True fear comes to a patient when he realizes his doctor’s a quack. For the country laid out on the operating table, there was a sudden realization last week, amidst the outpouring of reports from Washington, that the leaders of the country had lost all sense of reality. The truth came home in a number of different ways.
• There was Dr. Arthur Burns, seemingly the most collected and powerful member of the government, insisting that a default by New York City would not injure the international economic system. Even as he pronounced these views, international bankers were talking of withdrawing funds from New York banks and were saying that a default by New York would have “a major negative impact on international financial markets.”
• More profoundly there was the sight of the appointed President of the United States uncomfortably trying to explain a botched in-house coup in which his chief of staff had seized the Department of Defense to boost his own political career and in which the chief of the CIA had been fired in favor of a political hack from Texas. It became clear to all that Ford is a continuation of Watergate by similar means; that the country is run by a bungling junta exclusively preoccupied with the supposed threat presented by a retired actor and his wild-eyed horde streaming toward Washington from the Western provinces.
• In Congress, presumed center of democratic supervision, the mood was one of listless hysteria. “Everyone here thinks the whole thing is coming to an end,” said one Senate aide to us last week as he hurried in to yet another meeting about antitrust.
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As a matter of rational analysis there is no doubting the seriousness of the situation. Nobody likes to shout “Fire” in a crowded theatre, but it is obvious that even a two-day delay in welfare checks could mean a frontal assault on supermarket windows; beyond that, the possible shut-off of electricity and gas, the closing of 51 schools and hospitals, and the wind-down of other vital services may well follow from a default.
At the moment the headline story in ongoing crisis is the situation of the New York banks. Because of the complex and secret internal operations of banking, much of this talk is pure speculation. But by the end of last week there were clear signs that the big New York banks were under some measure of strain, signified by the fact that they were having to pay more money for certificates of deposit lodged with them by large corporations in and outside the country. Until a few weeks ago a Chicago bank would have had to have paid a higher interest rate than a New York one. By the weekend the situation was reversed. There were other signs that individual investors may have been shifting funds from the banks to Treasury securities. Yields on Treasury securities were going down, reflecting a heightened desire to buy them.
Various banking analysts and trade periodicals have begin to discuss the names of specific banks which they believe to be under acute pressure. Most commonly mentioned are Chemical Bank, long a focus of discussion because of poor management; the Chase Manhattan, because of the sickness of its $900 million real estate investment trust; and Bankers Trust, which has sunk millions in foreign investments. There was even talk that Bankers Trust was looking for a merger. All these banks own city and state paper — and the imminence of default throws into harsher relief their long-term problems.
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There is certainly no agreement on what would happen if any of the banks were on the edge of failure. Burns has made it clear that the Federal Reserve will bail them out. But such a process is not as simple as it sounds, for if a tremor ran through the banking industry straining several banks at once Burns would be hard put to pour enough money into them to plug the dikes without removing significant sums from other sectors of the economy and thereby risking a deeply damaging structural blow at the “recovery.”
In Congress legislation to avert default became dimmer than ever, with the unions holding out against the possibility of federal revision of their contracts and pensions in a post-default situation. Revisions of bankruptcy laws allowing New York to be considered a supplicant before the courts underwent some reverses in Congress, but according to some congressmen, looked as though they would struggle through.
This is rational talk. More dominant was the simple, irrational statement expressed by almost all involved that no one knows what is going to happen.
New York’s problems are presented against the backdrop of an alleged “recovery” in the national economy. But there are doubts about this, too, and whether the recovery is already over.
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Despite the much-touted but now concluded “upturn,” unemployment remains high and in some instances is increasing. In New York, for example, the October rate was 11.9 per cent — up from 7.3 per cent last year. In Boston the rate is 12.9 per cent, up from 6.9 per cent last year. In Detroit, where the auto industry is allegedly enjoying a modest upturn, the rate is 13.6 per cent.
World trade in basic commodities does not appear to be improving. We have previously reported the deep slump in iron ore, which has led to reduction of 40 per cent or more of iron ore imports by European steelmakers. Only last week news came that U.S. steel producers were cutting back their production along with investment programs for future expansion. Pessimism about the future of the economy is the reason for the steelmakers’ timorous prudence.
The world shipping industry is in severe decline. Oil demand, as we have noted before, is down. Such facts should not be construed as mere statistical embroidery. For the last year everyone has known that world copper trade was in severe decline and that efforts to curtail production by producing countries had failed. The end result hair been that Zaire, one of the major copper producers in the world, has defaulted on loans from major New York banks. This default led to frantic demands for special bail-out legislation by Congress, in which millions would be lent to Zaire in an effort to avert domino third world defaults.
We have already mentioned the situation of the big U.S. banks. Many of the economic thunder clouds could be dispelled if people would only increase their spending. There is little sign of this. Worse still, there is real resistance to purchasing high-priced cars and appliances, and simple lack of financing to buy a house. The construction industry remains in a deep slump.
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In a rational world, as the capitalist system has shown over time, there could indeed be a recovery and a reorganization of the economy by 1977. World trade could take a turn for the good and U.S. trade profit by the strength of the dollar.
But it is plain that the country is not under rational control. Its leaders are unable to focus on reality and prefer to drift along on a broad river of illusions:
• There is the illusion, fundamental to the situation of New York City, that things will right themselves if only the canons of private enterprise are applied.
• There is the illusion that the Federal Reserve is indeed a central bank and can control the monetary system. But the Federal Reserve is not the central bank of Western Europe and Japan and cannot control economic activities there.
• There is the illusion that the country can survive high structural unemployment without enormous social strains. There is the concomitant illusion proposed by advocates of “the capital shortage.” They say U.S. industry needs capital presently being devoted to social spending. They call for a simple redistribution of wealth toward business. Their illusion is that the country could comfortably survive such a reallocation without enormous turmoil.
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Running behind these contradictions is a long-term and destructive self-deception: that the United States is controlled ultimately by a pluralistic democracy, replete with checks and balances; that all will be well if those “crooked politicians” are chased out. The events of the last few months have made it clearer than ever that the U.S. is dominated by large corporate institutions and run from day to day by a junta which makes any banana republic seem a model of stability and restraint. One way that these illusions can be maintained is to have a strongly run country: in the case of the United States a strong president who leaves freedom for illusion beneath the umbrella of authority. This crucial pact was shattered with the assassination of John Kennedy, the central trauma of the postwar era. In the wake of the trauma came dislocation: the disaster of the Vietnam War; the other assassinations; the ruin of democratic procedures at the Chicago convention in 1968; ultimately the discrediting and collapse of Nixon; his spiritual survival in mangled form with the Ford junta.
People yearn for a reknitting of old pacts, for some sense of continuity in authority. This is what explains a fact incomprehensible to some: the popularity of Hubert Humphrey as a Democratic candidate. Humphrey links us to the New Deal, to institutional continuity. It also explains why the Newsweek cover of Richard Nixon was among its better selling issues.
If this is so, the real question is not whether there should be a strong president — or a dictator. Things may have slid beyond the point where a dictator could spring successfully to the levers of power. By failing to govern, by lying badly and by acting the fool, Ford has finally shattered the pact. What he is nominally leading is a people whose illusions are broken, whose structure of society is eroded and who face panic. It is this situation which renders almost impossible the seemingly simple rational acts required to repair — if only for a time — the political and economic order.