A History Lesson on Money Market Certificates
One of the big problems facing U.S. commercial banks back in the 1970s was disintermediation caused by the Federal Reserve's Regulation Q. Reg Q limited the interest rates that banks could pay on their savings accounts and time deposits. The problem was that from time to time interest rates climbed above the Reg Q ceilings, usually because of increasing rates of inflation. Depositors naturally transferred their savings out of the banks and into money market mutual funds, which were not constrained by a rate ceiling.
The banks finally got regulatory relief. In June 1980, commercial banks were allowed to issue 6-month money market certificates (MMCs) that paid the 6-month T-bill auction rate plus 25 ...
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