The Money Flood.(Brief Article)

Clowes, Michael J.

John Wiley & Sons, Inc., New York, 2000, 308 pp

Brennan Schwarz is a Policy Analyst in GFOA's Research and Consulting Center in Chicago, Illinois.

In The Money Flood, Michael J. Clowes provides a narrative of the evolution of the pension industry from the its beginnings after the American Civil War to the end of 1998. It traces the history of the pension industry from its beginnings when pensions were a method of providing a minimum standard of living for elderly workers, through events that led to the pension industry reshaping the way the world invests.

The book focuses on the post-war era, beginning in 1948 when the National Labor Relations Board (NLRB) ruled that Inland Steel Corporation must conduct negotiations with employees on pension provisions. This unleashed a "money flood" upon the U.S. economy, spurring the growth of pension funds in every sector of the American workplace, both public and private.

In 1949 pension executives typically chose to invest primarily in their own corporate assets and in low-yielding government bonds; funds were rarely invested in common stocks and other high growth instruments. Today, pension assets in the United States total more than $8.7 trillion. The pension fund industry was a driving force behind the rise of the junk bonds, contributed greatly to the building boom in the United States in the 1980s and 90s, and played a tremendous role in the venture capital market.

Prior to 1948 many firms maintained pension funds, but there were few that were fully funded to back all the promises made to employees. The NLRB decision forced companies to pour money into their pension funds so that they could back the promises made. Unions were no longer willing to place their confidence in the health of the sponsoring corporations to secure pension promises. They wanted money set aside, and demanded that their contracts contain language that gave them a final pay plan. As a result, in the 1950s there was a dramatic shift in how corporations and public entities went about managing their pension plans. In the wake of the Inland steel decision, companies such as Ford, General Motors, and Inland Steel found themselves negotiating the pension assets of their hourly workers, benefits that they formerly had complete control over. Increased demands meant they had to begin stepping up their annual contributions. They also sought ways to get more out of their contributions. Stringent insurance re gulations and the burgeoning number of employees now required to have pension coverage made insurance companies too costly and inflexible. As a result, many corporations turned the management of their pension funds over to banks who managed the funds as legal trustees.