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While old savings institutions are struggling to cope, the new money hybrid of the future is rapidly materializing. Neither a simple savings and loan nor a conventional bank, it is a combination bank, insurance company, brokerage firm and credit-card company. The mergers in recent months of the Prudential Insurance Co. with Wall Street's Bache Group Inc. and American Express with the Shearson Loeb Rhoades brokerage firm provide a glimpse of the shape of things to come in finance. With the help of computers, plastic credit cards and toll-free long-distance phone calls, these money supermarkets are carrying out perhaps the most significant change in the way people handle money since Marco Polo discovered the Chinese using paper currency in the 12th century.
No company looms larger in this new arena of financial services than Merrill Lynch & Co., the world's largest brokerage house (1980 sales: $3 billion). As an example of the financial shopping center of the future, Merrill Lynch, in addition to selling its traditional stocks and bonds, will provide customers with money-market funds, sell them life insurance, buy or sell their homes, and lend them money. Says an admiring Samuel H. Armacost, president of Bank of America: "We've already got the nationwide banking of the future. It's called Merrill Lynch."
The reasons for the upheaval in personal finance are not hard to pinpoint: double-digit inflation and high taxes. There are almost no savings instruments that pay interest high enough to offset their ill effects. "When inflation gets into double digits, you have to do something or else lose the race," says George Sullivan, an IBM executive in Denver, who has switched most of his cash from a bank to a money-market fund. Assuming 10% inflation, someone in the 50% tax bracket would now have to get 20% interest on his savings just to break even.
Until the 1970s, an after-taxes annual return of 1% to 2% on passbook savings was considered to be about normal. The trouble began in the mid-1960s, when inflation rose from 1% to 5%. In 1965, when thrifts were paying up to 4¾%, a family earning the national average of $7,704 and with a nest egg of about $3,500 in the bank would have realized an annual return of about $80 after inflation and federal taxes were taken into account. By 1967 inflation and taxes had reduced the gain to zero. In the year 1970, that same average family would have lost $110; and in 1979 it would have lost $830. "Just like money in the bank" no longer meant certainty and stability. Now savings were like a sand castle, slowly being washed away by wave after wave of inflation.
Until recently, most people had two choices: they could put their money into regular savings accounts, where its value eroded at a frightening rate, or they could spend it. Most chose to spend it. The result: frugal Americans have become spendthrifts. The savings rate dropped from 8% in 1970 to the present 4.7%. By contrast, the West Germans put away 13.5% of their earnings, and the Japanese save 19.5% of theirs. Among major nations, only the Swedes save less than Americans.