New York City on the Brink

The famous October 30, 1975, headline.

Thirty years ago today President Gerald Ford agreed to float more than $2.3 billion in short-term federal loans to help New York City avoid the catastrophic move of declaring municipal bankruptcy. This was just weeks after a televised address in which the President had vowed to “veto any bill that has as its purpose a Federal bailout of New York City to prevent a default”—a speech that had prompted the New York Daily News to run its famous banner headline “Ford to City: Drop Dead.” The new announcement seemed to herald a new relationship between the federal government and urban America. In fact it was a divorce settlement, and one long in the making.

Technically, New York’s troubles had begun the year before, when the newly sworn-in mayor, Abraham Beame, had found that the city was so strapped for cash it could barely meet its monthly debt-service obligations. Actually the problem stretched back over decades.

Because New York was a labor town where unions claimed high rates of membership and wielded unusual power, the city had erected a miniature social welfare state unlike anything in America. More than 200,000 city residents attended the City University of New York tuition-free. It had 10 senior colleges, eight community colleges, and a graduate center. Between the 1930s and the 1970s the city had erected middle-class housing, built municipal hospitals, imposed apartment rent controls, staffed a world-class public school system, kept mass-transit prices affordable for working-class residents, and offered municipal workers generous health and retirement benefits. At the same time it had shouldered a growing welfare budget.

All these things cost money, and by the mid-1960s it became routine for the city to augment its long-term capital debt with short-term loans to plug holes in the annual budget. Banks were more than willing to lend the city money, since there was little risk of default and because municipal-bond revenues were tax-exempt. But in the wake of the national recession after 1973, private lenders balked. With the city’s unemployment rolls increasing (and, consequently, its tax base falling), New York no longer looked like such a safe investment.

In 1974 Beame was forced to enact drastic cuts in city services. When that didn’t work, the state created a new entity, the Municipal Assistance Corporation, which became known as “Big MAC” and was authorized to float upward of $3 billion in bonds for the city. Its board, made up primarily of business and banking leaders, demanded fiscal austerity in return.

Over the next year the mayor canceled pay raises for municipal workers (despite skyrocketing price inflation) and made even deeper cuts in social services. He even agreed to a 42 percent hike in subway and bus fares, even though transit costs were not part of the municipal budget (they fell under the purview of the Metropolitan Transit Authority, a state entity). The banks effectively demanded the fare hike to make a show of strength. There would be no more nearly free ride for working-class New Yorkers.

When even these measures didn’t allay investors’ fears, influential bankers pressured the state into creating an Emergency Financial Control Board, comprising the mayor, the governor, the city and state comptrollers, and three private-sector businessmen. The EFCB enjoyed sweeping powers that included control of city revenues and oversight of the municipal budget.

Again, even these actions, plus thousands of teacher layoffs, failed to assuage the fears of bankers. So New York turned to the federal government. Egged on by his arch-conservative treasury secretary, William Simon, Ford attacked the city for its tuition-free university, its system of public hospitals, and its generous municipal benefits.

The federal government seemed to delight in Gotham’s woes. A New York Times reporter, Fred Ferretti, noted that “the resistance in Washington to helping the city was grounded in the view that the city was a haven for ‘welfare cheats’ (read that ‘lazy niggers’), people with an over-abundance of chutzpah (read that Jews), for ‘minorities who want a free ride’ (read that Puerto Ricans and other Hispanics), for arrogant smart-asses who don’t give a damn about the rest of the country.” The problem with this view, of course, was that New Yorkers had been footing the bill for the rest of the country for more than 40 years, without any acknowledgment or thanks.

Since the early New Deal era the government had lavished suburbs with federal highway money, thrown defense funds by the billions at the Sunbelt states of the South and West (in the 1950s alone the South’s share of defense spending doubled), undertaken massive public public-power and dam projects in the West, and generously subsidized housing loans. Meanwhile, the Federal Housing Authority had refused to underwrite mortgages in either preexisting urban tracts or racially and ethnically mixed neighborhoods (read, urban neighborhoods), so geographically compact cities like New York didn’t benefit from the massive expansion of home ownership in the postwar years. Consequently, neither did most New Yorkers benefit from generous federal tax exemptions for interest payments on home mortgages.

In other words, New York was broke in part because its expenses outstripped its means, but also because working-class New Yorkers could no longer afford to pay for themselves and for the rest of the country.

Little good did it do to make that argument. By the time President Ford agreed to extend the city loans to meet its short-term debt obligations, a new working arrangement had been ironed out. Municipal unions were forced to invest their pension plans in low-yield municipal and MAC bonds, thus destabilizing their retirement accounts, and like other city residents they swallowed massive cuts in public services.

Ford’s announcement only gave voice to what should have been painfully clear by 1975: The federal government wasn’t much interested in the future of American cities. New Yorkers weren’t told to drop dead, exactly. They were just told not to expect a helping hand.

Since 1975 the city has made terrific strides. Today it’s a center of banking, commerce, publishing, and advertising, and it is host to hundreds of thousands of new immigrants who are building rich, stable middle-class communities. Whole neigborhoods that lay in ruins 30 years ago are once again attracting young families.

New Yorkers can be proud of these accomplishments. They’ve done them all more or less on their own.

—Joshua Zeitz is a contributing editor of American Heritage magazine and the author of Flapper: A Madcap Story of Sex, Style, Celebrity, and the Women Who Made Modern America, to be published in April 2006.