Lessons From the Great Default Crisis of 1975
In this October 21, 1975 file photo, New York Gov. Hugh L. Carey, right, and Felix Rohatyn, chairman of Municipal Assistance Corporation, press members of a House subcommittee in Washington to aid deficit-ridden New York City. (AP Photo/Charled Gorry, File)
It appears as if the United States government will just barely avoid defaulting on October 17. It’s not the first time that the date featured in fiscal history. Thirty-eight years ago, on October 17, 1975, New York City almost went bankrupt. Then as now, conservatives in the White House pushed a style of brinksmanship that could have forced a major government to default.
The context, of course, was very different. New York City’s finances were under stress as the city tried to maintain its extensive local welfare state, despite the pressures of the recession of the early 1970s and the underlying economic problems it faced of industrial decline and middle-class flight. The city tried to borrow to cover a widening budget gap, but by 1975 the major banks refused to market its debt. New York’s mayor and governor—Abraham Beame and Hugh Carey—appealed repeatedly to Washington, DC. Pointing to ailing corporations which had been able to obtain government funds, they argued that New Yorkers should not be made to suffer for problems that were the result of economic forces beyond the city’s control.
President Gerald Ford and his advisers (who included Donald Rumsfeld and Alan Greenspan) insisted that the city’s problems were its own responsibility. New York’s default, they claimed, would not have a significant economic impact. “There is no short cut to fiscal responsibility,” Greenspan, then chairman of the Council of Economic Advisors, wrote in one memo.
On October 17, the president’s sanguine attitude toward bankruptcy was put to the test. The previous evening, trustees for the teachers’ union pension fund had voted against using the pension money of their members to purchase the city’s bonds, even though the city needed this money to pay notes coming due. In the middle of the night, city lawyers had drawn up a bankruptcy petition: “The City of New York is unable to pay its debts or obligations as they mature.”
That morning, the Dow Jones fell, the price of gold rose and city note-holders lined up at the Municipal Building to make a futile attempt to redeem their bonds. Still, Ford refused to help. As his press secretary put it, “This is not a natural disaster or an act of God. It is a self-inflicted act by the people who have been running New York City for a long time.”
Shortly after 2 pm, the union trustees changed their minds, and the teachers’ union bought the bonds. For the moment, New York was safe from default. But it was now clear that New York could come to the edge of bankruptcy and the federal government would simply let it happen.
A few days later, Ford made his famous speech—immortalized by the Daily News headline, “Ford to City: Drop Dead”—in which he promised to veto any bill that bailed out the city, warning that New York’s problems were a microcosm of those facing the nation: “If we go on spending more than we have, providing more benefits and more services than we can pay for, then a day of reckoning will come to Washington and the whole country just as it has to New York City.” And when “that day of reckoning comes, who will bail out the United States of America?”
But as bankruptcy ceased to be a metaphor and moral threat, and edged closer to becoming reality, Ford’s hard-line stance began to seem impractical, destabilizing and short-sighted. Bankers and business leaders testified in Congress about the potential disaster of bankruptcy. West German Chancellor Helmut Schmidt warned that New York’s default would have global repercussions. In the end, Ford agreed to support legislation that extended loans to New York. The city, in turn, embraced austerity, firing thousands of police officers, fire fighters, teachers and other public workers.
Still, the conservative logic according to which the federal government should stand aside and let the nation’s largest metropolis go bankrupt simply to teach a political lesson has never entirely disappeared. Indeed, more than fiscal recklessness, it now seems that this anti-government animus may bring us to the “day of reckoning” of which Ford spoke. Today, Washington allows cities such as Detroit to file for bankruptcy, even as financial institutions receive bailouts with few strings attached. Regardless of the consequences, the political descendants of Alan Greenspan seem happy to take the federal government to the brink of default, just as they were content to let New York City go under thirty-eight years ago.
On the fiscal crisis deal struck by Congress, Nation editors write, “Even When the GOP Loses, It Wins.”