Over the course of the 20th century, courtesy of improvements in communication, and some deregulation along the way, owning shares in listed companies was transformed from a privilege of the wealthy and connected few to something almost as common as a bank account or insurance policy. Yet, in the decade after the stock market crash of 1929, share ownership became less common among ordinary Americans. Charles Merrill and his firm Merrill Lynch & Company drove the reversal of this trend, introducing or reintroducing millions of Americans to the stock market in the years after the Great Depression.
In the early 20th century, individual investors in the stock market largely consisted of wealthy individuals, usually advised by banks, and invested in only the most conservative investments. They largely invested in bonds and to the extent they picked stocks, they were only those of the most well-established railroad and industrial companies. Besides these were the speculators focused on short-term gains and generally working with less money. Neither was a particularly large group.
Most ordinary people, especially those outside the big cities, were largely uninvested in listed stocks. For most people of moderate means, the usual destination of accumulated savings was a bank account or insurance product. The First World War began to change this. Mass bond offerings during the war inducted many ordinary investors into the securities market but it would be the repayment of these bonds, and the opportunity to reinvest the money elsewhere, that would open up the stock market to ordinary people.
Charles E. Merrill
Perhaps the man most responsible for driving this change in the way securities were sold was Charles E. Merrill. Merrill was born in Glen Cove Springs, Florida in 1885. He studied at Amherst College and the University of Michigan but learned the basics of finance at a textile company, Patchogue-Plymouth Mills, where he managed to obtain a bank loan for the firm in the midst of the Panic of 1907.
Later, he became a banker for Burr & Company and Eastman Dillon & Company. Burr & Company was a fledgling new firm, and Merrill could see that selling its investment products to wealthy investors, already courted by the well-established firms, would be more difficult than selling to a broader investor base of more modest means. After leaving Eastman Dillon, Merrill founded his own firm, Charles Merrill & Company, in January 1914. This became Merrill Lynch & Company when he was joined in July that same year by his friend Edmund Lynch, a soda machine salesman who had little in the way of experience in finance.
Early Days of Merrill Lynch
Out of the gate, Merrill Lynch & Company did not focus primarily on making common stock investing available to the masses. Instead, it was an investment bank largely focused on the retail industry, which Merrill specialized in at his past firms. Their first transaction was a $6 million share offering for chain store J. G. McCrory Co., which had to be delayed when the New York Stock Exchange closed at the start of the First World War. When all was said and done, Merrill made $300,000 from the offering. During this time, Merrill Lynch was also busy creating some of the first advertisements for war bonds.
Early clients of the firm included grocery and department store chains like S. S. Kresge, J. C. Penney, Walgreen Drugs, and Safeway Stores. The company was run out of 120 Broadway in New York and had only a few offices elsewhere, not at all the mass-market brokerage firm spread across the country that it would become. Retail investors were already part of its strategy though. It sold its securities to a broader market of investors than usual, in part because Merrill knew that ordinary people would recognize the success of these chain stores, often because they shopped at them themselves.
As holders of the stock they underwrote, Merrill and Lynch became very wealthy in this early period of their firm’s history. The other investors in the issuances it had sold also benefited from the booming stock market of the 1920s. Yet, in 1928, recognizing that less knowledgeable investors were pouring money into stocks, Merrill urged restraint near the stock market peak. He recommended customers reduce margin debt and many heeded this advice, enough to greatly reduce its customers’ aggregate use of margin debt.
This did not stop Merrill from shifting away from the securities business as the boom’s end approached. Merrill Lynch shut its investment banking unit just before the crash of 1929. Afterward, sensing that no recovery was on the horizon, Merrill sold the brokerage business to another survivor of the crash, E.A. Pierce & Co., in February 1930. Charles Merrill spent the Depression years focused on his personal investments in Safeway Stores as brokerage and investment banking business dried up during the Great Depression.
‘Bringing Wall Street to Main Street’
At the end of the 1930s, Charles Merrill decided to re-enter the brokerage industry. During the Depression, Merrill had absorbed even more practical knowledge about the high volume, low-margin retail business. Merrill thought he could import some of this business model into the brokerage world. Edmund Lynch would not join him though; he had died in 1938.
It was not an obviously favorable time to return to the industry. The brokerage business had been on a seemingly terminal decline, even E.A. Pierce & Co., the successor to the pre-Depression Merrill Lynch & Company, though having become the nation’s largest stockbroker by acquiring struggling competitors, was not operating profitably and had depleted its capital with years of losses. Still, Charles Merrill chose to retake control of this firm, injecting it with fresh capital. He merged it with another brokerage company, creating Merrill Lynch, Pierce, Fenner & Beane.
The new firm would focus on just one thing, mass-market retail brokerage. Costs were cut so that the firm would be able to serve smaller accounts profitably. Compared to the boom years, this was now a smaller industry; by 1940, only around one million American households had a brokerage account, a far lower proportion than a decade earlier.
As part of his plan to reverse this decline, the company focused on restoring investor confidence. Charles Merrill believed new regulation, like the Glass-Steagall Act of 1933 and the Securities Acts of 1933 and 1934 had made this easier, since they were designed to prevent frauds, bank failures, and another panic.
To do its part in this effort, Merrill Lynch published its 1940 balance sheet; this was at a time when few brokerages, usually privately-held partnerships, would even give a moment’s thought to the appeal of voluntarily sharing this kind of information. Releasing the balance sheet turned out to be a source of free publicity though as the financial press came to use Merrill Lynch’s financial performance as its public barometer of the industry’s health.
Merrill Lynch welcomed ‘odd-lot investors’, those trading in increments smaller than the standard 100-share denomination. The firm trained stockbrokers for six months upon hiring and called them ‘account executives’ instead. They would be paid a salary and a bonus rather than by commissions on each trade, aligning their compensation better with customers’ best interests. The firm distributed professional research to these account executives and its investors. So much was done to enhance the firm’s customer-friendly reputation that it was almost a given that this research department would be kept separate from the sales organization to maintain its independence and impartiality.
In 1941, its first full-year in business anew, Merrill Lynch earned a profit of approximately $500,000 on revenues of $8.6 million. In time, advertising came to be a meaningful expense. Indeed, the new Merrill Lynch advertised heavily at a time when advertising in the brokerage industry was uncommon and viewed with suspicion.
Merrill’s advertising was unique though because it was informational. One of the company’s most memorable newspaper ads was a 6,000-word primer on the securities business titled “What Everybody Ought to Know About This Stock and Bond Business”, published in The New York Times in 1946. In 1947, the firm distributed 75,000 free copies of its biweekly Investor’s Reader to potential clients, mimicking grocery store circulars.
Success and Unfinished Business
Charles Merrill’s direct involvement in his company waned after a debilitating heart attack in 1944. In 1945, the company earned a profit of $8.8 million, in excess of its top-line revenues just four years earlier; Merrill Lynch’s revenues now stood at $28.1 million. It grew still further from here, establishing a school to train demobilized soldiers becoming stockbrokers after the Second World War. They would fill its offices sprouting up around the country.
By 1947, the brokerage firm was behind 10% of all orders executed on the New York Stock Exchange. In 1949, it ran 2,774 distinct advertisements across 288 newspapers. Merrill Lynch opened its one-hundredth branch office in Omaha, Nebraska in December 1949. The New York Stock Exchange’s 608 members had 1,247 offices across the United States in 1954, an average of about two each but by then Merrill Lynch had 119 of them. Even still, after all this growth and investment, investing was hardly something most ordinary people thought possible, or sensible, for them.
Charles Merrill died in 1956, by which point his firm was earning $16 million on revenues of $70 million. The company was serving half a million customers. Revenues would exceed $180 million five years later, 350% greater than those of the second largest brokerage firm in the country, Bache & Co. At the time of Charles Merrill’s death, approximately 8.6 million Americans owned common stock, compared to 6.5 million in 1952 and just 1.5 million in 1929. By 1969, the number would reach 30 million.
The popularization of once-exclusive products requires that someone overcome the barriers standing in the way of delivering that product to the mass-market. With respect to securities, it was Merrill Lynch & Company that stood at the vanguard. To be sure, changes in technology and regulation played their part, but Merrill Lynch was able to seize the opportunity afforded by these changes to introduce the stock market, and Merrill Lynch & Company itself, to the average investor.
To do so, it spurned some of the norms of its industry, both those meant to protect investors, like limits on mass-market advertising, but also those that often fleeced them, like commission-paid brokers. Considering the importance of investing to people’s economic lives today, these changes were probably for the better.
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1. Gross, Daniel. “Charles Merrill and the Democratization of Stock Ownership.” Forbes Greatest Business Stories of All Time, Wiley, New York, 1997, pp. 90–105.
2. Markham, Jerry W. A Financial History of the United States. M.E. Sharpe, 2002.
3. Morris, Edward. “Chapter 5: Charles E. Merrill: The People’s Capitalist.” Wall Streeters – the Creators and Corruptors of American Finance, Columbia University Press, 2017, pp. 91–110.
4. Smith, Winthrop H. Catching Lightning in a Bottle: How Merrill Lynch Revolutionized the Financial World. Wiley, 2013.