"“The Ascent of the Prudent Man: Trusteeship and the Legal Origins of Financialization”"

In the years after World War II, an alliance of lawyers and bankers rewrote the laws governing trust investments, a campaign that transformed American finance. The changes focused on state-level rules that determined how trustees—who oversaw estates, surplus corporate capital, and blossoming pension funds—could invest funds entrusted to their care. Before the war, most states followed New York’s “legal list” model. Legislatures and courts created strict criteria for permissible investments. These tended to be safe, low-yielding assets, like government bonds, mortgages, and corporate bonds meeting specific criteria. By contrast, Massachusetts and a few outliers followed the “prudent man” rule, which enabled trustees to invest “how men of prudence, discretion and intelligence manage their own affairs.” Here, trustees could invest not only in safe assets, but also in corporate bonds, stocks, and more exotic securities.
Seeking to enhance their power over investment portfolios, in the late 1930s organized bankers and lawyers launched a sustained campaign to reframe trusteeship around the figure of the prudent man, supplanting government-mandated investments with the judgement of private fiduciaries. Over the 1940s and 1950s, the rule supplanted the legal list model in most states.
State prudent man rules elevated prudent men—trust lawyers, bankers, investment advisers—granting them substantial authority over socially consequential capital allocation decisions that had, under the legal list model, resided in government officials. More broadly, the ideology of the prudent man led public and private investors to pursue maximal individual returns, to downplay systemic risk, and to reject public-spirited tradeoffs (effects especially visible, the paper will show, in public employee pension plans). The ascent of the prudent man was, in the last analysis, a formative vector of financialization.