It’s 1975, and Wall Street has just refused to purchase New York City’s short-term notes. It’s nothing less than a coordinated credit strike that instantly lit the match on the worst fiscal crisis in the city’s history. Suddenly unable to roll over its debt, New York teetered on the brink of bankruptcy, even though the banks had happily underwritten the same notes for years — and made millions doing it.
A few weeks later, something remarkable happened. The Speaker of the New York State Assembly, Stanley Steingut — a consummate machine politician — introduced legislation, cosponsored by freshman Democrat Charles E. Schumer and sixty assemblymembers, to create a state-owned public bank as well as authorize New York City to establish a municipal bank of its own. With roughly $3 billion in state deposits sitting in private commercial banks, the state bank alone would have instantly become one of the twenty-five largest banks in the country. It would have had all the powers of a major financial institution: to hold deposits, make loans, and — by no accident — underwrite the municipal bonds and notes that Wall Street was suddenly using as leverage to bring the city to heel.
Steingut, of course, publicly denied that the proposal was retaliatory. But the timing made the truth undeniable. For a moment, New York’s political leadership briefly considered the most profound challenge possible to financial power: reclaiming public credit and putting the ownership of capital itself on the path to socialization.
What happened next — and why it matters now — is a story about austerity, political discipline, and a vision of public finance that New York abandoned just when it needed it most.
The Making of Austerity
The standard tale of New York City’s 1975 fiscal crisis casts it as a morality play about liberal excess: an indulgent welfare state, bloated public payrolls, and irresponsible urban governance finally colliding with economic reality. But historians and political economists like Kim Moody and Kim Phillips-Fein have shown that this story is deeply misleading. The city did not collapse because it was uniquely reckless. It stumbled because the political and financial ground beneath it shifted.
For decades, New York had relied on short-term borrowing to manage cash flow and fund public investment. This was not an innovation of the 1970s. It was a normal feature of urban governance in an era when cities were expected to build housing, infrastructure, transit, and public institutions at scale. The real constraint was never spending — it was revenue.
Then as now, New York City lacked meaningful taxing authority. The state legislature and governor dictated when — and if — the city could raise revenue, even as local needs grew more complex and expensive. When fiscal pressure mounted, the city could not simply change its tax structure. It turned instead to borrowing — not as a reckless gamble but as a rational response to a structural constraint.