Reserve Fund created money market funds to bypass deposit interest cap

A Depression-era federal rule, Regulation Q (required by law from 1933), capped the interest that banks and other depository institutions could pay on savings deposits — around 5 percent — as a guard against runaway deposit-rate competition that had contributed to widespread bank failures. By 1969 inflation had reached roughly 5 percent, so the money ordinary households and companies parked in savings accounts was effectively earning no real return.

In 1970, financial consultants Bruce R. Bent and Henry B. R. Brown saw the arbitrage. Rather than petition regulators or Congress to raise the deposit-rate ceiling, they created a mutual fund — the Reserve Fund — that pooled money from many savers and invested it solely in those very short-term, market-rate instruments, redeemable at any time and structured to hold a stable price near $1 a share. Because a money market mutual fund was not a bank deposit and its operator was not a depository institution, the interest cap that governed bank deposits simply did not apply to it.

Reclassified the product: wrapped market-rate securities into a mutual fund that behaved like a savings account, so the deposit cap never applied.

The cap applied to 'deposits' at depository institutions, not to mutual funds, so the fund was legally outside its reach.

Pooling small sums let savers access market-rate instruments with $10,000 minimums, which were individually unaffordable.

Daily redemptions and stable $1 share price gave bank-like liquidity, making the fund a direct substitute for savings accounts.

Savers flocked to the fund, demonstrating its value and pressuring regulators to eventually deregulate deposit rates.

When a rule caps your category, deliver the same function through a category the rule doesn't govern, instead of fighting the rule.

The first money-market fund created a trillions-dollar sector, helped repeal the cap law, and gave small savers liquid market-rate yield