The Two Bailouts

I highly recommend William L. Silber’s excellent volume, When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy (Princeton University Press, 2007), even those who aren’t financial history buffs. Those of you who are know that the New York Stock Exchange shut down in August 1914, not to fully reopen until 1915, by far the longest suspension of trading in the history of the NYSE. (Which first began trading in 1792, and not in 1817, and almost every book and newspaper on this subject has it wrong, but that is another story.)



Silber’s book lucidly explains why the exchange was shuttered, basically to prevent foreign investors from cashing in their securities and exchanging their cash for gold, how this worked, and how the US avoided a panic in the summer of 1914, and emerged, by early 1915, as the strongest financial power in the world, with the dollar starting to dislodge sterling as world’s premier currency.

What I hadn’t known before reading this book is that, because of the strains in the financial markets in August 1914, when New York City had to make payments in British pound-denominated bond issues to European capital markets, the city teetered on the brink of bankruptcy, and had to be bailed out by the Secretary of the Treasury, along with much tut-tutting on how the city had to learn to live within its means. Silber argues the bailout of NYC in 1914 was the beginning of the “too big to fail” doctrine in American finance, with Lockheed and Chrysler, being later examples of federal largess. The second bailout of the city in 1975 forms a partial exception to this principle, for while Ford did not allow the city to actually “drop dead,” it was hedged with so many controls and restrictions that (unlike the private companies the federal government aided) it would take many decades for the city to recover its financial independence, and in many ways it never really has.

The two bailouts of NYC, 1914 and 1975, make for an irresistible comparison, and the two dates perhaps mark the dates of what might be called “New York City’s short 20th century.” As Silber points out, even if the Secretary of the Treasury, William Gibbs McAdoo, had played his hand less expertly than he did, New York City would have eventually replaced London as the global financial center, but it would have taken much longer. The events of 1914 would have a profound effect on the city’s and state’s finances. In their aftermath, New York City would no longer go the European capital markets to raise funds, but would have their bond offerings underwritten by New York City bankers. Public authorities, the Port Authority, and later Robert Moses’s various creations like the Triborough Bridge and Tunnel Authority would make use of friendly relations with underwriters. The expansion of New York State’s budget and services in the 1920s under Al Smith was likewise dependent on access to capital, and this would be a hallmark of “liberal” governments in NYC and NYS, Democratic and Republican, until the bailout of 1975.

In 1975 this access to capital started to dry up, and there were other, far reaching changes in America’s capital markets, starting with the end of fixed commission rates on the NYSE on May 1. 1975, the first stage in a process that would see a transformation of investment banks, and their supplanting of commercial banks as the dominant financial institutions of the United States. In the end the relatively cozy relation to home-grown capital than New York enjoyed from 1914 to 1975 would not be possible in the globalized marketplace that emerged thereafter. Today, the NYSE is a for-profit corporation, its trading floor steadily dwindling in size and importance, and the co-owner (and co-owned by) several European exchanges. What impact this and other changes will have on the finances of the city and state, only time will tell.