Wall Street to Main Street: Charles Merrill and Middle-Class Investors

Published by EH.NET (September 2000)

Edwin J. Perkins. Wall Street to Main Street: Charles Merrill and

Middle-Class Investors. New York: Cambridge University Press, 1999. xiv +

283 pp. $29.95 (cloth), ISBN: 0-521-63029-0.

Reviewed for EH.NET by Kenneth A. Snowden, Department of Economics, University

of North Carolina at Greensboro.

Ed Perkins claims (p. 237) that “Charles Merrill deserves high ranking on any

list of the most influential entrepreneurs in American History … in the same

rarified company as Carnegie, Rockefeller, Edison, Ford, Walton, Gates and J.P.

Morgan.” In this lively and well-written book Perkins makes the case with equal

doses of biography, business and economic history and homage to a subject

familiarly referred to throughout the text as “Charlie.” Do not despair if your

syllabus, like mine, fails to recognize Merrill’s “unparalleled contributions

to the development and democratization of twentieth-century capital markets,”

because “[t]he main reason for his lack of public recognition has been the

paucity of information about his monumental accomplishments” (p. 237).

Or perhaps not. In fact, the biographical high points that Perkins lays out,

while clearly establishing Merrill as a shrewd, successful financier and

remarkable personality, hardly seem to place him in the entrepreneurial

pantheon. In 1914, at age 29, this native Floridian, average college student,

and aspiring Wall Street bond dealer opened Charles E. Merrill & Company to

specialize in investment and merchant banking activities for clients in the

retail sector. A largely unsuccessful foray into financing automobile

manufacturers, and a fortuitous and highly lucrative one into movie production,

did not distract his company from becoming a major player in this small and

previously neglected corner of the capital market. By the mid-1920s Merrill and

his then-partner Lynch issued, underwrote and distributed securities for chains

such as Kresge, McCrory, J.C. Penney’s, Kinney’s and Safeway. This last company

commanded increasingly large shares of Merrill’s attention, time and the firm’s

resources, and he abandoned the financial services industry altogether in 1930

when Merrill and Lynch’s brokerage arm was transferred to E.A. Pierce & Co. in

which the firm became silent and inactive partners. By 1932 Merrill had

engineered a remarkable expansion of the Safeway chain through merger, but the

management of the grocery giant was left to his hand-picked CEO, Marion Skaggs.

By 1940 the fifty-five year old Merrill had triumphed twice — as an investment

banker and a grocery chain magnate. Perkins has to acknowledge, however, that

his claim to entrepreneurial immortality had not yet been earned. Merrill’s

genius, according to Perkins, emerged during the next decade and a half as he

created the first truly nationwide system of brokerage houses to connect Wall

and Main Streets. But even here Perkins’ claim seems to founder on biographical

detail; after a series of devastating heart attacks in 1944 and 1945, Merrill

rarely visited the firm before his death in 1956, and served as directing

partner from homes in Long Island and Florida through his most trusted

colleague, Winthrop Smith. Perkins convincingly argues that Merrill’s influence

on the firm, even when infirm and partially incapacitated, remained significant

during the last decade of his life. But the biographical facts frame ever more

narrowly the window during which Merrill’s entrepreneurial accomplishments

occurred. Perkins’ ultimately relies, in fact, on events between 1940 and 1944,

well before the spectacular postwar growth of Merrill Lynch, Pierce, Fenner &

Smith.

The crux of the argument is laid out in Chapters 11 and 12 where Merrill’s

third career is characterized as formulating and testing a new strategy on Wall

Street. In 1940 Merrill was faced with either dissolving the firm’s interest in

Pierce’s faltering brokerage firm or becoming active once again in the

financial service industry. Merrill and trusted associates huddled for two

months in early 1940 as the merger of Merrill Lynch and E.A. Pierce was being

arranged, and in April 1940 the organizing principles of the new company were

announced at a meeting of branch managers.

Merrill relied on his experience in both financial services and the retail

trade in formulating his strategy and even used information culled from a

survey of the brokerage’s customers in California. Perkins observes that little

of the plan was modified in subsequent years, and that the April meeting “set

the tone and direction for Merrill Lynch over the next quarter century.” We

have here, therefore, entrepreneurial innovation in its purest form.

Merrill integrated three interrelated principles: a new culture for the

brokerage house and its employees, a rejuvenation of the public’s confidence in

securities and the securities markets, and an expansion in the numbers and

types of investors. Numerous specific innovations were involved: the firm’s

brokers received training, were referred to as account executives and were

compensated with salaries and profit-sharing instead of commissions; the firm

began to publicly disclose an annual performance statement, advertised the

benefits of stock investment as a long-term investment strategy and liberally

offered education and research on security investments to current and

prospective customers; new customers were asked to fill out a questionnaire

after which their accounts were directed to account specialists who were most

experienced in the investment activities that they desired. Merrill had been

espousing some of these ideas since the 1910s; had been exposed to others in

his dealings with retail firms; and had gleaned still others from the research

his team had recently undertaken. This amalgam proved wildly successful — by

1953 Merrill Lynch was operating 108 retail offices nationwide (9 percent of

the brokerage outlets of all NYSE members) and claimed a 12 percent share of

all trades on the NYSE exchange and an 18 to 20 percent share of trades on

regional exchanges. As Perkins notes, Merrill’s firm was an undeniable leader

in introducing the customer-oriented approach to marketing securities and

promoting the postwar expansion and democratization of corporate ownership.

But was Merrill an innovator of first rank? Perkins has taken an important

first step in making this case, and his book deserves to be widely read and

discussed. But additional work and analysis on two fronts will be required

before the name Merrill rolls as easily off the tongue as Morgan, Ford or

Carnegie. To begin with, it is not clear from Perkins’ treatment where the

contributions of Merrill end and those of numerous trusted associates and

colleagues begin. Win Smith, son-in-law Robert Magowan, consultant Ted Braun

and journalist-advertising head Louis Engel play pivotal roles in this story

both before and after Merrill’s incapacitating illness. Merrill clearly

assembled this team and was early on its leader and most powerful spokesman,

but the entrepreneurial contributions of his firm may be better described by

the “We the People” moniker that journalists bestowed on the multi-name

organization firm in the early 1940s than on Merrill’s contributions alone.

More fundamentally, it remains unclear just how Merrill’s innovations solved

underlying informational problems and market imperfections that had prevented

an earlier development of the modern retail brokerage house. We are told that

Merrill advocated full disclosure in his company’s dealings, aggressively

invested in advertising and educational programs that benefited the entire

brokerage industry as well as his firm, and welcomed rather than feared

imitators of his methods. This list of “accomplishments” looks impressive when

juxtaposed against the worst instances of market “manipulation,” “fraud” and

“greed” that Perkins attributes to nameless predecessors in the industry, but

they only suggest how Merrill’s specific innovations cost-effectively overcame

security market imperfections.

Parts of the Merrill story, in fact, can be interpreted as evidence that his

“genius” lay in advertising, packaging and selling unnecessary services to

small and medium investors. The firm’s own research in the 1940s and 1950s

identified “churners” — investors who borrowed from the firm on margin and

undertook a large volume of trades — as the principal source of the firm’s

profits. The numerous accounts of small, relatively inactive investors actually

generated losses for the company, but were cultivated in order to increase the

pool out of which new churners would emerge (p. 153). Furthermore, while the

company’s favorite advertising slogan, “investigate, then invest” had the

trappings of empowering investors, it also created a market for investment

advice and research of dubious value. In fact, Perkins tells us (pp. 222-32)

that Merrill’s dogmatic resistance to mutual funds in the early 1950s stemmed

from his belief that their availability would lead investors to adopt rigid buy

and hold policies that would reduce trading volume and the firm’s revenues.

Was this self-proclaimed “grocery man at heart” a giant of financial

innovation? Maybe, but do not rewrite your syllabi just yet. Instead, read

Perkins’ interesting and provocative treatment yourself and, like me, wait for

the outcome of the discussion of Merrill’s career that this fine book is sure

to engender.

Ken Snowden is author of “Historical Returns and Security Market Development,

1872-1925,” and “American Stock Market Development and Performance, 1871-1929,”

Explorations in Economic History (October 1987 and 1990). He is

currently working on a history of the Building and Loan Industry, see “Building

and Loan Associations in the US, 1880-1893: The Origins of Localization in the

Residential Mortgage Market,” Research in Economics, 51, 1997.