The city, of course, saw everything much differently. Equating cities and corporations, they felt, was ludicrous. The unalterable economic realities of all large cities made true budget-balancing impossible. And in addition to a heavy load of conventional services, New York City had many unique financial obligations. No other city, for instance, had a tuition-free, open-admission university, or paid much of its own welfare costs and most of its correctional and court expenses. The federal and state governments, city officials believed, had an obligation to make up city deficits. The officials wondered how the federal and state governments could lecture the city on its budget gap when they faced huge deficits of their own. When Washington had a deficit, it could simply print more money.
The banks also had an obligation to help, as city officials saw it. New York banks earned millions of dollars in underwriting city issues, which totaled $7.4 billion in 1974-75. They made millions more as depositories of city funds and investment managers of the city's $7-billion pension fund. In imposing what Mayor Beame came to call a "cash boycott" of the city, the banks, the city felt, were acting irresponsibly. The city could not understand the banks' evaluation of the note issues exclusively in terms of investment merits. At a briefing in March of the New York congressional delegation, an official of the First National City Bank, the most outspokenly critical of the New York banks on city fiscal policies, remarked that unless New York cut expenses, "the city's fiscal situation might not be viable and New York City paper would then be suspect, regardless of interest rate." When the comment was leaked to the press, Beame called up Citibank president William Spencer and witheringly excoriated him for displaying "bad faith" and undermining public confidence in the city. The city reportedly also made its displeasure known by removing some pension money from Citibank's trust department. "Those fellows live in ivory towers," said Beame. "They run home every night to the suburbs. They don't know what is really going on in the city."
While some pruning could be done to the expense budget, the city believed massive cutting on the scale demanded by the banks and federal and state governments would, as Beame put it, "cripple the city" and create "social instability." Large layoffs, one city official noted privately, would have an impact mainly on lower-echelon and lower-income workers, especially blacks and members of other ethnic groups, and would lead to demonstrations and perhaps even rioting. The layoffs could also bring on a confrontation with the unions, which in the past had starkly demonstrated power to disrupt the city. As late as May 15, the city had not dismissed a single city worker. City officials remained convinced that in a crunch the federal or state government or the banks would come through. Nobody wanted to risk a default.
". . . Pressed on the point, some bankers actually believed that a city should behave fiscally just like a corporation . . ."
The unions agreed with the city on the obligations of Washington, Albany, and the banks. They saw their salaries as justified and hard-won. They did not see why city employees should be out of work while bankers grew fat on the city's financial business. Victor Gotbaum, executive director of District Council 37 of the State, County, and Municipal Employees Union, said: "The people we represent are in pain, and we don't see any bankers jumping out of windows." The unions knew someone would come up with enough money to get the city through.
And so it went. As the city staggered through the month of May, its meager cash reserves being rapidly eaten away by payrolls, no one wanted to risk being called chicken. The federal and state governments felt the city would slash expenses sufficiently to balance the 1975-76 budget and thereby persuade the banks to end the cash boycott. The banks also believed that the city would act, and that if not, Washington or Albany would come up with aid. The city and the unions were determined to resist the pressure.
The events which were leading inexorably to the nation's worst financial panic came down to Friday, May 30. Two days earlier, Comptroller Harrison Goldin had asked again for bids to underwrite a long-delayed $280-million note issue. City officials made it clear to the press that if no one bid on the issue, the city would have to default on $220-million in notes expiring that day.
Chase Manhattan strived during Wednesday and Thursday to assemble a syndicate of all major New York banks and other underwriters to bid on the issue. But the bank soon discovered that due to the city's refusal to balance the budget, buying interest among institutional investors, even at interest rates well above 10 per cent, was nonexistent. With their own portfolios already bulging with city paper, the major banks had no interest in eating the issue themselves. And even if they did, they knew they would soon be faced with trying to unload future, probably unsalable, issues. Some $752-million in notes were due to mature on June 11. Another $249 million were to expire on June 25 and another $375-million worth on June 30. The banks couldn't eat everything.