Money market funds, those seemingly safe investment vehicles with a constant $1 share price, checkwriting and debit cards, are so commonplace that they are often seen as a substitute for bank accounts. As with so many other common financial tools, though, the financial crisis cast lingering doubts over money market funds.

The first money market fund, the Reserve Fund, was introduced in 1972 after a two and a half year approval process by the Securities and Exchange Commission. A money market fund is a form of mutual fund, just like stock and bond mutual funds. The money market fund was designed as a way around Regulation Q, a Federal Reserve rule that controlled the interest rates that banks offered their customers. Inflation had exceeded the rates allowed by Reg. Q, meaning savers were losing ground on their bank deposits. By investing in short-term government securities and corporate debt, and devising a daily interest rate formula that adjusted for any market value changes in its investments, the money market fund was able to pay a much higher interest rate than banks and maintain a $1 share price. (Money market funds are not to be confused with money market accounts, which are insured bank deposits with limited withdrawals and interest rates set by the bank. Reg. Q was phased out in 1986.)

Checkwriting for money market funds was introduced by Fidelity Investments in 1974 and led to explosive acceptance and growth. In his 1994 book “A Piece of the Action”, Joseph Nocera called money market funds “the seminal invention of the money revolution” and “the first truly different wrinkle in personal finance since the credit card.” Nocera further described the transformative impact of the money market fund.

It was the first product to cross previously iron-clad boundaries between banks and other financial institutions, not to mention the psychological (but no less iron-clad) boundaries separating “savings” money from “investment” money . . . Its creation signaled the beginning of the end for the old world of personal finance.

In 1991, money market funds had grown to hold over $400 billion in assets; today the figure is over $2.5 trillion.

This growth was not without some bumps. If a money market fund was not able to maintain its constant $1 share price (known as “breaking the buck”), hard-earned investor confidence would be lost. While Reg. Q was long gone, the Securities and Exchange Commission implemented rules for the quality, maturity and diversity of money market funds. In particular, funds could own a maximum 5% of its assets in the debt of any issuer except for government securities. These rules were effective until the recent financial crisis, with only one small money market fund breaking the buck in 1994, and it eventually paid back investors 96 cents of every $1.

Critics, however, contend that money market funds have been much riskier than simply looking at funds which broke the buck would suggest. The SEC has identified nearly 300 money market funds that have received assistance from their parent companies over the past 23 years to both boost investor confidence and maintain the $1 share price. That assistance has ranged from “precautionary” agreements that did not result in any actual financial transaction, to buying risky securities from the funds at full value, to directly adding cash to the fund.

In 2008, the original money market fund (then known as Reserve Primary), had 1.2% of its assets ($785 million of a total $62 billion) in debt of Lehman Brothers. Investors rushed to take money out of the fund and when Lehman failed Reserve Primary became the largest money market fund to break the buck. To alleviate investors’ growing concerns about the ability of money market funds to absorb losses, the Treasury created a temporary program to protect all shareholders, without limit. Funds had to apply and pay a fee to participate, and rules were tightened to require that 30% of a fund’s assets be convertible to cash within one week. The program ran from September, 2008 to September, 2009 and the guarantee program was not needed to reimburse any shareholders.

There is an as yet unresolved debate about permanent regulations to protect money market fund investors. The funds propose that they could temporarily halt fund withdrawals and then impose fees on investors seeking to withdraw funds. These restrictions would kick in if a fund had to convert 7.5% of its assets within one week. Tougher government proposals include a permanent cash buffer and, most important, accounting changes that would cause all money market funds’ share prices to fluctuate with market changes, rather than maintaining a constant $1.

Reserve Primary investors have received 99 cents of every $1, and $99 million is still tied up while executives of the fund, including one of the original funders, face civil charges of misleading investors.

We find ourselves in the same environment as when money market funds were introduced, with the Fed keeping interest rates very low. Today, though, bank deposits and money market funds alike are paying well below the inflation rate. Hopefully, we have learned our lesson that higher return is always accompanied by higher risk, even if that risk is not obvious.