Shoppers hustle down 42nd Street in 1975. (Photo by Peter Keegan/Getty Images)
On a Tuesday in mid-May of 1975, Abraham Beame and Hugh Carey—New York City’s mayor and governor—arrived at the White House to meet with President Gerald Ford. The news they brought was not good: New York City was experiencing a severe cash shortage, and without help, the city would not be able to cover its bills much longer. Beame described a recent demonstration of CUNY students outside of Gracie Mansion; Carey warned that serious retrenchment might mean the collapse of civil peace. The president listened and then said that he needed twenty-four hours to think it over. (“24 hours. Must do what’s right. Bite bullet,” he wrote on a note- pad, probably before the meeting even happened.) The next day, Ford told Beame and Carey that there was nothing the federal government could prudently do to help. The city would have to solve its problems on its own.
Throughout the rest of the year, New York would flirt with default on its massive loans, scrambling to patch together one plan after another, each intended to save the city from declaring bankruptcy while cutting back on the social and municipal services it provided. Today, the city’s heralded renaissance is often contrasted with the bad old days of the 1970s, a dark, distant past through which the city had to pass to arrive at the rosy present. But in fact, the fiscal crisis of the ’70s—and the subsequent budget cutbacks that followed—reshaped the city in ways that continue to influence it even now.
Like most fiscal crises, New York’s was at once long anticipated and a complete shock. Many observers in the early ’70s had noticed that New York was entering a period of difficulty and falling tax receipts, as the city’s economy was rocked by the decline of manufacturing and the flight of the white middle class to the suburbs. New York did provide more services than most other American cities—more about these in a moment—although contrary to the railing of conservatives at the time, its public workers were not paid wages out of line with those of workers in other cities. During the Great Society years, the expenses of the city climbed, particularly those for Medicaid (for which it bore almost 25 percent of the cost, in accordance with state law) and welfare. At first, increases in federal and state aid helped fuel this expansion. But when the economy turned south in the early 1970s, New York turned to borrowing to make up the budget gaps. The tacit assumption of city leaders—rarely spelled out clearly—was that the borrowing was merely a temporary measure. Perhaps national healthcare would pass and the city would no longer have to foot a massive Medicaid bill. Once the economy recovered, the city would regain its fiscal footing.
But by 1975, as recession enveloped the American economy, the banks that marketed New York’s debt (and owned a great deal of it) became increasingly wary about the city, as did investors around the country. Some business leaders began to tell Mayor Beame that if he didn’t cut spending and balance the budget, “managers” should be put in place and made accountable for New York. In extreme times, wrote Jac Friedgut, a vice president at First National City Bank, “many things can be done even if they are technically not possible.” By the spring, the banks told the city that the bond market had closed.