In the aftermath of the stock market crash of 1929, the Great Depression, and the Second World War, the stock market looked moribund in America. Share prices were still a long way from returning to their peak levels from just before the crash. Brokerage firms were also having trouble engaging with new customers. Trading volumes, and therefore broker commissions, were stagnant. Amidst these disappointing circumstances, the New York Stock Exchange, its brokerage firm members, and mutual fund managers looked for a change. They tried to bring about a renaissance in the 1950s by introducing more Americans to the stock market.
In The Market
In 1949, just 4.2% of the U.S. population owned shares. This was not because financial products were achieving little penetration in the mass market. At that same time, 82% of American families had a life insurance policy, for comparison. Also, 21% held an annuity or pension and 42% owned a U.S. government savings bond. Three years later, when the New York Stock Exchange commissioned a study by the Brookings Institution, they found 6.5 million people, or once again just 4.2% of the population, owned a listed share.
It was not quite a matter of perceiving investing in stocks as difficult or inaccessible. Rather, people did not view the opportunity to invest in shares positively to begin with. Despite new regulations for the securities markets in the 1930s, many were hesitant to jump into the market, even long after the crash of 1929. A few bad operators, most notably among the old closed-end investment trusts of the 1920s, spoiled things for the whole industry. That said, it did not help that a 1930s president of the New York Stock Exchange, Richard Whitney, was convicted of embezzlement. Making matters worse still, only in 1945 did the Dow Jones Industrial Average recover to half of its 1929 peak levels!
Amidst these negative circumstances, it is not surprising that when a poll was commissioned by the New York Stock Exchange in 1954, conducted by the consumer researcher Alfred Politz, it found that 90% of Americans would not even consider buying a common stock. Further, only 23% could define what a common stock was and 24% could describe the role of the New York Stock Exchange. Even among those who could describe what a common stock was, 77% would not consider investing in one.
There was strong interest in changing the sorry state of public participation in the stock market. Starting from 1953, the New York Stock Exchange began to more aggressively promote stock ownership among the public. The exchange and its members had previously spurned advertising; in 1953, for example, the entire American securities industry spent just $2.4 million on advertising.
Times were changing. Now, the industry was launching advertising campaigns spanning promotional films and educational literature. A museum was even opened at the New York Stock Exchange which also formed a new market development department. The new enthusiasm for marketing was encouraged by George Keith Funston, the president of the New York Stock Exchange; suitably, he was someone who, when taking up the post, possessed more sales and marketing experience than financial services experience.
One of the new stock exchange campaigns was titled “Own Your Share of American Business”. These publicity efforts were to some extent propelled by the Red Scare when many were keen on promoting the superiority of capitalism over socialism and it was safely presumed that the broad public would be receptive to such an appeal. The message was conveyed to the public in all sorts of places; stockbrokers even set up booths in department stores to sell mutual funds next to these stores’ other wares. While stockbrokers may have been at the frontlines, the New York Stock Exchange provided much of the marketing material.
Mutual Funds
While the New York Stock Exchange was ramping up its engagement with the public, mutual funds increasingly served small investors in the 1950s too. Managers pitched their funds on the basis of their diversification and professional management. At the start of this effort, some were gloomy about the business. There were those who predicted that new regulations for investment companies introduced in 1940 would kill off the industry but the opposite happened; growth picked up.
More effective marketing certainly helped. Fund managers refined their training of sales agents, often employed on a part-time basis to make sales door-to-door, and rolled out better promotional materials. Some hosted lecture series on the topic of investments. Mutual fund managers’ own efforts were complemented by those of stockbrokers. A stockbroker may have seen in mutual funds a competitor because they offered an alternative to buying and selling individual shares. Yet, stockbrokers increasingly began to sell mutual funds to complement stagnant stock trade commission income. So, they supported the mutual fund industry, selling shares and thus augmenting the mutual fund shares sold directly to investors by the funds themselves.
Further, some mutual funds introduced monthly investment plans for small investors in the early-1950s. Typically, these required an initial $100 to $250 investment but thereafter investors were able to increase the size of their portfolio in increments of as little as $25 per month. By the early-1960s, monthly (or quarterly) investment plans of different sorts were comprising 15-16% of new mutual fund sales.
It is rather remarkable how fast mutual fund adoption was growing in the 1950s. By 1954, American mutual funds had assets of over $5 billion across two million accounts. This may not seem like much today but it was massive compared to the mere $450 million across 296,000 accounts that comprised the entire American mutual fund industry in 1940. By 1955, there were 125 mutual funds in the United States, nearly double the number active in 1940. These invested in the largest publicly-traded companies of the day, the likes of Radio Corporation of America, Dow Chemical, General Motors, American Telephone, Standard Oil of New Jersey, and General Electric.
NYSE’s Own Monthly Investment Plan
Perhaps in response to mutual funds’ investment programs, the New York Stock Exchange and some of its member firms created a “Monthly Investment Plan” of their own. This was not a mutual fund product but rather a special type of brokerage account for small investors available at certain firms. They allowed someone to invest in listed shares starting with a $40 investment that itself could be paid over three months.
Each monthly investment plan was oriented around a single stock. Investors received allocations in fractional shares in that stock, if necessary to fully deploy their investment, and could reinvest dividends automatically. While each plan was designed around a single stock, diversification could still be achieved. An investor seeking diversification and professional management could buy shares in an exchange-listed diversified firm, like the Tri‐Continental Corporation, a closed-end fund.
The first NYSE monthly investment plan launched on January 25, 1954. They largely interested small investors, as intended; 90% of these early customers were also new investors. Among those making monthly contributions, the average monthly investment was $70. Among those selecting a quarterly frequency, the average investment was $90. For comparison, a monthly investment in the investment plans was capped at $100.
Some mutual funds feared the plans could compete with their offerings. After all, mutual funds also facilitated monthly investments. This did not happen though, at least not to a meaningful degree. The monthly investment plan introduced by the NYSE and its member firms got off to a slow start. Within the first twelve weeks, 13,500 such accounts were opened and 19,000 by June 1954.
Merrill Lynch was one NYSE member firm which introduced this form of monthly investment plan to compete with mutual fund managers. Merrill Lynch was particularly interested in finding new investors and, after a while, the product became particularly important to it, driving 60% of its investment volume in the early-1960s. In any case though, the brokerage firms’ installment plans did not threaten mutual fund managers. The market was growing for everyone.
Investment Costs
In the past, small investors were greatly disadvantaged by large transaction costs relative to the size of their investments. Unfortunately, the reality had not really changed and this remained true in this period of growing brokerage account and mutual fund adoption. Commissions were high on brokers’ investment plans, deterring investors; 4% was the average commission but on very small investments, commissions could be as high as 6%, excluding extra sales charges of as much as $0.25 on small orders. Mutual funds’ sales charges were also often in the high-single digits, typically 7% or higher.
Some employers allowed employees to fund investment plans by payroll deduction. In one variation of an NYSE monthly investment plan offered by an employer, this allowed employees to save on commission expenses because their allocations were shared in a single trade. Along similar lines, 15,000 investment clubs were active by the end of the 1950s according to NYSE President George Funston. These arrangements may have helped investors save some money on brokerage commissions.
Incremental Progress
Despite all the headwinds, more Americans were participating in the stock market. Between 1952 and 1956, the number of individual shareholders in America grew by one-third to 8.6 million people. Still, this was a relatively small fraction of the population. Nonetheless, the number would reach 12.5 million in 1959, 17 million in 1962 and 20 million in 1965. Among those holding shares, adoption of NYSE monthly investment plans picked up; compared to $4 million in mid-1954, there came to be $200 million held in these accounts in 1961. By year-end 1963, over $300 million in investments had been made in over 350,000 accounts.
In that same year, the majority of NYSE monthly investment plan accountholders also had conventional brokerage accounts. Many terminated their monthly investment plan after accumulating about $1,000 in investments, sometimes to convert into another account type. With respect to mutual funds, by 1963, fund assets reached $25 billion and growth was very strong; mutual fund accounts reached 6.7 million in 1965.
Of course, this was still a small fraction of Americans but the 1950s and 1960s were just the beginning of a surge in stock market participation. In a sign of progress and future potential, polling was showing that more Americans were considering investing in stocks and conferred more respect towards the stock market and stockbrokers.
Lesson
Today, stock market participation is very high in the United States. Indeed, the participation rate in the U.S. is one of the highest in the world. To some extent, this is a function of the country’s wealth and average income but that should not lead someone to presume it was always this way.
Very few Americans were active in the stock market before 1950. To be fair, this is also true of 1965. Yet, the 1950s and 1960s were a period of tremendous growth and innovation in the investment business and was a period in which many people’s perception of the stock market changed. In later decades, reductions in broker commissions and new ways of selling investment products over the phone or the internet would further support stock market participation. Still, the earlier developments were no doubt crucial to shaping later adoption of mutual fund and brokerage account products.
More from the Tontine Coffee-House
Read about how Merrill Lynch & Company became a mass-market retail brokerage firm in a challenging environment and the 1975 abolition of fixed brokerage commissions in the US. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
1. Funston, G. Keith. The Boom in Shareownership; Remarks at Denver, Colorado Chamber of Commerce, in Connection With Colorado Centennial Celebration, April 24, 1959. Denver, United States of America.
2. Markham, Jerry W. A Financial History of the United States: Volume II: From J.P. Morgan to the Institutional Investor (1900 -1970). M.E. Sharpe, 2002.
3. McMahon, J. E. “Investors’ Stake in Stock Plans Up; Exchange’s Program Has No Adverse Effect on Mutual Funds — May Be Aiding.” The New York Times, 27 June 1954.
4. “Personal Finance: Battle for Small Investor.” The New York Times, 20 Jan. 1964.
5. Traflet, Janice. “‘Own Your Share of American Business’: Public Relations at the NYSE During the Cold War.” Business History Conference, 2004.
6. Traflet, Janice M. “Never Bought, Always Sold: Salesmanship, the Small Investor, and the Early Postwar Surge in Mutual Fund Participation.” Essays in Economic & Business History, vol. 27, Jan. 2009.
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Marc Howe