Gerald Ford Told NYC to Drop Dead. Here's Why It Didn't.
I read an interesting book. Let me tell ya' about it!
In 1975, NYC was facing a fiscal crisis and the increasing possibility of defaulting on its debt. You know about this because you know about the NY Daily News headline “Ford to City: Drop Dead.” It’s one of the most famous newspaper headlines of all time. If you are like me, however, you probably don’t know much about this beyond the few sentences I just wrote.
Wikipedia doesn’t even have a dedicated entry to this crisis. But considering its recency and importance, it seems like a sort of big deal! So a few days ago I went looking for a book to read about it and found “Fear City: New York’s Fiscal Crisis and the Rise of Austerity Politics” by Kim Phillips-Fein, who I once had as a professor in college and, though I vaguely recall she didn’t like me very much, was a very good teacher, and is, apparently, a very good writer!
The book is fascinating and about a lot more than just the immediate crisis that led to that headline—and you should buy it and read it—but since you might not buy it and read it (since it’s a book and books are long) I figured I might as well tell you some of the story myself.
Gerald Ford, telling the world that he wouldn’t help NYC, October 29, 1975.
New York City has always had a fairly strong welfare state, but in the 60s, NYC was hit with a few new structural changes: a lot of its residents moved away because of white flight, and the industrial jobs that had been a key element of the city also departed. This led to among other things the budget projections for the city being vastly wrong. Which isn’t to say that New York had had a balanced budget before—it hadn’t; its revenues had been outpaced by its expenses forever. In the 30s LaGuardia faced a severe fiscal crisis that only ended with the help of the New Deal. Some of that is just because NYC is the country’s largest city and has a fairly liberal tradition. But it also has been at the center of larger national trends. For over a hundred years, people arrived in New York City not just from the East, but also the South.
Immigrants came to the United States through New York City. Most of them were poor. Generations would live in NYC and then as they rose economically and their children and their children’s children would reach greater economic heights, they’d move to other parts of America. And it isn’t just Europe that people came to New York escaping, it was also Jim Crowe.
This is literally what makes New York City wonderful and special and the greatest city in the world, but it also means that New York City has historically had to spend more money on social programs than other American cities..
LaGuardia had something NYC in the 70s didn’t have: a friend in the White House. And NYC in the 1970s had two things LaGuardia didn’t have to contend with: 1) public sector unions, and 2) even more costly social programs.
In 1958, the city had started signing collective bargaining agreements with city employees and by the the 70s those unions were massive and carried huge sway in the city’s politics. Police unions and teacher unions and correction officer unions.
The NYC that Abe Beame inherited from John Lindsay in 1974 had almost half a million city employees and the most thorough social programs in the country. In addition to normal things that every city provides like police and firemen and public schools, it had free admission to city college, and dozens of public hospitals, and daycare centers. For good or ill, those things cost money, and the city didn’t have it.
NYC had spent the first few decades after the war covering its bills by issuing municipal bonds that were underwritten by the biggest banks on Wall Street. By the early 1970s however, the banks had grown weary. The internal finances of the city made it a questionable investment. There was, to the bankers, little reason to believe that the city’s budget was ever going to improve. Some of the banks even feared that they had a legal duty to warn potential bond buyers of the city’s dysfunctional finances, which would guarantee that no one would buy them. So in 1974, the banks informed the city that they would no longer be helping market the bonds, which effectively meant the city could not access credit markets to meet its obligations and would run out of money.
What did the bankers want? Austerity. They wanted Mayor Abe Beame and the city council to demonstrate a commitment to reducing their outlays to instill confidence in the bond market. In a word, they wanted layoffs, and pay-freezes, and the end of free city college. The city’s credit was naturally downgraded by S&P. But it was not downgraded by Moody’s. Moody’s argued that despite the inarguable craziness of the city’s books, there was no way the city would default because New York was too big to fail and DC would find a way to bail them out.
Gerald Ford was president however and Gerald Ford believed in the very silly ‘well if family can manage a budget, so can the government’ thing. In the spring of 1975, he declined to support a bailout.
New York Governor Hugh Carey put together a board of businessmen to come up with ways to save New York City. They came up with what was basically a financial trick: the state would create a new agency called the Municipal Assistance Corporation that would be led by people appointed by the Governor.
This agency would issue bonds on behalf of the city and control the funds. If the city made proper austerity moves, they would release the money to the city. Basically, it was a financial vehicle to convince bond buyers that the city was going to get serious, at the point of a gun, about its finances.
New York City politicians didn’t like it! They were effectively handing over their own fate to Albany. But they didn’t have a choice. “This is not a game of chicken,” Felix Rohatyn, a businessman tapped by Carey to lead to the agency, warned city leaders. “If by Monday Big Mac is not in business, you’re finished.”
And was it even legal?
“Rohatyn smiled and patted the Mayor on the shoulder. With no small condescension, he ribbed Beame about the many questionable ways he’d already stretched the borrowing power of the city: “Don’t worry, Abe. You’ve done it plenty of before.”
City hall agreed, MAC came into existence, and New York passed a budget that called for firing 40,000 people.
On July 1st, 1975, the New York Times reported that the layoffs were beginning.
First Deputy Mayor James A. Cavanagh ordered department heads to put into effect by midnight layoffs for‐among others‐a total of 5,034 policemen, 2,127 firemen, 2,934 sanitation men, 534 correction officers, 831 park employees, and a total of 1,630 employees of the Human Resources Administration.
In all, he was giving the go-ahead for an estimated total of 19,000 layoffs in mayoral agencies and 21,442 in non‐mayoral agencies, such as the Board of Education, the Board of Higher Education, and the Health and Hospitals Corporation, which can achieve their budget cutbacks either by dismissals or equivalent savings. and the city fired 5,000 cops, who responded by
The sanitation workers that remained went on a wildcat strike. Garbage piled up. crime increased, and fires burned out of control. People didn’t like it. And once Albany gave the city $150 million in new taxing authority, Beame immediately promised the unions to undo some of the layoffs. This outraged the bankers who said it undid the entire point. They could no longer trust that structural change was going to last.
Beame reluctantly un-rehired the layer off workers.
This was supposed to be the end of the fiscal crisis. MAC would sell bonds and cover the city’s debt and that would be that.
The bonds didn’t sell very well. A lot of large institutions bought some and so did union pension plans, which had an interest in the city not going insolvent, but when the bonds hit the general market, the price dropped like stone.
The bankers who made up the MAC board wanted more austerity to instill more confidence in the bonds. They wanted more layoffs, a hike in subways fees, and CUNY to start charging tuition.
Beame above all did not want to start charging fees for CUNY. “I’ve said time and again I couldn’t be Mayor if it wasn’t for my opportunity to get tuition-free college.”
He argued that neither CUNY fees nor raised subway costs would materially make much a difference to the bottom line. But the bankers insisted that that wasn’t the point. The point was optics. The city had to convince bond buyers that it was committing to a fundamental rethinking” of “ the quality and level of services” it would provide.
New Yorkers did not like this one bit! In particular, the fact that these cuts would affect the poorest communities the most, despite them not being represented at the discussion tables was a point of great consternation. The various committees being set up to solve the financial issues were filled with white rich plutocrats and the changes they were demanding were being felt by communities they knew nothing about and looked nothing like.
Gerald Ford in the meantime wasn't helping things. Aid from DC was not coming soon and the president took shots at the city. In San Francisco, he told an audience (falsely) that their city had recovered from the Great Fire of 1906 without a bailout from DC. While on a trip to the communist country of Yugoslavia, Ford was inspired by Belgrade to ruminate on New York’s troubles: “They don’t know how to handle money. All they know is how to spend it.”
The president of the United States criticizing the largest American city in a communist country was sort of a no-no during the Cold War and people back home weren’t thrilled. Beame suggested perhaps NYC should open negotiations with the Soviet Union. “That appears to be the fastest way to get aide from Washington.”
Ford, a generally pretty moderate Republican, was in a bit of a pickle. He had never been elected by the nation. He became Vice President when Spiro Agnew was forced to resign and became President when Richard Nixon was forced to resign. What open-minded “give 'him a chance” popularity he had in August of 1974 suffered a massive blow when the next month he announced an infamous pardon of his reviled predecessor. And though a moderate in many ways, Ford had always hated the type of liberalism that had reached its crescendo with the Great Society. New York City was the apotheosis of that kind of government.
In half a year, Ford would be running for reelection, and everyone knew that he would face a primary challenge from his right in the shape of California governor Ronald Reagan. If ever there was a time to lean into his conservative beliefs, it was then.
But his Vice President, Nelson Rockefeller, was the former governor of New York after all. It’s not like no one in the Empire State had a direct line to the White House. And if Ford had an image as a moderate he had to contend with, Rockefeller had one as a liberal. But like Ford, Rockefeller was more conservative than his image let on. He had moved to the right over his three terms in Albany; maybe because of drugs; maybe because of Attica; maybe because he was a Rockefeller after all with pro-business policies in his blood; maybe it was in anticipation of a run for president; or maybe at this moment, in 1975, he was still moving right in the doomed hope of being kept on the ticket in ‘76.
Whatever the reason, Vice President Rockefeller had disappointed Carey and Beame earlier in the spring when they first took DC’s temperature. Beame took it as an act of betrayal when the man he had known for decades suggested that the city look no further than Albany for help.
So, in August, the city was on the brink again. If DC wasn’t going to help out NYC, the fish weren’t going to bite the MAC bonds. And that meant that NYC had a billion-dollar shortfall and the deadline was September 1.
Cities and municipalities are the creation of their state. US States are granted formal powers in the US constitution. Within a state though, every other smaller government lives and dies by the wills and wiles of the statehouse. They have to be granted power by that state. With that in mind, Albany effectively seized the sovereignty of NYC in the late summer with the creation of the Emergency Financial Control Board, which was empowered to read the government of New York City the riot act and overrule it if necessary.
The EFCB was 100% white. When it was suggested that a black person be on the board because their actions would mostly affect African Americans and other minorities, Carey scoffed. “The only way to restore New York’s fiscal health [Carey] believed,” according to Philips-Fein, “was to make its government less democratic.”
This drastic action convinced Wall Street to buy enough bonds to get the city into the fall.
But the city was becoming resigned to eventual bankruptcy. It seemed only a matter of time.
So, a bunch of “city leaders,” which is to say rich white men, got together to make another committee. This time it was called the “Citizens’ Committee For New York City” and it was led by New York states two senators; Jacob Javits and James Buckley.
Only one person present at the early meetings suggested there might be something unseemly about the city's rich gathering in support of cuts that would hardly affect their own lives: Episcopalian Bishop Paul Moore. For years, Moore had been an impassioned advocate for the city's poor. He had castigated the city's corporations for their disinvestment from New York, reminding them that such abandonment was a moral and not a purely economic choice. He insisted that the problem of poverty in the city was not local in its origins—that it was a national story of black Southerners who had come to the northern cities to escape Jim Crow and found themselves stranded in metropolises that were being drained of jobs. Rejecting the program of austerity advocated by the others, Moore asked the group to imagine what poor New Yorkers might think if they knew that a group of businessmen "tried to save New York by making their lives even more miserable." Perhaps there was a way to reach out to these communities and discuss how to "refine" their services rather than making them feel that "the fat cats of this city are trying to save the city by dumping them down the drain." For Moore, this was not simply a question of morality, but of stability and social equality. "If we cut back further on the welfare and social services that some people feel are cut-backable, not only will there be a tremendous human tragedy involved for millions of these people, but there will be an enormous reaction sooner or later, whether it be in riots or more anti-social activity, who knows?"
“If anyone there had driven through the South Bronx recently, they would understand what he was talking about, Moore said—knowing, of course, how unlikely it was that anyone present had.”
New York’s annual Al Smith Dinner in NYC was scheduled for the night of October 16. Twenty hours later, hundreds of millions of dollars of the city’s debt would be due, but the treasury had only $34 million in its coffers.
Governor Carey and Mayor Beame and a whole slew of other political luminaries were there. It was a somber night.
“Mayor Beame used his turn on the five-tier dais to excoriate Washington for refusing to bail out New York, Jeff Nussbaum recounted in the New Yorker in 2015.
“The problems were simpler and less complex in Smith’s day, and there even seemed to be a greater sense of responsibility on Washington’s part.” He then left the dinner to return to the debt negotiations.
The city needed hundreds of millions of dollars and it needed it quick. They needed to sell a huge number of MAC bonds in the next few hours. That might have been easy if Gerald Ford went into the White House press room and announced he supported federal action to insure the bonds or some sort of bailout. But short of that, it was up to New York to save New york.
And there was a chance it could happen! Officials had been in discussions with the Teachers’ Retirement System about a potential last-minute purchase. But a day earlier Beame, as forced by Albany, released a plan to further slash public sector commitments. The Teachers’ Union wasn’t thrilled, and the next night, at the Waldorf Astoria, the powerful head of the fund informed MAC that he couldn’t in good conscience risk his members’ pensions with such an investment.
After the dinner, the leaders of the city government met with lawyers at Gracie Mansion to work out the logistics of an imminent bankruptcy filing. It wasn’t even clear if the city could declare bankruptcy. Bankruptcy law at the time required that 51% of creditors agree to a payment plan but NYC didn’t even know how many creditors it had. Despite this, by morning they had come up with a petition.
The Mayor’s staff prepared a statement about the insolvency, making the case for bankruptcy filing. “I have been advised by the comptroller that the City of New York has insufficient cash on hand to meet debt obligations due today. This constitutes the default that we have struggled to avoid.”
“We needed to figure out which services were essential, and which weren’t,” Sid Frigand, the Mayor’s press secretary, later said. “It was an interesting exercise because when you think of what is essential and what is not essential that there are functions of public service that we don’t know about that are very essential. Bridge tenders who raise and lower bridges were essential. Teachers weren’t life-or-death. Hospital services and keeping the highways open were essential.”
While the lawyers were burning the midnight oil, Governor Carey dispatched a rich real estate developer who had been tapped to help advise on the crisis named Richard Ravitch to go to the apartment of the man in charge of the Teachers’ Union, Al Shanker, and beg.
In his memoir, Ravitch would later write that when he got to Shanker’s apartment, Shanker “was genuinely distressed by his decision not to buy mac bonds. He knew the risks to the city, but he believed his primary obligation was his fiduciary responsibility to his teachers. As city employees, they had already been put at risk by the city’s fiscal crisis. It was no small thing to make their pension money subject to the same risk.”
They stayed up all night together, but when Ravitch called Carey as he left the next morning, he told the governor he didn’t know what would happen.
News of the impending default led the papers that morning. In DC, Gerald Ford’s press secretary Ron Nessen was asked again if, given the catastrophic threat a NYC default would pose to the US economy—the Dow was in free fall—and the US dollar, if the president had any last-minute plans to step in. The answer, in a word, was no.
“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.”
With the 4pm deadline looming, everyone in New York City politics put the screws to Shanker.
“The teachers’ union was in a bind,” Nussbaum writes. “Shanker later called it blackmail. If the city went bankrupt, a judge could order thousands of teacher dismissals, undo the raises the teachers had recently negotiated, and override any pension laws, stripping retirees of their pension checks.”
After a third and final meeting with officials from MAC, Shanker went to meet his union members and implored them to approve the bonds. “No one else was coming forward to save the city,” Shanker said. “the pressure is not from the governor, and it’s not from the Mayor. The pressure is from the situation.”
Just after 2pm, the union announced it had agreed to buy $150 million worth of bonds, and MAC was receiving checks by 3:10pm.
The statement that Mayor Beame’s aides had written announcing the default was not released until decades later.
But the city was still in dire straits. This had just avoided that one deadline. Another deadline was coming. And then another and then another. All of these were just short-term solutions.
The men from New York went back to DC, the only place one can get the billions of dollars necessary to buy enough breathing room to make long-term changes.
It isn’t like Congress was totally reluctant to help. It had been earlier in the year when the leaders of the Senate and the House had told Beame that a bailout would never get out of committee, but everyone from Wall Street to economists, to other municipalities, to the chancellor of West Germany was now screaming at the top of their lungs that a NYC default could bring down the entire municipal bond market, send the US economy into a tailspin, devalue the dollar, and make the West look like fools. “How would Russia look if Moscow failed?” the New York Law Journal.
When [Helmut] Schmidt visited the United States in early October for a private lunch with Ford, the German leader was blunt about his fears that New York's financial collapse might challenge the security of both nations. He was deeply worried about William Simon's blithe attitude. Should New York go under, Schmidt warned Ford, it would be a "Black Friday" around the world, and might well lead to panic in all kinds of markets. Ford responded as he always did, insisting that the problem was the city's because it had been "mismanaged for ten years." But Schmidt's concerns were widely reported in the press, reinforcing the sense that Ford did not fully appreciate the threat of the city's collapse.
Not everyone thought DC should help out. One of the era’s most conservative senators, James Allen (D-AL), was mostly known for three things: hating the Panama Canal treaty, loving the filibuster, and being “George Wallace’s man” in DC. He thought that helping New York City would imperil "the survival of local self-government.”
And then of course there was Gerald Ford, the president himself, egged on by Donald Rumsfeld, his chief of staff, William Simon, the Secretary of the Treasury, and Alan Greenspan, his chief economic advisor. They all thought that New York had spent its way into oblivion and that it was a microcosm for what was wrong with liberal governance across America in the years since the Second World War
Stop them in New York, stop them everywhere. Bail them out in New York, the thinking went, and the Great Society would never end.
So on October 24th, Ford called a cabinet meeting and asked if anyone in his administration agreed with the rest of the world that they should help NYC. The answer was no. “Not just no,” Rumsfeld said. “But ‘hell no.’”
The recalcitrant cabinet did however understand that they couldn’t let NYC turn into some Escape from New York-type anarchist state. The city and its millions of residents would still exist after their leaders were forced into bankruptcy. They would need police and firemen and teachers and EMTs and everything else. So they would have to help pay those things but only after liberalism had been humiliated and vanquished forever in the form of the city going bankrupt. Whether that dragged down the country’s economy and everything was irrelevant.
It was agreed that President Ford would give a speech on October 29th telling New York that no funds were coming anytime soon and explaining his reasons.
Mayor Beame and Governor Carey, Ford told the National Press Club, were trying to leave “responsibility for New York City's financial problems…on the front doorstep of the Federal Government—unwanted and abandoned by its real parents.”
“Other cities, other states as well as the Federal Government are not immune to the insidious disease from which New York is suffering. This sickness is brought on by years and years of higher spending, higher deficits, more inflation and more borrowing to pay for higher spending, higher deficits and so on and so on and so on. It's a progressive disease and there is no painless cure.”
“I can tell you—and tell you now—that I am prepared to veto any bill that has as its purpose a Federal bailout of New York City to prevent a default,”” Ford promised.
Ford thought this speech was…nice! He thought it was the watered-down version, that it would play well. The day before he told union leaders that his speech would be “very sympathetic to the people of New York.” In the years to come, his staffers would say they weren’t even sure in what draft the veto threat was added.
After the speech, Ford took questions. The final one was this: “Do you think you’ll carry New York City in the coming election?”
“I'll take my chances in New York City,” he responded confidently, “because I think there's a substantial number of people in New York City who have known for a long period of time that their great city was being misled and they ere now ripe for some straight answers, some straight talk and I'm confident that we can solve the problem and when we do it and do it right.”
“I think I'll have a friend or two in New York City.”
If that’s what he thought, a conversation happening at that very moment in the newsroom of the New York Daily News should have given him pause.
Daily News Managing Editor William Brink was working on the headline for the next day’s cover story.
“FORD REFUSES AID TO CITY.”
“FORD SAYS NO TO CITY AID.”
Then it hit him:
It captured the feeling of the city perfectly and has become one of the most famous headlines in journalism history. It’s so famous that in 2006 the New York Times felt the need to write a story about how it wasn’t a literal quote.
Though temporarily bonded together in outrage at the White House, New York nevertheless faced the less than appealing possibility of, uh, dropping dead.
If the public reaction gave Ford second thoughts, he didn’t immediately show it. When Hugh Carey asked him to get the Federal Reserve to act as a lender of last resort to gain access to the credit markets, Ford shrugged and reminded him the Federal Reserve was independent.
November came, as it does, and Carey had lunch, as he did. It was lunch with an old friend from Brooklyn. They ordered pastrami, as old friends from Brooklyn do. They talked about New York history and the friend told him that back during the depression Governor Franklin Roosevelt had passed a law that allowed homeowners in New York to delay paying the principal on their mortgages, as long as they paid the interest.
Was it legal? Carey asked. FDR—like Lincoln!—used to pass laws and hope for the best. And in the meantime, while the cases made their way through the courts, the policies were enacted.
Carey wondered if he could do the same thing but for New York City. If the law was challenged it would take a year or so to get struck down and that would be enough time to seek a long-term solution.
Carey had legislation drawn up that would allow New York City to delay paying the principal on its debts—just the interest—and creditors would have the option of exchanging their debts in full for MAC bonds.
“The Pastrami Agreement,” as Carey called it, would save New York City over a billion dollars in 1976.
On November 14, Albany enacted the Pastrami proposal. With that in hand, Carey went to DC one last time. He now only needed a smaller assistance package. He promised the usual suspects—raising revenues with new taxes, cutting costs by reducing social spending—and included commitments from the largest holders of NYC’s debt to convert their notes to 10-year MAC bonds.
And Ford started to bend. On a visit to France, he privately promised anxious allies that he would approve legislation saving NYC.
But how to spin such a flip flop?
“Good evening,” Ford began. It was November 26 and was speaking to the White House press corps. “I would like to comment briefly on recent developments in New York.”
“As you know, I have been steadfastly opposed to any Federal help for New York City which would permit them to avoid responsibility for managing their own affairs. I will not allow the taxpayers of other States and cities to pay the price of New York's past political errors.”
Any second now.
I have, quite frankly, been surprised that they have come as far as they have. I doubted that they would act unless ordered to do so by a Federal court. Only in the last month, after I made it clear that New York would have to solve its fundamental financial problems without the help of the Federal taxpayer, has there been a concerted effort to put the finances of the city and the State on a sound basis. They have today informed me of the specifics of New York's self-help program.
Only a few months ago we were told that all of these reforms were impossible and could not be accomplished by New York alone. Today they are being done.
Therefore, I have decided to ask Congress when it returns from recess for authority to provide a temporary line of credit to the State of New York to enable it to supply seasonal financing of essential services for the people of New York City.
FORD TO CITY: OK OK, FINE.
And like that, for the national media, the story was over. How over?
The second question at this press conference was from Helen Thomas.
“Mr. President, in view of recent revelations, are you fully satisfied that you are aware of everything that the CIA does since you became President, and do you accept full responsibility?”
For New Yorkers, it was still just beginning. The agreements that got them out of the crisis had not even been fully implemented. Austerity had not yet begun to make its impact felt in New York City.
That would come in the following months and years and fires spread and crime spiraled out of control and hospitals were shuttered and daycares closed and class sizes doubled. It would be seen in the bungled response to the blackout of 1977. (The second half of this book Fear City is about what the enactment of austerity policies in NYC actually looked like and you should read it!)
And in the end, it came full circle for Ford as well.
After staving off Reagan from his right in the GOP primary, he lost to Jimmy Carter, who won 50.1% of the popular vote and 297 electoral votes.
Despite winning almost every county in the state, Gerald Ford narrowly lost New York—and with it the presidency—after getting trounced in NYC by a historically large margin.
This is not college and so I didn’t footnote this but for the most part, if there is a quote or stat or detail that I haven’t sourced, it’s from the Kim Phillips-Fein book.