An Excerpt from Fear City
New York’s Fiscal Crisis And The Rise Of Austerity Politics
Kim Phillips-Fein’s gripping narrative history, Fear City: New York’s Fiscal Crisis And The Rise Of Austerity Politics, has received high praise from a wide ensemble of interested and prominent voices. For instance, James K. Galbraith says: “This revealing narrative of New York’s transformation from working-class social democracy to the glittering home of fancy finance reminds us that behind the mask of austerity there always lurks a bitter politics of class.” Here, Public Seminar picks up the narrative with an excerpt from “Chapter 6: Washington Politics.” Phillips-Fein unveils the details of an encounter between former mayor of New York, Abraham Beame, former New York governor, Hugh Carey, and the 38th president of the United States, Gerald Ford, in May of 1975 on the “possible insolvency” of New York City.
Chapter 6: Washington Politics
Such was the state of play when the president gathered his inner circle to talk about the “possible insolvency” of the city. Most of Ford’s advisers believed New York was shamelessly begging for help to prop up its welfare state. Before it got any aid at all from the federal government, they said, the city should adopt austerity. It should impose tolls on the East River bridges. It should raise the subway fare and lay off 10,000 workers. It should cut the education budget by $100 million. It should slash faculty salaries at CUNY and end free tuition. (CUNY was a particular bête noire of the Ford administration: it seemed the ultimate symbol of municipal largesse, the embodiment of its most utopian promises.) The cold light of default, some of Ford’s advisers suggested, might be the only thing that could compel the city to change its ways. “A default,” argued Robert Gerard of the Treasury Department, “could trigger the kind of radical action by the city which is required.” And as far as the impact a New York default might have on the national economy, Ford’s advisers thought the bankers and politicians were exaggerating the risk.
This argument appealed to the president. Its simplicity, fortitude, and stark critique of New York all gave Ford the courage he needed. He would not cave to the scare tactics and pleas for aid. The city’s profligacy — the rampant spending of the arrogant liberals — would stop with him. Rather than seek a low profile way of providing aid to the city and giving it time to restructure its debts, Ford adopted a highly ideologically charged response to the city’s fiscal crisis.
A meeting with Mayor Beame and Governor Carey was set for May 13. As the president was preparing for the encounter, he wrote himself a little note: “24 hrs. Must do what’s right. Bite bullet.”
The weather on May 13 was balmy and warm, a humid spring day in Washington. Beame and Carey arrived at the White House early in the afternoon and went to meet the president, the vice president, and their staffs in the Cabinet Room of the White House. Peter Goldmark, Carey’s budget director, had accompanied his boss to Washington, and he recalls seeing the look of recognition that passed between Carey and Ford as they sat down at the long table that filled the room. They were two long-time men of the House of Representatives. No one had thought either would have a career that would go beyond Congress, but one had managed to become governor, the other president.
The aftershocks of the Vietnam War were still reverberating throughout Southeast Asia. It was only two weeks since the last American personnel had evacuated Saigon. The day before the meeting, the Khmer Rouge had captured the Mayaguez, an American merchant ship that had been sailing through what the United States argued were international waters. Thirty-nine American crew members were being held prisoner, and Ford had to decide whether to send in military troops to rescue them — a final show of force in the region. As he listened to the leaders of New York, Ford had a great deal on his mind.
The president’s briefing notes for the meeting had been prepared by James Cannon, the director of his Domestic Council and a veteran of the Rockefeller administration in New York State. Cannon had urged the president to strike a sympathetic note: “You are up against a hard problem.” But he also felt the president should make it clear that Washington could not help New York, because this would open the floodgates for requests from other cities. The city’s problems were, at heart, the result of bad local management. They had not developed “overnight” but reflected years of misplaced priorities. The president was obligated to deliver the message that Beame and Carey had no alternative but to cut the city’s spending drastically. This was the only real solution to the fiscal crisis.
The meeting began just a little after 2 p.m. Gathered in the Cabinet Room alongside President Ford and Vice President Rockefeller was a team of administration officials: William Simon, Alan Greenspan, L. William Seidman of the Economic Policy Board, James Cannon and Richard Dunham of the Domestic Council, and James Lynn of the Office of Management and Budget. Beame and Carey brought their advisers as well: Peter Goldmark, David Burke, and Judah Gribetz came with the governor, and Deputy Mayor James Cavanaugh accompanied Beame.
The president’s opening words might have reassured Carey and Beame that he was open to their case. Ford began by reminding them that as a former member of the Appropriations Committee in Congress, he had a very good understanding of the complexity of fiscal politics. He felt “sympathetic” to the people of New York. Then he opened the floor to the supplicants.
Carey spoke first. The leaders of the city and of the state, he said, felt as though “we are headed for a cliff.” He feared that if services had to be abruptly suspended or further cut, conflict might erupt in the city. New York, he said, did not want a “handout.” What he wanted was for the federal government to offer to guarantee the city’s bonds — in other words, to promise that if the city was not able to pay interest and principal on them, the federal government would step in to do so. Doing this would provide greater security to investors, and they would be willing to purchase the city’s debt again.
Then Beame began, and all the emotion he usually kept tamped down flowed into his remarks. He opened with a passionate denunciation of the “boycott” the financial markets were trying to mount against the city. It was unbelievable, “stupid” — a cash boycott against the city of New York! Even though he had been pushing austerity like no mayor before, closing schools, hospitals, and fire stations! “This whole thing,” he exclaimed, “has been so damned distorted all over the place!” His budget cuts had already brought the city to the brink of “social chaos.” Just the previous week he’d returned to the city from Washington, where he’d been meeting with William Simon, to make a dinner appearance. But it was the day when the CUNY students were holding their demonstration in front of Gracie Mansion, and the mayor hadn’t even been able to get into his own home. “I think I’ve gone as far as I can. Otherwise the city will disintegrate,” he said. “I know what’s going to happen to me but I don’t give a God — I don’t give a damn.” Why couldn’t the president see that New York’s fate mattered to the rest of the country, and to how the United States was seen around the world? After all, Europeans didn’t travel to America to visit Detroit or Columbus, did they?
Here, the president laughed at the mayor’s touching New York pride, his sense that the city was the heart of the nation. “I’m a good Michigander,” he reminded Beame. And Nelson Rockefeller, quiet until then, chimed in: “Don’t get carried away, Abe.”
The mayor returned to his theme. He didn’t ask for much, but what he did want was a bit different from what Carey asked for: Beame hoped that Ford would provide support for congressional action to give the city a $1 billion loan. That money would help tide things over — to push the city through the next three months, during which time it would be able to pass new taxes, make any further necessary cuts, and arrive at a balanced budget. Just the promise of support from the president would be enough to restore the confidence of the banks.
The president took it all in, listening calmly to the mayor and the governor. He then began to ask questions. Why, he wondered, should the city have to turn to the federal government for this financial guarantee — why couldn’t the state step in? Rockefeller agreed: the state was a more logical guarantor for city bonds, since its information about the city was likely to be more extensive. Carey grew angry. “We’ve done all we can,” he said. He would not damage the credit of the state to help the city. Ford then asked Beame why he couldn’t go back to the banks. Why wouldn’t they accept his promise to balance the budget?
“I don’t know,” said Beame. “I’ve asked that question a hundred times.”
Why, asked Ford, hadn’t the city made more cuts? He began to count them off, using the suggestions that his advisers had prepared for him. “Why don’t you raise the 35- cent transit fare to 40 or 50 cents?” asked the president.
Beame responded that this would be inflationary, and that the constant upward press of prices menaced the entire national economy. What was more, he had promised to hold the fare steady through the end of the year. And besides, a small fare hike would hardly put a dent in the city’s debt. To make a real difference it would have to be raised to 65 cents — even a dollar.
Ford responded with irritation: Beame didn’t understand. Raising the fare was symbolic, a way of telling the markets and the banks that the city was changing its ways. The purpose would be more to overcome the city’s “lack of credibility” than to raise revenue. He brought up another cut his advisers had suggested: “Why not charge tuition at community colleges?”
For Beame, this was too much. Free tuition, he insisted, was a 128-year tradition in the city of New York, one that went to the heart of the city’s social contract. Thousands of student demonstrators were already massing in the streets; tuition might push them over the edge. What’s more, he owed his own upward mobility to City College: “I wouldn’t be here today if it weren’t for free tuition.”
Ford then stopped proposing cuts and asked whether the Federal Reserve Board was amenable to aiding the city. Simon responded that this seemed impractical. Out of alternatives, the president finally took up the question that had brought Beame and Carey to Washington. “Let’s consider federal help,” he said, as though playing out what the scenario would involve. How much would the city require? And for how long?
Beame repeated that he only wanted a loan for ninety days. That was enough time for the state legislature to grant new taxing powers to the city, which it would then use to arrive at a truly balanced budget. Without the help, Carey jumped in, the city would default — and any alternative was preferable to that.
And when did the city need the money? By May 30, Beame replied — less than three weeks away.
Ford quickly began to demur. Realistically, he could not imagine Congress acting quickly enough, even if he were to ask for legislation the very next day.
This meant, Carey said, a “premonition of default.” And Congress should be aware that it would affect municipal bonds across the nation, not only in New York.
Ford went on. He could not make — no president could make — a commitment to the city until he saw the “facts and figures,” until he had proof that New York would in fact balance its budget. “You have made a plea in general terms. But I have to look at cold figures. I believe you. I’m very sympathetic. You are making an effort at fiscal responsibility. I admire you for it.” But he would need to “see it in black and white” before he could do anything to help.
“I go along 1000% or 100%, whatever the figure is,” Beame said. But his promise was empty. Everyone present knew the mayor could not guarantee a balanced budget. He would need the support of Albany law-makers, both for state aid and for taxing powers for the city, and many of the lawmakers were Republicans. Nor had the City Council members seen Beame’s plan, and they were the ones who would need to vote to approve it. Ford insisted those steps had to come first. He couldn’t just have Abe Beame’s word but needed “some iron” — for example, the commitment of the entire City Council to a program of austerity.
Throughout the meeting with the president, Beame presented the city’s problems in the narrowest possible terms, reluctant to concede that there was really a problem at all. He claimed the city was just running low on cash while it waited for revenues to arrive. His blinkered vision of the city’s problems and unwillingness to acknowledge the severity of the situation, his inability to describe what was happening in New York as the result of broader social and economic changes, made Beame’s case to Ford all the less persuasive.
The president ended the meeting by asking his visitors to give him twenty- four hours to think things over, while they figured out what they could do in terms of rallying the City Council around budget cuts more draconian than anything New York had seen before. “For ten years, it was done wrong,” Ford said. “You’ve got to do it right.”
After leaving the White House, Beame and Carey hurried to meet with Oklahoman Carl Albert, Speaker of the House, and then with Senator Mike Mansfield, Senate majority leader. Both Democrats tried to sidestep the conversation, saying that the mayor and governor had to talk to the chairs of the Banking and Currency Committees instead. In these private meetings, Carey was pessimistic, saying that Ford had made it clear that he thought “no New York bailout bill” could ever pass Congress. Meanwhile, the city’s congressional delegation was also making the rounds in Washington. They met with Arthur Burns, chair of the Federal Reserve, who told them there was no way he could get five of the seven votes on the Board of Governors in favor of having the Fed purchase city debt. “He couldn’t have been more bleak,” said one representative. “He sounded as though he wished we didn’t know the Fed existed.”
But in the press conference that followed their conversation with the president, Carey and Beame did their best to sound cheerful and optimistic. Carey spoke of the “warmth and understanding” with which Ford had greeted them. The generous length of the meeting — it had lasted a full hour and a half — underscored how seriously the president was taking the problems of the city, as did his promise of a response the very next day. Beame chimed in: “I was pleased that he had an open mind.” When reporters began to ask questions about the possibility of default — how might it affect the nation’s bond markets? — Carey brought the press conference to an abrupt close.
Meanwhile, the president was trying to make his decision and figure out how best to convey it to New York’s leaders. James Cannon prepared a memorandum for him spelling out the options. Ford could agree to support the city’s request for a ninety-day loan from the federal government in the amount of $1 billion. Or he could “flatly deny the request.” Or — and this was Cannon’s preferred choice — he could deny the request, but “leave a slight loophole which would enable the Federal government to assist the City if disruption of the financial markets did occur as the result of a default; and/or subject to certain conditions and restrictions.” In other words, the federal government could refuse to provide immediate help, but keep in its back pocket the possibility of aid should the city’s default set off a cascade of bank failures.
Having recommended the last option, Cannon suggested Ford send a letter instead of just conveying the message by phone. A letter that could be publicly released would best communicate Ford’s under-standing of the “complexity” of the situation, and would “explain to the financial community the care with which you have considered this matter and the reasoning that supports your decision.” It would be for the bankers as much as for Beame.
Cannon drafted the “Dear Abe” letter. Although the president was “deeply impressed” by the seriousness of the situation, it said, and by the “extraordinary imbalance” between revenues and expenses, he did not feel that he could aid the city. “It is clear that the City’s basic critical financial condition is not new but has been a long time in the making,” the letter stated. To have any chance at federal aid — here was the loophole — the city needed first to provide a plan to balance its budget. “Fiscal responsibility is essential for cities, states and the federal government.” Cannon took the opportunity to deliver a small lecture on budgeting — one likely directed at the Congress as much as at the city. “Every family which makes up a budget has to make painful choices. As we make these choices at home, so must we also make them in public office too. We must stop promising more and more services without knowing how we will cover their costs.”
The letter’s conclusion was clear and uncompromising. “In view of the foregoing considerations, I must deny your request for support of your Federal legislative proposal.”
Carey and Beame were together at a Brooklyn Democratic Party dinner at the Waldorf- Astoria Hotel when the news came from Washington. Cannon called Beame to alert him to the president’s response, reading him the letter over the phone before it was released to the press. Beame fumed with disappointment. “I don’t think this shows feeling for us at all,” he told Cannon on the phone. It seemed that even Rockefeller had turned against New York. “I always thought Nelson was a friend,” he complained. “This is a really bad move. I can understand the President having to take the position he does but I can’t tell you I like it. I’m upset about it and I hope you will pass that along to the President and more especially the Vice President.”
Beame went back to the dinner and gave the news to Carey. Before an audience of 2,300 party regulars who were more accustomed to boilerplate speeches and political nods than flustered, fiery rhetoric, the mayor and the governor then denounced the Republican White House. Threatening that civic disorder might be the result of the president’s position, Carey fumed against the “level of arrogance and disregard for New York” displayed by the federal government. “Have they no heart? Have they no understanding of our problems? Must a city riot?” he asked.
In a hastily organized news conference in the foyer outside the hotel ballroom, Beame lambasted the president for being more responsive to corporations than to the city. Bankrupt companies could get bailouts — why not New York? “It’s incredible to me that the President of the United States thinks more about the stockholders of Lockheed or Penn Central than the eight million people of our city,” he told the press. “Has anyone told the President that the Mayor is cutting services to the bone? Have his advisers seen the demonstrators pleading to keep us from closing hospitals, libraries, day- care centers, and fire houses?” Asked if he was sure that he would have enough money to cover payrolls and expenses and keep the city from default over the coming weeks, Beame equivocated for the first time, saying only: “All I can say is I will do everything I can.”
Beame had always believed that New York City was too big to fail, that its historic place in the country’s economy and politics would keep it safe, and that if bankruptcy ever became a real threat the federal government would provide a way out. Such was not to be the case. Gerald Ford and the advisers who surrounded him were attuned instead to the needs and politics of the conservative mobilization that was gaining momentum across the country. New York City was on its own.
This excerpt from Fear City: New York’s Fiscal Crisis And The Rise Of Austerity Politicsis published with permission, and thanks to, MacMillan Publishers.
Kim Phillips-Fein is also the author of Invisible Hands: The Businessmen’s Crusade Against the New Deal. She teaches history at New York University’s Gallatin School of Individualized Study, and has written for The Nation, Dissent, The Baffler, The Atlantic, and The New York Times, among other publications. She lives in New York City.