Limiting the money funds

"Here he comes," said a congressional staffer loitering in the hall. "The heavy." Paul Volcker, 6 feet, 6 inches tall and mostly bald, strode into the room and moved toward the witness stand, smiling and shaking hands. As chairman of the Federal Reserve Board, Mr. Volcker has been blamed for everything from high interest rates to the shaky condition of savings and loans.

And at this hearing he took yet another stand that will probably prove unpopular. Mr. Volcker proposed that money market mutual funds providing checking-type services be subject to reserve requirements. The move could lower yields for such funds.

Mr. Volcker thus became the most prominent government official to have suggested any kind of restriction on the fast-growing funds. Later in the day, Secretary of the Treasury Donald T. Regan said he was opposed to the proposal.

Banks and savings and loans have to post reserves on their checking accounts, argued Mr. Volcker, so why shouldn't money funds if they offer the same service? And he said the Fed has been forced to make "increasingly difficult judgments" about how money funds are affecting the US money supply.

"The approach I am proposing is designed to provide a framework for fair competition between money market funds and established depository institutions over time, to protect against erosion in our ability to measure and control the money stock, and to maintain attractive incentives for savings," said Mr. Volcker.

The key issue is whether small savers use money market funds as a substitute for checking accounts.

Critics -- mostly bank and S&L officials -- say they do.

Money fund managers say they don't, claiming their records show the average shareholder only writes three or four checks a year.

In any case, the point may be moot.

"There are a number of ways around [the proposed restriction]," said a spokesman for the Investment Company Institute.

Mr. Volcker himself said the restriction would cause money market funds to establish two types of accounts. One, featuring checkwriting privileges, would be subject to reserves and pay a slightly lower yield. A second would not have checks and thus remain relatively unrestricted.

Thus small savers could still get market yields, said Volcker. It would just be harder for them to reach their money.

Still, the high-flying money market fund industry was none too pleased.

"Essentially, it's a tax on small savers," said Paul Robertson, president of Capital Preservation Fund. "I cannot believe the Fed's ability to control and measure the money supply will be helped by putting reserves on money market funds."

David Silver, president of the Investment Company Institute, also claimed the move would hurt the little guy.

"Affluent individuals and large businesses would still obtain the highest interest rates while maintaining zero balance checking accounts and by using other devices which enable them to maximize returns on their cash. Everyone else trying to manage their money and earn the highest returns would take a cut in yields," Mr. Silver said.