A Piece of the Action : How the Middle Class Joined the Money Class

Book by Nocera Joseph

A Piece of the Action Introduction: The Money Revolution

SPRING IS THE BUSIEST TIME.

That’s what they’ll tell you in the “financial services industry”—the clumsy, all-purpose term that encompasses all the mutual fund companies and investment firms now spanning the nation, all the insurance companies and brokerage houses, all the S&Ls and banks and credit unions of every shape and size: the thousands upon thousands of entities that compete for the chance to handle our money. They know the routine by now; they’ve seen it enough times that they can predict what’s going to happen. Each spring, as the April 15 tax deadline approaches, the number of incoming phone calls begins to increase, a little more each week, until they are double their usual volume. The branch offices become crowded with customers and potential customers, as people jostle each other to pore over the merchandise or angle for a quiet word with an overworked salesperson.

For those in the business, spring has become a version of Christmas-time—one of the most important selling seasons of the year.1 Except, of course, the merchandise they are offering isn’t toys or clothes. It’s equity mutual funds. It’s certificates of deposit. It’s annuities. It’s municipal bond funds and individual stocks and overseas funds and hundreds of other tempting “financial products”—to use another of those unfortunate but useful phrases that have entered the language. In the spring, the industry has come to understand, millions of Americans go shopping for an investment, searching for a place to invest $2,000 or so in an Individual Retirement Account. That’s something we do now in America, pretty much as a matter of course: we shop for investments. Shopping for investments has become our habit and our responsibility, our burden and our thrill. It is an activity that has insinuated itself into the rhythms of middle-class life.

Whenever a large behavioral change enters the realm of habit—whenever it becomes akin to watching television or using a personal computer, something that was once new and strange but is now second nature—we tend to forget where it came from, and what life was like before its arrival on the scene. This is so even when the change in question is relatively recent, as is the case here. This book is a history of one such enormous change in American life: the astonishing transformation of the financial habits of the middle class. By this I’m referring not only to the process that led us to become investors, though that’s certainly a large part of it. Rather, I’m speaking about a broader set of habits that have resulted from Americans having to take charge of their own financial lives, habits that include changes in the way we borrow, the way we save, even the way we think about our money. Over the past two decades, we’ve been participating in nothing less than a money revolution. This is not a term I use lightly. When one recalls what the financial life of the middle class was like twenty years ago—when thrift was the highest virtue, when the daily movement of the Dow Jones average had almost no relevance to our lives, when few of us knew what a mutual fund was, much less the distinction between, say, a growth fund and a balanced fund—it’s hard not to conclude that this transformation has, indeed, been revolutionary.

It’s always difficult to pinpoint precisely where social revolutions spring from, and the money revolution is no exception. If you ask the marketers at the big mutual fund companies, they’ll tell you that it is we who have instigated the changes, by grabbing control of our financial destiny and forcing the nation’s financial institutions to cater to our yearnings. “People want control,” a marketer at Fidelity Investments told me several years ago. “They want to make their own decisions.” No doubt there is some truth in what the man says.

But it’s equally true, I think, that most of us perceive the money revolution as being fueled by “them”—the nation’s financial companies—rather than by us. We feel pulled into it by forces larger than ourselves. We didn’t demand, for example, the right to be able to make an instant personal loan by pulling a piece of plastic out of our pocket, to cite another financial innovation that helped instigate a huge behavioral change. Somebody, somewhere, had to create those things we now know as Visa and MasterCard, and then they had to persuade us to use them. And, in addition, the social and economic conditions had to be exactly right to cause this practice of paying by credit card to catch on—to cause it, that is, to become one of our new financial habits. The history of the money revolution is a history of all those somebodies, somewhere—the inventors of credit cards, the creators of discount brokerages, the marketers of mutual funds—and a history of those larger forces, such as inflation and financial deregulation, that made such innovations all but inevitable, and a history of our own evolving attitudes, which caused us to embrace these innovations. It’s pointless, it seems to me, to try to place one factor over all the others, and in the pages that follow, I’ve tried not to do that. Had any one ingredient been missing, this stew would never have been made. Of that I’m convinced.

I’m equally convinced, by the way, that the money revolution has been, in general, a force for good. Without question, it’s created a layer of complication to our already complicated lives, adding responsibilities that didn’t exist before, making it necessary for us to learn about things that never used to be among our concerns. We can make mistakes with our money now, and those mistakes can be costly. Markets, as we’ve learned again and again in recent years, can go down as well as up. Taking control of our finances can be quite nerve-racking at times. But we also have tools and resources at our disposal that were formerly unavailable to us, and we have been handed possibilities for making money that had always been out of our reach. The financial markets were once the province of the wealthy, and they’re not anymore; they belong to all of us. We’ve finally gotten a piece of the action. If we have to pay attention now, if we have to come to grips with our own tolerance for risk, if we’re forced to spend a little time learning about which financial instruments make sense for us and which ones don’t, that seems to me an acceptable price to pay. Democracy always comes at some price. Even financial democracy.

Sometimes change comes about in an obvious and dramatic way, but more often it takes place gradually and even imperceptibly. It’s only afterward, when the dust has settled, that we suddenly have the presence of mind to look up and see that everything is different. The money revolution has been a work in progress for some thirty years now, but it’s only been quite recently that we’ve finally been able to look up and see how much has changed. When did we start putting our savings in money market funds instead of bank passbook accounts? When did we start using credit cards for items that used to require a trip to see the loan officer at the bank? When did mutual funds capture our fancy? When did we become so aware of yield that we began moving our money around to capture an extra half a percentage point? When did we start keeping track of the Japanese stock market? When did this all happen? How did this all happen?

Here is how it happened.