The 1970s New York City fiscal crisis commanded the attention of the world. The possibility that the largest city in the United States — the center of its financial industry, home to more corporate headquarters than anywhere else; its capital of art and culture — might go bankrupt became, like the proverbial car wreck, an irresistible spectacle.
Initially, the crisis was portrayed as a local story, a reflection of New York and its “mongrel” population, liberal social policies, profligate spending, and powerful unions. But the means of its resolution became a template for the imposition of neoliberal policies around the world. Ruling elites took seriously the call to “think globally, act locally,” making a municipal finance problem into an event of world significance.
Public debt — seemingly arcane and technical, yet in the end all-powerful — was at the core of New York’s brush with financial meltdown. From the 1960s on, the City’s debt ballooned, reaching $11 billion in 1974 (the equivalent of $54 billion in today’s dollars). Government played an unusually expansive and expensive role in New York life, as a liberal political culture and decades of popular struggle had led to the creation of massive public healthcare, education, housing, and transportation systems and — compared to much of the country — generous welfare benefits.
Local tax revenues and federal and state aid lagged behind spending, including municipal labor costs pushed up by extensive unionization. An exodus of largely white middle-class families to the suburbs, an aging and increasingly poor population, and the movement of jobs out of the city all added to the fiscal woes, obscured by the increasing use of borrowed funds for operating expenses. The brokerage firms and banks that underwrote City bond offerings and held much of the debt happily went along, profiting from trading activity and high, tax-free interest.
But when the deep recession hit in 1973 — sending the unemployment rate in New York to 12 percent by 1975 — assets turned into liabilities, and investors grew reluctant to buy City bonds. Nonetheless, the City had to keep borrowing to refinance debt coming due. Each month, a dwindling pool of lenders demanded higher interest rates. In the spring of 1975, the lenders disappeared entirely, raising the prospect of default.
With billions of dollars at stake, the cardinals of finance — led by David Rockefeller, chairman of Chase Manhattan Bank; Walter Wriston, chairman of First National City Bank; Donald T. Regan, chairman of Merrill Lynch; and William Salomon, managing partner of Salomon Brothers — got personally involved in New York City government affairs, an arena normally well below their radar.
They were appalled at what they found, including archaic accounting practices and gimmicks like putting operating expenses into the capital budget. More importantly, they confronted elected officials who were resistant to their insistence that the City adopt austerity measures like reducing the number of municipal employees and increasing their productivity, cutting services, slashing capital spending, and raising taxes and fees.
At the helm of the City sat Mayor Abraham Beame, a longtime civil servant and Brooklyn machine Democrat, as unimposing in his manner as in his stature (he stood only 5'2″). Beame’s seeming obliviousness to the scale of the crisis, his clubhouse values that placed loyalty over competence, and his susceptibility to municipal union pressure led the financial powers to see him as an obstacle who needed to be circumvented in order to carry out their agenda of fiscal reform and social transformation.
For some financial leaders, the main concern was simply making sure that holders of New York City debt, including their own institutions, got repaid. For others, the crisis presented an opportunity for a bold attack on New York’s social democratic cast, with its high level of unionization, generous social wage, and pervasive government regulation (including rent control).
Conservative leaders in Washington, including Secretary of the Treasury William Simon and White House Chief of Staff Donald Rumsfeld, promoted a radical resolution to the financial crisis. They aligned themselves with national business leaders to pursue a social and political environment conducive to the restoration of robust profitability and ruling-class power after the decade of leftward drift resulting from civil rights struggles and subsequent social movements.
The tension between the two elite approaches became evident when New York’s political and financial leaders turned to the federal government for loans to help the City repay its debt. Titans of finance like Rockefeller and Ellmore Patterson, chairman of Morgan Guaranty Trust, had no objection to state intervention in the market if it meant protecting lenders and forestalling municipal bankruptcy. In Washington, however, they ran into ideologues with grander aspirations.
Simon, who had helped build up the City’s debt as a bond trader, now saw it as a pry bar to move the national “philosophy of government,” as he called it, away from liberalism and the welfare state. Simon rejected the city’s plea for help, as did President Gerald Ford. In Congress, New York faced hostility not just for its alleged profligacy but also for its seeming un-Americanness — with its large Jewish, African-American, and Puerto Rican populations, and well-advertised contempt for what New Yorker editor Harold Ross famously called “the old lady from Dubuque.”
With no federal money forthcoming, New York Governor Hugh Carey took charge, working with corporate and financial leaders to develop a series of new governing structures he forced the City to accept.
First was the Municipal Assistance Corporation (MAC), authorized by the state to sell bonds to retire City debt and assume control over City sales and stock transfer tax receipts. The unelected board wielded vast power, since it had the discretion to decline to lend to the City unless its demands were met. In spite of a wave of union and popular protests, MAC forced City officials to lay off tens of thousands of workers, freeze wages, cut welfare benefits, raise the transit fare, and impose tuition at the historically free City University of New York.
When MAC and the cutbacks proved inadequate to revive the market for New York City debt, the state created a new body, the Emergency Financial Control Board (EFCB). It had even greater power over City finances than MAC, including the ability to reject labor contracts and remove the mayor and other elected officials if they refused to go along with its policies. Yet investors still stayed away.
In the end, the City had to turn elsewhere to get the cash it needed to make good on its debts. First, it began tapping the huge reserves of the public pension funds, which required the acquiescence of the very unions whose members were supposed to fund beneficiaries.
Second, it went back to Washington. This time they met with more success, as Ford’s mean-spirited approach to the city — captured in the immortal Daily News headline “FORD TO CITY: DROP DEAD” — turned out to be bad politics. Sober heads were concerned with the potential ramifications of a New York City bankruptcy amid global economic turbulence and the Cold War.
The federal government agreed to give seasonal loans to the City, but imposed yet another set of controls that Simon then used to force up local taxes and shift some pension costs from the municipality to its workers.
With MAC, the EFCB, the pension fund loans, and federal seasonal lending in place, bankruptcy was avoided and the city was remade. The financial sector and business in general saw their power and ideological legitimacy restored while ordinary New Yorkers faced years of misery.
Steep budget cuts combined with the recession meant laid-off city workers, overcrowded schools, shuttered hospitals, high crime, widespread arson, broken subways, and collapsing streets. Yet the victory of the financiers and conservatives proved limited, as the municipal unions, partially because of the pension fund investments, preserved collective bargaining and much of their power. Rent regulation was not killed, and social democratic tendencies were moderated but not rooted out.
Nationally and internationally, though, the blitzkrieg of finance and free-market ideologues against New York’s welfare state had profound effects. It provided a model for using debt crises to force restructuring along neoliberal lines and revealed the possibility of taking bold steps against accepted social arrangements. The terrain was set for future routs, such as Ronald Reagan’s attack on striking air traffic controllers and Margaret Thatcher’s on British coal miners.
The New York City playbook was also put to use in 1979, when Chrysler, one of the country’s largest corporations, faced bankruptcy. Officials in the Carter administration, involved in supervising federal loans to New York, worked with Congress to offer loan guarantees to the automaker that were contingent on financial concessions from creditors, suppliers, dealers, and most importantly, labor.
The Chrysler bailout, like the resolution of the New York crisis, was far from a free-market solution, which would have been to allow the company to collapse. Instead, it was an example of aggressive corporatism — using public credit to bail out private interests while making labor accept austerity. It again proved the power of using debt relief as a weapon to change social and economic relationships to the detriment of workers and to the benefit of large corporate and financial interests.
Three years later, the International Monetary Fund (IMF) picked up the ball. When Mexico found itself unable to repay its sovereign debt, the IMF negotiated a program that required the Mexican government to adopt a variety of austerity measures.
Soon, the IMF was routinely linking debt relief for floundering countries to “structural adjustment” measures that lowered the standard of living for workers, diminished government benefits and subsidies, promoted privatization, and opened the door for foreign trade and investment. The New York fiscal crisis solution — impoverish workers and the poor to pay back investors, use non-elected bodies to supersede local democracy, and force a move away from social democratic policies — had gone global.
In a broad sense, Thatcherism and Reaganism were likewise extensions of the New York counterrevolution, as they shifted power to economic elites, denigrated the efficacy of government, extolled the market, and prioritized private over collective solutions to shared problems. In doing so, they laid the basis for an era of greed, inequality, and high-level managerial incompetence.
Rupert Murdoch was a link between the fiscal crisis and the conservatism of Thatcher and Reagan. In 1977, his newly purchased New York Post, a long-time liberal stalwart, endorsed Ed Koch, a liberal congressman turned neoconservative, in the New York City mayoral primary. Once elected with the help of the Post, Koch institutionalized the financial community’s priorities of fiscal probity, government austerity, and a hard line toward municipal unions. Murdoch papers went on to endorse Thatcher and Reagan, serving as cheerleaders for the free-market revolution they had ushered in.
The New York fiscal crisis was only one of many steps along the uneven road to neoliberalism, whose triumph has sometimes been overstated. In New York City, rent regulation lives on, as do powerful municipal unions, a low-cost if no longer free public university system, and extensive public services.
Bill de Blasio, the recently elected mayor, has declared confronting economic inequality his highest priority, and unions and community groups continue to campaign for higher wages and expanded municipal services. Nonetheless, it is a markedly different world, in part as a result of the fiscal crisis of the 1970s.
Nothing makes that clearer than the political and public reaction to the plummeting fortunes of Detroit. President Ford received so much pressure after his initial refusal to aid New York that he ultimately reversed his position. By contrast, President Obama and the current Congress have faced virtually no criticism — at least outside of Detroit — for not even considering federal intervention to prevent a municipal bankruptcy.
In New York, financial and state leaders hemmed in local elected officials with new, unelected bodies. In Detroit, the governor and the courts weakened local democracy even further, appointing an emergency manager and placing the city in receivership.
What William Simon could not do in New York — use bankruptcy to radically restructure a major city and break longstanding social covenants — has been achieved in Detroit. And so what first seemed like a local crisis in Gotham turned out to be a glimpse into a global future of financial rule, decayed welfare states, and diminished democracy.