insurance industry, come to Wall Street and invent the money-market fund in 1970. Jim Benham, a California < broker, has the same idea simultaneously. It takes the SEC two years to approve this.

Charles Schwab opens his discount-brokerage office. He is ready for business when the SEC does the unthinkable and abolishes fixed commissions on stock trades on May 1, 1975. Forget Pearl Harbor Day; it's May Day that lives in infamy on Wall Street. Traditional brokerages try to hold the line on rates for the small investor. Merrill Lynch responds by actually raising its rates. It's Schwab who forces them down.

Ned Johnson, the head of Fidelity Investments, has a brainstorm and offers a "check-writing feature" to investors in the company's money-market funds in 1973. This is the beginning of the end for the no-interest checking account. Under Johnson's leadership, Fidelity popularizes the mutual funds that bring millions of small investors into the stock market, in time for the 12-year bull run that adds more than $1 trillion to the national wealth.

The money revolution hasn't done the banks much good. Nocera makes a convincing case that the demise of Reg. Q in the 1980s is a principal cause of the banking crises that led to the S&L bailout. Having lost their easy source of profit, desperate bankers tried to make up the difference by lending money at high rates to such risky borrowers as Latin American dictators, land speculators and their own in-laws, who never paid their loans back.

But what's been bad for the banks has been great for the average bankroll, no longer the chump in a rigged game. Now a small sum can travel anywhere the big sums go: stocks, bonds, options, futures, municipals, foreign stocks, you name it. Now we've got banking services in the department stores; stockbrokers in the banks; 300 million credit cards in circulation; and 5,000 mutual funds -- so many they're hard to make heads or tails of.

Nocera worries about the state of confusion the people's money is in today, with all these choices. But after learning from him how bad it was not all that long ago, who wants to go back to a dreary old savings account? Williams, Hock, Johnson, Bent, Brown, Benham, Schwab: these guys deserve a monument someplace.