Main Street Broker

By JOSEPH NOCERA

In 1940, the year Charles Edward Merrill founded the firm we now know as Merrill Lynch & Co., he was 54 years old and had already lived an extraordinarily productive and visible life. A poor boy from the backwaters of Florida, Merrill was forced to leave college by lack of funds. But he schemed his way to Wall Street and made himself wealthy by the time he was 31.

He was the first investment banker to realize that chain stores would one day dominate retailing, and he got rich by underwriting (and often controlling) such future powerhouses as S.S. Kresge (now K Mart) and Safeway Stores. He set up one of America's first wire houses--brokerage firms with branch offices in different cities connected to the main office by Teletype.

He was also the first big-name Wall Streeter to predict the Great Crash of 1929. Indeed, in the months leading up to the Crash, Merrill pleaded (to no avail) with President Calvin Coolidge to speak out against speculation. By February 1929, Merrill was so sure the end was near that he liquidated his firm's stock portfolio, an act that made him famous in October, when the Crash finally came.

Merrill made the gossip pages as regularly as the financial pages. By 1940, he had been married three times, had had countless affairs ("recharging my batteries" was his euphemism for philandering) and had sired three children, the youngest of whom, James Merrill, became one of America's finest poets. A short, self-absorbed, prideful, flamboyant fellow--"Good Time Charlie Merrill," his friends called him--he had the unconscious expectation that Great Men always have: that he should be at the center of any orbit he entered. And so he was. As his son once wrote, "Whatever he decided to serve, the victim was meant to choke it down and be grateful."

Merrill can't be dismissed as a moneybags who made a lucky guess on the Crash. He truly deserves to be remembered for what he did during that second career of his, the one that began when he was deep into middle age. In founding Merrill Lynch--his partner and sidekick, Edmund C. ("Eddie") Lynch, was a soda-fountain-equipment salesman--Merrill created an important and enduring institution. But more than that, he started the country down an important and enduring path.

Merrill, you see, was the first person to openly advocate that the stock market should not just be a plaything for Wall Street insiders but should also be an avenue for the broad mass of Americans. Decades before founding Merrill Lynch, he coined the phrase "Bringing Wall Street to Main Street." For the last 17 years of his life, that's what he tried to achieve with his new firm, which became a laboratory for his grand experiment. Today when we conjure up the names of the great American financiers, we tend to think of people like J.P. Morgan and Warren Buffett and even Michael Milken. But none of them had the effect on American life that Charlie Merrill had. In fact, they're not even close.

Can there be any doubt that the democratization of the markets is the single most profound financial trend of the past half-century? The statistics certainly bear this out: by some measures, half of America's households now invest, compared with only 16% in 1945, and mutual funds alone hold more of America's financial assets than banks do. Indeed, a strong argument can be made that the small investor, far more than the professional trader, is the true foundation upon which the modern bull market has been built.

Look at how fixated we've become with the daily ups and downs of the Dow--how our hearts race when the market is up and how we sag when the market does. Or look at how we've turned mutual-fund managers like Peter Lynch into celebrities. Most of all, look at the extraordinary extent to which we now rely on stocks to fund our retirement, send our kids to college and allow us to lead the kind of comfortable lives we view as middle class. We believe in the market today with something approaching religious faith.

Which, it turns out, is a pretty fair description of how Merrill always viewed the market. Its ability to create wealth broadly was to him an undeniable proposition. And while this is now a more or less universal truth, it was not always so. During the first part of this century, after all, the Street was largely a rigged game. Insiders manipulated the market from behind the curtains, behavior that, while unseemly, was legal then. Small investors were scorned--or fleeced. Yet Merrill was untouched by the cynicism that pervaded Wall Street. Like so many American visionaries, he was marked by naive and exaggerated optimism that was unshakable, even in the face of the darker reality he saw all around him.

Did the events of the Roaring Twenties and the Great Depression change Merrill's views? Quite the contrary. The Crash proved that people should have listened to him instead of to those charlatans who encouraged investors to borrow so heavily and to speculate so wildly. And if Americans had soured on the market by the end of the 1930s--and how could they not as the Dow Jones average lost 60% of its value and people came to see how rotten the game had been--Merrill eventually came to the conclusion that someone would have to rekindle the country's faith in the market. He turned to the only man he thought capable of the task: himself.

In retrospect, Merrill Lynch was really Charlie Merrill's bully pulpit, the platform from which he could preach the virtues of the stock market and show the country that the small investor could get a fair shake on Wall Street. "Demystification had been the key to [my father's] great success," James Merrill later wrote in his memoir. "No more mumbo-jumbo from Harvard men in paneled rooms; let the stock market's workings henceforth be intelligible even to the small investor." To that end, the firm published an endless stream of reports, magazines, pamphlets--11 million pieces in 1955 alone--with titles like How to Invest. Under Merrill the firm gave seminars across the country, with child care provided so that both husband and wife could attend. It set up tents in county fairs. It ran a brokerage on wheels. Once, it even gave away stock in a contest sponsored by Wheaties.

By Merrill's death, in 1956, the firm had some 400,000 clients and had become the largest brokerage in the country, a distinction it holds to this day. But Merrill died a sorely disappointed man. Wall Street had not rushed to follow his example, as he had hoped, and the majority of the country, still scarred by the memory of the Depression, was not ready to plunge back into stocks. He was simply too far ahead of his time.

There are many other people--mutual-fund pioneer Ned Johnson at Fidelity Investments and discount broker Charles Schwab, to name two--who over the course of the next 40 years helped push Wall Street and Main Street closer together. Yet for all their innovations, they remain at bottom Merrill's heirs. Their modern investing mantra is the same basic message he preached so many years ago-- that people should invest for the long haul; that they should have a clear understanding of the companies they are buying; that despite the hair-raising ups and downs, stocks have historically outperformed every other form of investment. Today the stock market no longer belongs to insiders. It belongs to all of us. We all now partake in its gains, just as we share in its losses--and who among us would argue that it should be any other way? Good Time Charlie Merrill's lonely voice has become America's common wisdom.

Joseph Nocera is an editor at large at FORTUNE and author of A Piece of the Action