Apocalypse Then, and Now

By Jennifer Klein, Democracy Journal

F ew headlines encapsulate a moment better than the New York Daily News's front-page banner on October 30, 1975: "Ford to City: Drop Dead."

In early 1974, fiscally struggling New York City tried to stay afloat by issuing new bonds. New York's banks refused, demonstrating their power to withhold capital, and thereby setting off a crisis. With the city locked out of the bond market, it unsuccessfully turned to the federal government for help. Under banker supervision, New York then implemented wide-ranging austerity measures, after which President Gerald Ford and Treasury Secretary William Simon agreed to short, very restricted loans, with tight repayment strings. Simon further made clear that if the city gave in to any union demands for wage or benefit increases or failed to extract other savings, any further federal aid would be withheld. While the Daily News headline captured a city's frustration at the Administration, the broader context was also clear: the unquestioned ascendance of finance capitalism over manufacturing and the democratic state.

Fast forward three decades. In early 2008, worried creditors stopped lending to investment house Bear Stearns and pulled their money out, leading to its collapse. The government then helped JPMorgan Chase acquire it on very favorable terms. In September, Lehman Brothers crashed. By October, the stock prices of Bank of America, Citigroup, Goldman Sachs, Merrill Lynch, Wells Fargo, and JPMorgan had plummeted, their balance sheets were in tatters, and the entire industry's short-term outlook was grim. Unable to raise money in the private markets, they too went hat in hand to the federal government. But there was no "Bush to Banks: Drop Dead." Quite the opposite. Treasury Secretary Henry Paulson, a former head of Goldman Sachs, invited them in to collect their cash. As Simon Johnson, a former IMF chief economist, tells us, "Not only did the government choose to rescue the financial system–a decision few would question–but it chose to do so by extending a blank check to the largest, most powerful banks in their moment of greatest need." We had arrived at the total inverse, the culmination of a process begun in the 1970s.

To understand how we got here, we need to take a look again at the 1970s: not the cultural malaise ’70s, or the backlash ’70s, but the economic ’70s. The 1970s have been viewed through the lens of the 1960s, and thereby defined by the reverberations of its culture wars. But as Judith Stein argues, the 1970s can’t just be seen as the result of a shift in national mood or strictly as a cultural phenomenon. At the heart of Pivotal Decade is a question we should be asking now: “Why did the nation replace the assumptions that capital and labor should prosper together with an ethic claiming that the promotion of capital will eventually benefit labor–trading factories for finance–a very different way of running a nation that produced very different results?” The 1970s were the years in which American investment in the productivity of its enterprises dropped and political leaders and their advisers reoriented policies toward wealth rather than capital formation. And as the financial crash of 2008 and persisting Great Recession have made clear, creating wealth is not the same as creating prosperity.

Stein, a professor of history at City University of New York, offers a story of structural economic change, chronicling a shift in the balance of power that led Democrats as much as Republicans to displace employment-focused New Deal policy with a politics of fighting inflation focused on maximizing investment returns. The inflation and unemployment that began climbing in the early 1970s were not the result of mere cyclical downturns. Manufacturers like General Instrument, Bendix, Caterpillar Tractor, and RCA disinvested from factory towns in the United States and turned to Europe, Mexico, and East Asia; banks invested in shipyards, steel mills, and chemical plants from Brazil to Korea. While American productivity sank, Europe and Japan dramatically increased manufacturing, productivity, and exports. Keeping its market closed and charging high domestic prices, Japan began to sell goods to the American market below their domestic price. For geostrategic reasons, Presidents Nixon and Ford were willing to allow the United States to be the market of first and last resort for the rest of the world, propping up an overvalued dollar to make sure Americans would buy imports. Consequently, American exports became harder to sell, producing the country’s first trade deficit since the 1890s. Yet few seemed concerned about what these policies meant for those who produced goods in the United States–that is, for American workers.

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