Money market funds (MMFs) first appeared in the United States in the early 1970s as a solution to a pressing challenge for individuals and businesses: how to earn a return on cash holdings amind rising inflation and interest rates.
At the time, Regulation Q (introduced in 1933) capped interest rates on deposits, restricting banks’ ability to pay interest to both individuals and businesses.
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In 1971, two entrepreneurs, Bruce Bent and Henry B. R. Brown, conceived a simple yet powerful idea: creating a mutual fund that pooled capital from savers and treasurers and deployed it into short-term debt instruments to pay interest on a day-to-day basis while preserving capital. The first MMF, called the 'Reserve Fund', was born. Designed to compete with bank deposits, it aimed to maintain a stable value per share of $1 while offering daily liquidity and daily interest close to the risk-free rate.
The Reserve Fund launched with a few hundred thousand dollars. At the beginning of 1973, it managed only $1 million in assets. However, following a January 1973 article in the New York Times (Overnight Mutual Funds for Surplus Assets, by Robert D. Hershey Jr.), the product quickly gained recognition and traction. Assets under management (AUM) surged, reaching around $100 million by year's end. By the early 1980s, the Reserve Fund had billions of dollars in AUM, a huge success for a new financial product.
Inspired by the success of the Reserve Fund, many fund managers launched competing products. For example, in mid-1974, Fidelity Investments launched the Fidelity Daily Income Trust (FDIT), which became the first money market fund to offer check-writing privileges, allowing investors to write checks directly from the fund, much like a bank account. Fifty years later, Fidelity Investments is the largest money market fund manager in the United States, with more than $1.5 trillion in MMFs and a ~20% market share.
Overall, the number of MMFs in the U.S. rose from a handful in the early 1970s to more than 600 by 1990. Within a decade, MMFs had become a key cash-management instrument, adopted by savers, treasurers, and institutional investors, either alongside or in place of bank deposits.
Although deposit rate ceilings were gradually relaxed in the 1980s and fully repealed in 1986, banks were reluctant to erode their profit margins by raising interest paid on deposits, which helped money market funds retain their appeal over the years.
By the 1990s and 2000s, MMFs - including the Reserve Fund - had become major players in short-term credit markets, financing banks, corporations, government agencies, and the federal government. That said, at the time, MMFs were still largely invested in debt securities issued by private entities - typically banks or large corporations - rather than public ones, which would soon cause difficulties.
The Reserve Fund grew steadily for decades, maintaining a $1 NAV (value per share), paying regular interest, and surpassing $60 billion in assets by 2008. On September 15, 2008, everything changed overnight. Lehman Brothers filed for bankruptcy. The Reserve Fund held $785 million of Lehman’s short-term debt, which had now likely become worthless, reducing the fund’s assets by 1.2% and mechanically pushing its NAV below $1, thereby eating into investors' capital. For the first time in its history, the Reserve Fund had ‘broken the buck’, and it was also the first time in U.S. history that a large, retail-focused MMF had done so.
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As the NAV broke below $1, investors in the Reserve Fund began to panic. On September 16, the fund faced $15 billion in redemption requests. The fund managers decided to temporarily suspend redemptions for institutional investors while continuing to honor smaller redemptions from retail investors. The panic quickly spread beyond the Reserve Fund, focusing on money market funds invested in private debt securities whose value was now being questioned by the market. In just a few days, redemption requests from such MMFs totaled over $400 billion.
On September 19, the U.S. Treasury announced a temporary guarantee program to protect investors’ capital and restore confidence in the MMF sector. Under this program, participating funds could guarantee their shareholders’ balances, effectively assuring that NAVs would not fall below $1. The program succeeded in quelling the panic. Investor withdrawals slowed and confidence in money market funds gradually returned.
Nevertheless, it marked the end of the Reserve Fund. On September 29, the fund announced that it would wind down by allowing its assets to mature or gradually selling them, with the proceeds distributed to the remaining investors. Ultimately, losses were limited to around 1%, roughly reflecting the fund's holdings of Lehman Brothers debt.
This event had a major impact on the U.S. money market fund industry. In response, an SEC rule adopted in 2014 and implemented in 2016 required so-called ‘Prime MMFs’ (see definition below) such as the now defunct Reserve Fund to adopt floating NAVs, meaning share prices could no longer be fixed at $1. To avoid floating-NAV complications and meet investors’ increased sensitivity to credit risk, fund managers shifted their allocations toward government securities, primarily Treasury bills.
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Before 2008, Prime MMFs dominated the U.S. MMF landscape, accounting for roughly 80% of assets. By 2010, Government MMFs already held over 50%, and today they represent more than 80% of total MMF assets (souce: ICI). In a couple of years, Government MMFs have effectively become the default product in the U.S. market. No Government MMF has ever broken the buck, and it is unlikely that any will, unless the government defaults on its short-term debt. Thus, the unfortunate demise of the first-ever MMF helped solidify the industry.
Interestingly, Europe has yet to follow the U.S. model. While the story of the Reserve Fund and its sudden collapse remains a warning for everyone, European MMFs continue to invest heavily in short-term debt issued by private entities. Fortunately, there are a handful of exceptions, such as the Spiko Euro money market fund, which maintains a 100% allocation to Treasury bills.
Amid the Great Depression (1929–1933), the primary goal of regulators was to stabilize the banking system. To this end, they decided to limit banks’ ability to pay interest on deposits, viewing it as a way to prevent excessive competition that might push banks to take on excessive risks to deliver the promised returns on deposits.
To date, only three money market funds have ever broken the buck in the U.S.: 1) the First Multifund for Daily Income (FMDI) in 1978, 2) the Community Bankers U.S. Government Fund in 1994 and 3) the Reserve Fund in 2008. Each time, the cause was the same: exposure to credit-risky assets.
Prime MMFs are money market funds that invest in short-term debt securities issued by banks or corporations. While generally low-risk, these instruments carry credit risk - that is, the possibility that the issuer may default. In contrast, Government MMFs invest exclusively in U.S. Treasury or government agency short-term debt securities or repurchase agreements backed by government debt, making them effectively risk-free.
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