Beginning in late 1950s, New York Comptroller Arthur Levitt fundamentally reconfigured his state’s fiscal relationship with its public employee retirement system. In 1958, 30 percent of the retirement system’s $1.1 billion in assets, set aside to provide retirement security to state workers, were invested in state and local bonds. Then Levitt began to divest. By 1967, local securities made up less than 2 percent of pension assets, replaced with corporate stocks and bonds, 35 percent of the state’s $2.7 billion portfolio.
In orchestrating this transition, Levitt shifted the pension system away from its longstanding fiscal support of the local infrastructure of postwar liberalism. State workers and local governments, formerly bound in a relationship of fiscal support—which I call fiscal mutualism—were now equally dependent on financial markets, with broadly divergent outcomes. Entrusted to the financial instruments of corporate capitalism, pension yields went up, for a time at least. So did local bond rates, as municipalities experienced the full weight of market discipline.
So far, the story of the rise of finance in the United States has been a federal story, told in conjunction with the fall of the New Deal order during the pivotal decade of the 1970s. States, meanwhile, have been left out of the narrative. The experience of New York’s pension system reveals, however, that state policymakers turned to finance sooner and trusted in markets earlier than scholars have recognized. By bringing state-level financial intermediaries like Levitt to the center of the story, this paper demonstrates that finance was not the end of the New Deal order, it was its foundation.