The Origins of the New Finance Capital

Welcome back to This is Fine(ance Capital). We want to say up front that this will probably be the longest post we ever publish! It is intended to serve as a primer on how the new finance capital came to be the juggernaut that it is today. You can think of it as the context for everything that will follow, and a resource to which you can return in the future. Thanks in advance for bearing with us!

Introduction and Definitions

The first thing to remember about the asset management industry is that it does exactly what its name suggests – it manages the assets of others. That is, BlackRock, Vanguard, and State Street do not themselves own 20 percent of every company listed on the stock market – rather, they hold those shares on behalf of investors. Their clients include institutional investors (e.g. defined-benefit pension funds, university endowments, etc.) and participants in individualized investment vehicles (e.g. defined-contribution plans like 401(k)s and individual retirement accounts or IRAs).

Related to that point, the second thing to remember is that retirement savings are central to the story. Indeed, the modern asset management industry, and the broader financial system of which it is a part, is inconceivable apart from the tens of trillions of dollars of retirement savings available for investment.

For this reason, getting our heads around the new finance capital will require an understanding of how we came to have the system of retirement savings that we do. In this post, we trace the historical evolution of the U.S. retirement savings system focusing on the development of three important actors in the investment landscape: 1) public sector defined-benefit pension funds; 2) private sector defined-benefit pension funds; 3) individualized defined-contribution investment vehicles (e.g. 401(k)s and IRAs).

A defined-benefit pension fund is, quite simply, one that promises to pay its beneficiaries a defined benefit at a specified time. In the mid-twentieth century, retirement saving predominantly occurred in this form, thanks in large part to the struggles of unionized workers. A defined-contribution investment vehicle, on the other hand, is one to which an individual contributes a defined amount every month - though what they will receive upon retirement depends upon the performance of the market. In the “neoliberal era,” as unions have lost power, this has become the most common form of retirement savings.

Much of our emphasis will be on public sector defined-benefit pension funds, because these are among the largest institutional investors and, historically, the most important actors in the making of the new finance capital.

Finally, we should note what does not appear in this story: Social Security. Social Security is a ‘pay-as-you-go’ system, which means that current retirees are paid out of revenue collected by current taxes. In other words, workers today pay for the retirement security of elders today on the expectation that once they reach retirement age, younger generations of workers will do the same for them. Such a fully public, pay-as-you-go system exists entirely outside of the financial system and treats retirement security as a public good. Of course, Wall Street would love to see that change. Our goal, on the other hand, should be to dramatically expand it.

Early Systems of Retirement Income Provision

Some of the earliest modern institutional investors were pension systems established by local and state governments early in the twentieth century for the purposes of providing retirement benefits to public employees like teachers, firefighters, and police. In certain cases, these public pension systems operated on a pay-as-you-go structure similar to that of Social Security.

In other cases, public pension systems invested the assets entrusted to them with the objective of achieving returns sufficient to make benefit payments over time. The appeal of this kind of “funding” structure – and this is a theme to which we will return again and again – was that it enabled political officials to limit the cost to taxpayers of benefits owed to retired public employees.

Initially, the investments which public pension systems undertook were highly regulated and confined to low-risk municipal, state, and federal bonds. At the end of World War II, some 90 percent of public pension fund investments consisted of such government bonds.¹

In the mid-twentieth century, this sort of investment in government bonds constituted a mutually beneficial arrangement for public pension systems and municipal goverments. The pension systems got a predictable annual return, and government officials got access to low-cost credit which they could put toward public infrastructure projects like the construction of schools, hospitals, and transportation systems. The historians Sean Vanatta and Michael Glass have aptly called this model of public pension investment “fiscal mutualism.”²

Meanwhile, in the private sector, millions of workers won defined-benefit pension plans in the years after World War II thanks to the growth of industrial unions like the United Auto Workers and United Steelworkers.³ In 1949, the Supreme Court ruled that pension benefits were a mandatory subject of private-sector collective bargaining, thus obligating employers to come to the table on the issue.⁴ By the mid-1950s, the U.S. labor movement’s historic apogee in terms of membership rates, more than half of all private-sector union members enjoyed pension coverage.

Many private-sector unions hoped to use these new pension systems in a manner analogous to the fiscal mutualist model adopted by their public-sector counterparts. In other words, they envisioned using these large pools of capital to advance the interests of workers – for instance, by investing in worker housing. As one might imagine, capitalists were not thrilled about that prospect. And, as we will see, they took action to make sure it did not happen.⁵

Pension Funds Meet the Asset Managers

Now, back to public-sector defined-benefit pensions. In the years after World War II, public pension systems began to depart from the fiscal mutualist model and to expand investments in private financial markets – above all, in corporate securities.⁶ The driving force behind this change can be summed up simply: the desire to achieve greater “yield” (industry parlance for returns, or gains, on investments).⁷

Why the sudden urge to increase yield? First, for a variety of reasons, a growing disparity emerged between the yields offered by government bonds and those promised by corporate securities. If corporate securities carried greater risks, they also came with the possibility of higher returns – and this became more and more attractive with time.

Second, the postwar growth of the labor movement led to heightened concern among investors about inflation. Union power, many capitalists worried, would place relentless upward pressure on wages and prices. For an investment to hold its real value, much less to gain (or “appreciate”) in value, it would have to keep pace with the rate of inflation. Thus, fears of inflation (whether rational or not) led to growing anxiety among pension system managers about the yields their investments achieved.

Third, the explosion of militancy among public-sector workers during the 1960s – struggles closely connected to the civil rights movement – placed new pressure on public pension systems. Public employees, disproportionately women and people of color, demanded and won the same kind of retirement security afforded to private-sector union members in areas like manufacturing.

And finally, linking together all of these factors was the old political preference among most local and state elected officials for meeting growing pension obligations without resorting to additional taxation.

Public pension system managers responded to these factors by overhauling their funds’ investment portfolios between the end of World War II and the mid-1970s. From the high point of the fiscal mutualist era in the mid-century, municipal and state bonds had virtually vanished from the holdings of these public systems by the time Richard Nixon left office. Taking their place were ever more corporate securities, making public pension systems among the biggest players in the stock market.

To stress the pressures felt by public pension system directors to increase yield, however, is only to tell half of the story. Throughout this period, an ascendant asset management industry furiously lobbied state governments to liberalize the regulations over public pension investments and to entrust stewardship of these assets to professionally trained financial experts. Moreover, as the asset managers lobbied, they gained standing within trade groups that represented pension funds and public financial officials (e.g. state treasurers), which opened even more doors of influence.⁸ These firms and their allies in government understood all too well the historic opportunity before them – access to the growing pools of postwar U.S. retirement savings could confer enormous profits and power. Wall Street, in short, was a key player in this process.

A parallel process played out in the private sector. Capitalist class interests were alarmed by everything about the labor movement’s mid-century growth, and that included private sector unions’ quest to assert control over the uses of their pension funds’ assets. Thus, the conservative drafters of the anti-labor Taft-Hartley Act of 1947 added to that law a provision requiring that the boards of collectively bargained private-sector pension funds include representatives of management at least equal in number to those of labor. The point was to place a check on union influence over investment decisions.⁹

In 1974, Congress went a step further with passage of the Employee Retirement Income Security Act (ERISA). ERISA did three key things. First, it mandated that retirement assets be held in trust, which is to say managed by a trustee on behalf of a beneficiary according to specified guidelines. Second, it imposed funding percentage requirements, or rules specifying how much pension funds had to have on hand at any given time. And third, it implemented a restrictive fiduciary duty regime to govern the plans. The latter explicitly required that pension fund decision makers prioritize their “fiduciary responsibility” to the plan - basically, the growth of the fund’s assets - above all other concerns.

While ERISA applied only to private-sector pension funds, state courts and legislatures increasingly applied those same principles to public pension systems. By this time, as we have seen, public pension systems had already largely moved away from pay-as-you-go and fiscal mutualist models and had “diversified” the composition of their portfolios to predominantly include corporate securities.

In both public and private pension systems, the new legal fiduciary requirements imposed by ERISA and its state-level corollaries accelerated the trend of delegating the investment decision-making to professional asset management firms. But while the process gained steam from the 1970s onward, it is important to remember that the origins of this growth in professional asset management lay in the deepening integration of U.S. retirement savings with profit-driven financial markets over the course of the postwar period.

The Shareholder Revolution and the Age of Inequality

In the aftermath of ERISA, pension funds and their asset management partners became active agents in what has been called the “shareholder revolution,” an era in which institutional investors placed intensifying pressure on corporate boards to increase profitability and drive share prices upward - at whatever cost to workers and society more generally. The shareholder revolution was part and parcel of the making of “neoliberalism,” the period of anti-union offensives, public-sector retrenchment, and increasingly rapid international capital mobility that contributed to the spectacular increase in economic inequality that has defined our times.

In this context, the share of workers covered by traditional defined-benefit pensions declined markedly. In their place emerged an assortment of individualized, defined-contribution investment vehicles - like 401(k)s and individual retirement accounts (IRAs). As seen in the chart below, these individualized investment vehicles accounted for nearly half of all U.S. retirement assets by the turn of the century and currently account for about 67% of all retirement assets.

From the perspective of asset managers, however, whether retirement savings are pooled in traditional defined-benefit pensions or something like a 401(k) makes little difference. They will happily work with them all and have done so as the collective size of retirement assets across all vehicles has ballooned to $44 trillion.

Finally, we should note that institutional investors’ search for yield, which began during the postwar decades, did not stop with the move into corporate equities. An additional aspect of the shareholder revolution was the emergence of so-called alternative asset managers. While the exact contours of this category are often disputed, the term is frequently used to describe investments that fall outside of the scope of publicly traded equities and bonds. Typically included are private equity, venture capital, private debt, real assets (real estate, farmland, and timberland), infrastructure, and hedge funds (more a trading strategy than an asset class). In future posts, we will elaborate at greater length upon the history and current practice of these alternative asset managers.

Source: Investment Company Institute, Quarterly Retirement Market Data, Q4 2024

The 2008 Financial Crisis and Beyond

Most recently, the asset management industry has experienced tremendous growth in the years since the 2008 financial crisis. In future posts, we will explore in greater detail how the political-economic context within which Wall Street operates has changed over the past fifteen-plus years. For now, however, we will simply note two factors that have added fuel to the rise of the Big Three since 2008.

First was the “monetary policy” implemented by the Federal Reserve. The Federal Reserve is a hugely important and complex institution that was established by Congress in 1913, and we may use a future post to walk through its historical development. But for now, suffice it to say that the Federal Reserve implements monetary policy, which is to say that it affects credit conditions across the economy - and by credit conditions we mean, basically, interest rates. By buying and selling large quantities of bonds, the Federal Reserve exercises power over the cost of borrowing for households, businesses, and the government.

After 2008, and again during the pandemic, the Federal Reserve undertook enormous actions to lower interest rates of all sorts. The hope was that this would encourage lending that enabled households to buy homes (and other stuff) and spur businesses to invest in ways that created jobs.¹⁰

On the one hand, this liberal monetary policy played a role in stabilizing some very shaky economic foundations. This was particularly important given that through the 2010s, the Republican-controlled Congress refused to spend money (via fiscal policy) to help put people back to work. But a side effect of this liberal monetary policy driving down interest rates was to nudge investors toward riskier assets, like corporate stocks and bonds, and real estate. The boom in the stock market and in real estate prices (which contributed to the skyrocketing cost of housing) was in part the result of this monetary policy.

In the context of the widespread rise in stock prices, the passive investment strategy pursued by asset managers (introduced in our previous post) made a lot of sense. Why try to bet on winners and losers when one can simply ride the wave of the booming market as a whole? Moreover, given that asset managers are universal owners, holding shares in just about every publicly traded company, the stock market boom had the direct effect of increasing the Big Three’s assets under management (AUM).

The second post-2008 factor that contributed to the growth of the Big Three was the financial regulatory reform that followed the crisis - namely, the Dodd-Frank Act. This legislation imposed restrictions on the activities of the “systemically important financial institutions” (SIFIs) that had been at the heart of the crash - above all, investment banks. Asset managers, however, were not included under the regulatory purview of Dodd-Frank. They were therefore free to undertake a wide range of activities outside the scope of the new regulatory regime.

The result of all of this has been that the forces already giving way to the rise of the asset management industry prior to the 2008 crisis got turbo-charged after the crash. Since 2022, however, the Federal Reserve has departed from a liberal monetary policy and increased interest rates with the objective of combating inflation. How this new monetary policy approach will impact the Big Three is a question we will explore in future posts.

What’s Next

This is a lot of information! And let us be clear - not everyone agrees about what all of this means. In our next post, we will lay out some of the competing perspectives scholars have offered for how to make sense of the growth of the new finance capital and will draw out strategic implications of these different interpretations for working-class movements.

1. A bond is simply a type of loan for which the borrower makes recurring payments set by specified “yield” (think interest rate). At a later date (the “maturity”), the borrower returns the principal in full.

2. Michael R. Glass and Sean H. Vanatta, “The Frail Bonds of Liberalism: Pensions, Schools, and the Unraveling of Fiscal Mutualism in Postwar New York,” Capitalism: A Journal of History and Economics 2, no. 2 (2021): 427-472 and Sean H. Vanatta, “The Financialization of U.S. Public Pension Funds, 1945-1974,” Review of Social Economy 82, no. 2 (2024): 261-293.

3. The origins of private-sector pensions date to the railroad industry of the 1870s, but the majority of beneficiaries over the subsequent seventy years were higher paid, professional employees. It was not until unions gained the right to bargain over retirement benefits that wage workers gained access to such pensions in large numbers. See Patrick W. Seburn, “Evolution of Employer-Provided Defined Benefit Pensions,” Monthly Labor Review (Dec. 1991).

4. We should note that historians have drawn attention to the way in which organized labor’s turn toward bargaining over “fringe benefits” like healthcare and pensions at the employer level marked a retreat from efforts to build more robust, universal public systems. If you are interested in learning more about this history, here are some good places to start: Jennifer Klein, For All These Rights: Business, Labor, and the Shaping of America’s Public-Private Welfare State (Princeton, 2003); Marie Gottschalk, The Shadow Welfare State: Labor, Business, and the Politics of Healthcare in the United States (Cornell, 2000): Nelson Lichtenstein, “From Corporatism to Collective Bargaining: Organized Labor and the Eclipse of Social Democracy in the Postwar Era,” in Steve Fraser and Gary Gerstle eds., The Rise and Fall of the New Deal Order, 1932-1980 (Princeton, 1989); and Henry Himes, “The United Steelworkers and America’s Path to Private Security: The Postwar Retiree Crisis, Politics, and Communism, 1946-1949,” Labor: Studies in Working-Class History 19, no. 2 (2022): 42-70.

5. Our account of the historical development of private-sector pension funds is drawn largely from Michael A. McCarthy’s outstanding study, Dismantling Solidarity: Capitalist Politics and American Pensions since the New Deal (Cornell, 2017).

6. The language of financial markets can be very confusing! Corporate securities simply mean stocks and bonds (see above for the definition of a bond). Corporate stocks are also called shares, and owners of stock are shareholders. A stock is simply a slice of ownership of a corporation, and ownership can also be called equity. Corporations whose shares are sold on the stock market are called publicly traded companies, because theoretically any member of the public can buy their shares (theoretically, because one obviously needs money to participate). These shares (or stocks) are often called public equities. The use of the word public in this context should not be confused with the public sector – for this is indeed the heart of the private sector. See, very confusing!

7. We are indebted for our understanding of this history to the excellent work of Sean Vanatta, Michael Glass, and Benjamin Braun. In addition to the Vanatta and Glass work cited above, see Braun, “Fueling Financialization: The Economic Consequences of Funded Pensions,” New Labor Forum 31, no. 1 (2022): 70-79.

8. Sean H. Vanatta, “The Financialization of U.S. Public Pension Funds, 1945-1974.”

9. Despite the check that Taft-Hartley imposed on working-class control over pension governance, some unions did retain a modest degree of influence over the management of these capital pools. This was especially the case when it came to those pension funds to which multiple employers contributed (as opposed to a pension fund for workers of a single large corporation). In such cases, unions could at times strategically outmaneuver divided and often rivalrous management representatives – something Teamsters President Jimmy Hoffa and his Central States Pension Fund (CSPF) did to great effect, albeit not without some illicit activity along the way!

10. In addition to traditional monetary policy, which affects short-term interest rates, the Federal Reserve also implemented what came to be called “quantitative easing,” or the purchase of all kinds of bonds with the objective of lowering long-term interest rates. Adam Tooze provides a magisterial account of the Federal Reserve’s post-2008 actions in Crashed: How a Decade of Financial Crises Changed the World (New York, 2018).