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The Domino Scenario: The Day New York City Defaulted

The idea of giving our gold to the oil producers came from Henry Reuss, one of the most informed congressmen on international monetary affairs. Reuss, who had long urged that gold be eliminated as a monetary medium, and who was concerned over a possible breakdown in the foreign currency markets, called Treasury Secretary Simon at his home Friday evening.

Initially skeptical, Simon liked the idea the more he thought about it. The attack on the dollar and Treasury securities was irrational, of course. The immense economic resources of the American economy far overshadowed the problems of New York City and the municipal bond market. Yet for all their statistical trappings, money markets are creatures of psychology, and the effects of a loss of confidence can quickly become mindless. As holders of such a large portion of the world's assets, the oil producers had become a highly visible symbol of financial strength. A $100-billion line of credit and guarantee of the municipal market seemed the only way that order and reason could be expeditiously restored to the markets. Giving them our gold, though an extreme step, seemed a far more palatable quid pro quo than such political concessions as removals of U.S. support for Israel.

The deal was in place by Saturday morning and fleets of trucks and tankers began moving to their assigned locations. The members of the Organization of Petroleum Exporting Countries were very attracted to the plan. Many Middle Eastern nations had recently become interested in gold and had already been accumulating it quietly as a hedge against their investments in foreign currencies and other ventures. In guaranteeing the muni market, they stood to incur losses on defaults. And the interest rate on the line of credit to the United States was several points below rates on comparable loans. But they figured the $45-billion market value of the gold would more than offset conceivable losses.

President Ford's TV announcement of the arrangement Sunday evening buoyed the market the next day as dramatically as New York's default had battered it on Friday. The dollar and Treasury issues rebounded and bank liquidity, thanks to several billion dollars in Federal Reserve discount window loans and other measures, was restored. All important potential corporate insolvencies were averted. Even the stricken muni market had by midweek achieved a semblance of normality. Federal officials congratulated themselves on their success.

On Wednesday, June 4, Mayor Beame called a joint meeting of representatives of the federal and state governments, the banking community, and the unions to explore new solutions to the city's financial problems. It soon became clear that the past few days had had a quite sobering effect. There was a conscious avoidance of the name-calling and backbiting that had characterized earlier negotiations. On the other hand, though, while everyone agreed on the need for an immediate accommodation, everyone knew it was important not to permit the rush of events to cause a loss of proper perspective.

At a City Hall press conference on Thursday attended by all the participants, it was announced that a bipartisan bill was being introduced in Congress providing for a federal guarantee of sufficient short-term note issues to finance the city through the end of the fiscal year. The banks indicated their readiness to market the notes at anticipated interest rates considerably below what the city had been forced to pay earlier in the year. New York State announced bipartisan support for legislation to permit a $500-million increase in city taxes and a $1-billion advance on state aid due the next fiscal year. With the concurrence of the unions, Beame announced a one-year freeze on hiring and wage increases for city employees. The 1975-76 budget, the mayor said proudly, would be in balance and might even run a slight surplus.

"The federal government stands ready to continue to assist New York City in its effort to regain its financial health," said Treasury Secretary Simon. "But it is important that the city realize that it cannot spend more than the people of New York can afford."

"The state is anxious to help the great city of New York restore the confidence of the financial community," said Governor Carey. "But as I'm sure Mayor Beame understands, it is the city's responsibility to put its own affairs in order."

"Speaking for the underwriters," said Ellmore Patterson of Morgan Guaranty, "I want to say that we are eager to continue to serve as money-raisers for the city. We are confident that as long as the city maintains a prudent degree of financial restraint and avoids counterproductive taxation that might weaken the city's economic backbone, investors will be eager buyers of city bonds and notes."

"We greatly appreciate the assistance of the federal and state governments during the last few traumatic days," said Mayor Beame. "As I have been doing since I took office sixteen months ago, I will strive to reduce city expenditures to a minimum. But as I'm sure President Ford and Governor Carey realize, the city government still has an obligation to meet the legitimate and growing needs of the people of this great city."

"Speaking for the other municipal union leaders," said Victor Gotbaum, "I can say that we were pleased to help in solving the city's financial trials, even though it will involve great sacrifices on the part of our members over the next year. But we hope that in return the city will understand that its employees cannot be asked to bear the entire burden for restoring New York's financial health."

Whereupon everyone smiled, shook hands, and went home. Nothing had really changed, of course: No one had really compromised his position. But at least the city of New York had been saved—perhaps even for as long as a few months.


  • Archive: “Features
  • From the Jun 2, 1975 issue of New York
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