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Chapter Five— The Default of Cleveland: Constructing Municipal Reality
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Chapter Five—
The Default of Cleveland:
Constructing Municipal Reality

The Cleveland situation . . . is a reminder of the power of commercial banks. The credit powers, alone, can be literally life or death for business enterprises and individuals and, as we have learned in New York and Cleveland, for large municipalities as well. When these credit functions are enhanced by trust investments, linked directorships and other ties, the potential for control and power is awesome .
—Congressman Fernand J. St. Germain

Commercial banks hold nearly one half of the municipal debt in the nation . . . [and] are an increasingly important source of short-term credit for hard-pressed cities across the nation. . . . With the importance of credit to local governments, the decisions of loan officers and the board of directors of financial institutions are critical, at times carrying far more impact than the decisions of thousands of citizens of a municipality .
—House Subcommittee on Financial Institutions Supervision, Regulation, and Insurance

Like corporations, municipal governments increasingly rely on external sources of finance capital. Inflation, recession, federal and state budget slashing, increasing social welfare expenditures, and declining tax revenues since the mid-1970s (and particularly since the new federalism of the 1980s) have forced local governments to


seek loans from the private banking community. These loans are often necessary for local governments to meet their normal operating costs as well as for investments in economic development and growth. They become the lifeblood of the city. Losing or renegotiating loans often leads the municipality into a major crisis and even default. Where loans from the private banking community are critical to municipal survival, nonelected economic elites may essentially run the city government. Cleveland in 1978–1979 is a case in point.

Cleveland is an old industrial city on the southern shore of Lake Erie in northeastern Ohio. Its economy relied heavily on commerce and industrial production, most notably iron and steel manufacturing and Great Lakes shipping. Like many other old northern industrial cities, Cleveland's industrial base began to decline in the late 1940s, a victim of recession, foreign competition, mechanization, and devastating plant closings, and the lack of offsetting fixed capital investment (Swanstrom 1985, 72). The city's economic and political troubles solidified in 1978 and 1979, when, locked in confrontation with an antagonistic banking community, Cleveland defaulted on $15 million in loans. What pushed the city to default, and why did the banking community steadfastly refuse to roll over or renegotiate the loans? What was at stake in the city of Cleveland?

The Storm Clouds Build

Cleveland became the center of national attention in 1977 with the election of Dennis Kucinich, at age 31 the youngest mayor of a major city, on a promise to preserve public control of the municipal power system (U.S. Congress, House 1979b, 6; see Dramatis Personae 4). The son of a Croatian-American truck driver, Kucinich studiously maintained his working-class allegiance and life-style. He saw himself as something of a maverick, a populist who championed the interests of the city's working class, which formed the basis of his political power. Some observers point to this populist activism as the cause of the business and banking communities' antagonism to his administration, arguing that these economic elites (led by Cleveland Trust Company, Cleveland's largest bank) tried "to capsize it through default" (Branfman 1979, 44). Others


Dramatis Personae 4. The Default of Cleveland
(in order of appearance)

Dennis Kucinich

Mayor of Cleveland (1977–1979)

Richard D. Hongisto

Police chief of Cleveland

M. Brock Weir

Chief executive officer and chairman, Cleveland Trust Co.

Ralph Perk

Former Mayor of Cleveland (1971–1977)

Carl Stokes

Former Mayor of Cleveland (1967–1971)

George Forbes

City council president

Ralph Besse

Former chairman, Cleveland
Electric Illuminating Co.;
advisory director of Cleveland
Trust Co.

Claude MacClary Blair

Chairman, National City Bank

George V. Voinovich

Former lieutenant governor of
Ohio; mayor of Cleveland (since

James A. Rhodes

Governor of Ohio

fault Kucinich's aggressive, strident manner for the city's contentious relations. Indeed, Kucinich's periodic clashes throughout his term were frequently reported as interpersonl struggles touched off by his abrasive style. But much evidence indicates that the conflicts and struggles were politically and economically motivated by powerful vested interests in the city.

Fierce attempts to remove Kucinich from office with a special recall election laid bare the fusion of the electoral political process with powerful economic interests. The recall movement was financially supported by the banks and the Greater Cleveland Growth Association (GCGA), a business organization composed of the city's large businesses. In addition, the banks' officers and directors personally helped finance the recall (see Table 8): "When an effort to recall the Mayor [in the summer of 1978] was underway . . . [m]uch of the banking fraternity—from which the Mayor was seeking an extension of the city's credit—lined up to support his ouster."


Four of the six banks and the GCGA provided a total of $20,228 to various campaign committees formed to recall Kucinich. The officers and directors of four of the six banks also contributed at least an additional $8,750 to these committees, as did the wives of two other directors of National City Bank and the wife of an ex officio board member of GCGA (U.S. Congress, House 1979b, 4, 772–773).

The list of contributors to the recall campaign was a Who's Who of corporate Cleveland. Many donors had corporate connections to Cleveland Electric Illuminating Company (CEI), an investor-owned utility. For example, White Consolidated Industries had officers sitting on CEI's board of directors. A partner of Squire, Sanders, and Dempsey, the law firm representing CEI, was a former chairman of CEI and an advisory director of Cleveland Trust Company. Another partner sat on Central National Bank's board and a third on CEI's board. Jones, Day, Reavis, and Pogue were the legal representatives of Ohio Edison (codefendants with CEI in Cleveland's anti-trust suit). Partners of this law firm sat on the boards of Central National Bank, National City Bank, and Cleveland Trust (U.S. Congress, House 1979b, 207). Together with the banks and GCGA, these major business interests contributed 31.3 percent of the total $128,681 in recall campaign funds. The remainder of the recall campaign contributions came primarily from suburbanites, prominent businesspeople, and other corporations (see Plain Dealer , 28 Sept. 1978, 22 Apr. 1979).

In contrast, much of the $102,000 raised to defend Kucinich's job came from the city's working class and unions and from the law firm Hahn, Loeser, Freedheim, Dean, and Wellman, which represented Cleveland in its anti-trust suit against the utilities (Plain Dealer , 28 Sept. 1978; see Table 9). Together labor and legal groups contributed 71.6 percent of the campaign funds raised in support of Kucinich. This evidence undermines the widely held argument that a ground swell of popular opinion forced the recall election. On the contrary, the citizens and their representatives appeared to rally to Kucinich's defense against Cleveland's corporate power brokers.

Of the six banks in Cleveland's lending consortium, Cleveland Trust Company (CTC) has been identified as the city's dominant power broker. In addition to its web of interlocking directorate re-


TABLE 8. Political Contributions to the Campaign to Recall Mayor Kucinich, 1978



Percentage of total funds

Number of directors contributing

Number of top officers contributing

Directors and top officers of banks


Central National Bank





Cleveland Trust





National City Bank





Society National Bank





Total contributions of directors and top officers



Corporate and organizational contributions


Case Western Reserve University Boardb




Cleveland Electric





Cleveland Trust



Greater Cleveland Growth Association




White Consolidated Industries



Arter and Hadden




Jones, Day, Reavis, and Pogue




Squire, Sanders, and Dempsey




Thompson, Hirie, and Flory




Total corporate and organizational contributions



Total recall campaign fundsd



Sources: U.S. Congress, House (1979b), 772–773. Cleveland Plain Dealer (22 Apr. 1979); denoted with asterisk (*).

a Wives of two other directors contributed.

b Three family members contributed.

c Wife of one ex officio board member contributed.

d Includes other unspecified corporate contributions in addition to the contributions listed above.


TABLE 9. Political Contributions to Defend Kucinich
in Recall Campaign, 1978



of total

United Auto Workers



Cleveland City Workers



American Federation of State,
County, and Municipal Employees



Hahn, Loeser, Freedheim, Dean &



Total from organizations



Total defense campaign funds



Source: Plain Dealer (28 Sept. 1978).

lations, twenty-four of its twenty-six directors were executives of firms whose single largest stockholder or principal stockholder was CTC. A 1968 congressional investigation noted that CTC, together with Cleveland's other major banks, "is probably the single most influential element in the entire economy of the area." Other bankers widely acknowledged the dominating influence of CTC. As one banker asserted, "No one can ignore the voting power they hold" on corporate boards. One businessman grumbled that CTC's dominating influence was "one of the greatest deterrents to the economic growth of Cleveland," an assessment with which many other businesspeople in Cleveland agreed (U.S. Congress, House 1979b, 195a, 196). During congressional hearings a businessman testified that CTC and its chief executive officer and chairman, M. Brock Weir, did not hesitate to exercise this power in determining the city's political leadership:

There's enough conviction in the financial community of Cleveland and enough resources to fill the short-term need with their own resources, provided we have confidence in whom we're dealing with. I have said I would personally undertake a program to develop an enthusiasm for the banks to recognize the possibility in the right circumstances of putting together a consortium that could provide up to $50 million. (Financier, Apr. 1979; cited in U.S. Congress, House 1979b, 196–197)


Clearly the banking and business communities had much at stake in the recall effort; in pressing their agenda, they contradicted any notion of the electoral process as a simple expression of the will of the people. But despite their powerful opposition, Kucinich prevailed by a slim margin in the special recall election (New York Times, 15 Aug. 1978, 127; 18 Aug. 1978, 30).

While Kucinich's political troubles brewed, Cleveland's economic problems continued. Part of the city's woes could be traced to a national trend of runaway shops. Many industries that had operated in the northern Midwest and Northeast of the United States were moving to the South and Southwest or overseas.[1] Since 1969 this trend had cost Cleveland 17,000 jobs a year. The city's population was declining at a rate of 20,000 annually (New York Times, 13 Nov. 1978, 1). Consequently, city tax revenues were also in decline.

Despite these signals of economic erosion, Cleveland's default was not necessarily inevitable. Most damaging to the city were the spending habits of the previous administration of Mayor Ralph Perk (1971–1977). Perk responded to the city's revenue loss by using "bond funds, borrowed to pay for capital improvement projects, to finance daily operating expenses" (Marschall 1979, 54). This policy left the Kucinich administration with the task of replacing $52 million in missing bond funds. Although an earlier city administration under Mayor Carl Stokes had also used federal funds to pay for Cleveland's operating costs, Perk's spending "more than doubled that of . . . Stokes" (Whelan 1975, 72). City Council President George Forbes admitted in 1978 that the city was paying for the Perk administration's misuse of bond funds and implied that the council could have "brought the city to a halt then instead of today" (Plain Dealer, 3 Aug. 1978). Perk also quadrupled Cleveland's short-term debt, from $22 million to $88 million, in an ill-conceived attempt to generate revenues (Marschall 1979, 54). These short-term notes, issued in 1972 and 1973, were required by law to be transferred to bonds in 1978 and 1979, foisting Perk's excesses onto the Kucinich administration.


In addition to the misuse of federal project grants to pay for Cleveland's operating expenses and the shortsighted escalation of the city's debt, Perk granted costly tax abatements for the construction of two new office towers, one of them for National City Bank. The potential revenues lost to the city because of these abatements totaled almost $35 million (Marschall 1979, 26; Clavel 1986, 78). Taken together, Perk's unsound fiscal practices set the stage for Cleveland's financial woes under the Kucinich administration. Oddly enough, the banks did not monitor Perk's spending and accounting practices.

By December 1978 the city appeared to be headed for default on $15.5 million. Kucinich recommended that voters approve a 50 percent city income tax increase. But the city council steadfastly opposed the proposal, as they opposed all proposals except the sale of the city's Municipal Electric Light Corporation, called MUNY (New York Times, 12 Dec. 1978, 18; 14 Dec. 1978, 19).

With Cleveland frustrated in its efforts to avoid default, the city's financial suppliers began to mobilize. Moody's, Standard and Poor's, and the Dreyfus Tax Exempt Fund further downgraded Cleveland's bond rating, which dropped from AA through 1969 to A in 1973–1977, and to BAA on 8 June 1978. Standard and Poor's finally suspended Cleveland's bond rating in July 1978 (U.S. Congress, House 1979c, 507; New York Times, 7 Dec. 1978, D2). Because this low rating and ultimate rating suspension forced the city out of the national bond market, the only alternative source of loans was the banks (U.S. Congress, House 1979c, 507; New York Times, 7 Dec. 1982, D2). But Cleveland's lead bank, Cleveland Trust Company (which held $5 million in loans due that December) did not approve of Kucinich's proposal for recovery. On the morning of 15 December 1978, Cleveland Trust Chairman and CEO M. Brock Weir and Councilman Forbes told Kucinich that the banks would roll over the city's debt and provide $50 million in credit if Cleveland sold MUNY. Kucinich refused, and Cleveland defaulted on $15.5 million in loans in mid-December 1978 (New York Times, 16 Dec. 1978, 1).

The Carter administration compounded Cleveland's problems by refusing Kucinich's request for an advance on the city's revenue-sharing funds (New York Times, 17 Dec. 1978, 25). Federal officials insisted that the city caused its fiscal crisis by allowing expen-


ditures to exceed revenues. Therefore, they argued, the city's fiscal problems should not be the responsibility of the federal government but should he resolved locally (New York Times, 19 Dec. 1978, 9). Ohio law left Cleveland essentially on its own, since it stipulates that the state may not intervene in the affairs of chartered cities such as Cleveland "without formal invitation." Fearing a loss of local control, Cleveland's officials did not want the state of Ohio to intervene (New York Times, 24 Dec. 1978, 12). The refusal of state and federal governments to respond on their own initiative locked Cleveland in a localized struggle with a hostile banking community.

The Banks, CEI, and MUNY

MUNY, the city-owned electric utility, became a political bone of contention in the struggle to resolve Cleveland's fiscal crisis. Cleveland's community relations and economic condition suffered as a result, particularly when Kucinich refused to honor the Perk administration's tax abatement to banks and businesses to build office towers.

Cleveland chose to create its own power system in 1905 rather than rely on existing private systems (the more common approach). MUNY—which provided relatively cheap electricity to 20 percent of the city's residents and to all municipal buildings and streets—had competed with Cleveland Electric Illuminating Company (CEI), a private utility, ever since. The demand for MUNY power had always exceeded capacity (especially during peak hours), forcing MUNY to purchase power from CEI or from utilities outside CEI's customer area. The situation worsened over the years as demand grew and MUNY's operating plants deteriorated. The public utility's decline owed much to CEI's interference, particularly in lobbying the city council not to maintain MUNY facilities (Bartimole 1977). Whichever option MUNY chose for obtaining more power (and it eventually bought all of its electricity from outside sources), an interconnection with CEI was critical because of the prohibitive cost and logistical difficulties of constructing separate transmission lines.

Although CEI could not legally deny MUNY's request for interconnection, its response was a more important factor than the


city's inefficient expenditure policies in producing Cleveland's cash flow shortage. After years of contentious negotiations CEI formed an interconnection but often provided inadequate power, causing regular power outages. The Nuclear Regulatory Commission accused CEI of failing to restore electricity immediately after such interruptions and of sending inadequate work crews for repairs and restorations (Bartimole 1977). The continuing problems tarnished MUNY's reputation as an efficient, reliable power system. "CEI took advantage [of this situation] . . . through its aggressive campaign to take customers away from MUNY." When the campaign failed, CEI sought to eliminate the public utility by purchasing it outright. In response Cleveland filed an anti-trust suit against CEI and other regional utilities in 1975 (U.S. Congress, House 1979b, 205). Cleveland lost that suit and had to pay its overdue bills to CEI in full. These bills mounted under the Perk administration, which left the debt unpaid. This debt was the primary cause of the city's serious cash flow shortage.

Proponents of the sale of MUNY to CEI, particularly the Greater Cleveland Growth Association, cited the public utility's decaying physical plant and the perception that MUNY represented a financial liability for Cleveland (U.S. Congress, House 1979b, 208). GCGA's position was not surprising: CEI helped create the association in 1962 (Clavel 1986, 61). Kucinich ardently opposed the sale of MUNY or any other city assets to balance the budget and countered the GCGA's analysis of MUNY as a fiscal drain:

The operation of MUNY has been stabilized. It is no longer draining the city treasury. In fact, with the MUNY Light debt [to CEI] paid off, we can expect MUNY to earn several million dollars a year for the city, as well as continuing to furnish us with low-cost street lighting, which saves Cleveland's taxpayers hundreds of thousands of dollars yearly. (U.S. Congress, House 1979b, 209)

The American Public Power Association, a trade association of public utilities, corroborated Kucinich's analysis and joined the mayor in opposing the sale of MUNY, arguing that the benefit to the public of MUNY's cheaper rates should not be dismissed lightly (U.S. Congress, House 1979b, 209).

The battle to preserve MUNY became a rallying point in what is often described as Cleveland's class war (Branfman 1979, 43).


Kucinich and his working-class followers fought to maintain the publicly owned utility. The business and banking communities tried to force the sale of MUNY to CEI, which would then have a monopoly on Cleveland's electricity. Indeed, Kucinich went before Congress and charged the banking community with deliberately throwing the city into default to aid its business allies by making the sale of MUNY to CEI a precondition for the renewal of Cleveland's loans (U.S. Congress, House 1979c, 5–13). Kucinich charged that "the decisions of the banks concerning extension of credit to the city [were] . . . influenced by massive conflicts between the banks' loan-making functions and their direct and indirect ties to other interests in the Cleveland area" (U.S. Congress, House 1979b, 1). Kucinich specifically named M. Brock Weir of Cleveland Trust, the dominant bank in Cleveland and Ohio's biggest bank (with assets of $4 billion).

The renewal of notes had been predicated by Cleveland Trust on the sale of the city's publicly-owned electric system—MUNY. . . . The Mayor also charged that Cleveland Trust had innumerable links to the neighboring private utility company—Cleveland Electric Illuminating Co.—and that denial of credit was leverage exerted by the bank to force sale of the publicly-owned system to CEI, an admitted long-standing corporate goal of the private utility. (U.S. Congress, House 1979b, 2–3)

Why would Cleveland's banking community be interested in the demise of MUNY? Because of their enormous investments in CEI, it was in the banks' collective interest to eliminate any cost competition for the private utility. Congressional investigations uncovered strong links between the city's six major banks (all of which were involved in Cleveland's lending consortium) and CEI.[2] These relations were based on loans and lines of credit to CEI, shares of CEI stock that the banks held in trust and pension accounts, stockholders' voting rights, corporate interlocks between CEI and the banks (including direct representation of the banks on CEI's board), the banks' management of CEI pension funds, and major CEI deposits at the banks (see Table 10). For example, four of the six banks provided CEI with a total of $74 million in lines of


TABLE 10. Cleveland Banks' Interests in CEI, 1978


Lines of
credit to
CEI (in millions)

held in

of voting rights

with CEI

tatives on CEI's

funds (in millions)

CEI compensating balances,
15 Jan.

to CEI, 1974–
1978 (in millions)

Cleveland Trust









National City Bank









Central National Bank









Society National Bank









Euclid National Bank









Capital National Bank
















Sources: U.S. Congress, House (1979b), 6–7, 50, 183, 372–375; House (1979c), 10.

a CTC's holdings may actually have been higher, since the annual report from which the data were originally taken included shares registered in the name of only one of CTC's two primary nominees.

b Remaining pension funds administered elsewhere (by other, perhaps national-level, banks).


credit, and the two largest banks (CTC and National City) together provided $79 million in loans to the utility between 1974 and 1978 (U.S. Congress, House 1979b, 372–374).

CEI kept compensating balances at four of the six banks totaling almost $2.8 million. Five of the six banks held almost 1.8 million shares in CEI (Capital National Bank did not provide figures), including more than 2 million with voting rights (U.S. Congress, House 1979b, 375, 50). Cleveland Trust and National City together held almost 4.5 percent of CEI's stock and 2.9 percent of the voting stock (U.S. Congress, House 1979a, 46; 1979b, 47). These same six banks shared 205 corporate interlocks with CEI and had 10 representatives sitting on CEI's board (U.S. Congress, House 1979b, 183). Cleveland Trust alone managed $70 million of the $130 million in CEI pension funds managed by banks (U.S. Congress, House 1979c, 10). In addition to these sources of direct common interest between the banking community and CEI, there were indirect connections between them through the law firms representing the defendants in Cleveland's anti-trust suit against CEI:

The firm representing CEI is Squire, Sanders and Dempsey, a major law firm in Cleveland with 78 members and 95 associates. One of the Cleveland partners is Ralph Besse, former chairman of CEI and an advisory director of Cleveland Trust Company. Squire, Sanders and Dempsey also has a partner sitting on the board of Central National Bank and another on CEI's board. Representing Toledo Edison in the case was Jones, Day, Reavis and Pogue. That firm has 60 members and 58 associates in Cleveland and 63 members and associates in its Washington office. Partners of Jones, Day, Reavis and Pogue sit on the boards of Central National Bank, National City Bank, and Cleveland Trust Company. Contributions to campaign committees supporting the recall of Mayor Kucinich in August 1978 included 8 Jones, Day, Reavis and Pogue members and 53 Squire, Sanders and Dempsey members. (U.S. Congress, House 1979b, 207)

Together these structural arrangements unified CEI and Cleveland's banking community in their struggle to force the city to sell MUNY.

Ratcliff, Gallagher, and Ratcliff (1979) note that interlocks between banks and regional nonfinancials tend to diminish the finance capital available to the local community. Because banks give lending priority to their interlocked corporations, they deprive the local area of residential mortgage capital. That capital is key to ur-


ban development; without it urban decline, decreased property values, and lost revenue are nearly inevitable. Cleveland suffered these problems because of disinvestment and redlining (U.S. Congress, Senate 1975; 1980). Disinvestment in the municipality contrasts sharply with the banks' investments in and interlocks with CEI and other capital accumulation interests in Cleveland.

O'Connor (1973) suggests that banks influence municipal policy making by refusing to extend loans for activities that compete with private capital accumulation. Since MUNY competed with CEI and other investor-owned utilities, it is not surprising that the banks pressured Kucinich to sell MUNY to CEI. More important, the investor-owned utilities around Cleveland were interested in investing in nuclear power generation. CEI wanted to absorb MUNY to expand its rate base and thus raise the revenues necessary for constructing a nuclear power plant.

CEI had other reasons for wanting to eliminate its competitor. Because MUNY, as a public utility, did not have to produce profits or pay dividends, it could charge lower rates than an investor-owned utility like CEI. The sale of MUNY to CEI would enable the investor-owned utility to charge even higher rates because of the loss of competition. Evidence from other cities indicates that rates rise sharply when investor-owned utilities buy up their municipally owned competitors. In Fort Wayne, Indiana, for example, the private utility's electric rates doubled after the 1974 sale of the public utility (see Marschall 1979, 114).

Why would the banks have any interest in such matters? The bonds of investor-owned utilities are guaranteed as if the utilities were state agencies. The rates a utility charges are guaranteed indirectly and sometimes directly. Indirectly, the precedent set by Smyth v. Ames (1898) guarantees a "reasonable return" on capital "used and useful in the public's service" (Bonbright and Means 1969, 63; see also Metcalf and Reinemer 1967, 21–23; Bonbright 1972). The Supreme Court ruled in Smyth v. Ames that rates could not be set so low that they forced a private utility into bankruptcy. But failing to pay a bond would force bankruptcy, because the utility's board would otherwise have a sure form of leverage on public service commissions to achieve the rates they desired. The notion of a reasonable rate of return "quickly became a de facto guarantee of income, sufficient to cover operating costs of fixed and vari-


able capital plus debt service and profits" (McGuire 1986, 258).

In other cases, state guarantees of a bond can be applied directly to secure sufficient capital and bond sales in periods of crisis or to fund joint utility-state projects. The bonds are usually tax free (Metcalf and Reinemer 1967; Wasserman 1979; Hertsgaard 1983). Banks then get a guaranteed return on these bonds, with the support of the state, at rates routinely 2–3 percent above those of state-issued bonds (McGuire 1986). Significantly, the total capital costs of the utility industry rose more than 600 percent between 1969 and 1979 (Munson 1979, 349). That represents a major increase in the bond market precisely when other industries were undergoing depression and recession. No wonder banks had an interest in nuclear-power investments: the costs were passed on to consumers and guaranteed by the state.

In addition to the evidence of common interests among the banks, CEI, and the business community, there was a political bone of contention between Kucinich and National City Bank, a member of Cleveland's six-member lending consortium and holder of $4 million of the city's notes. The previous mayor had given National City a $14 million tax abatement to support the construction of a new building for the bank, a move Kucinich "vehemently opposed." Frustrated by their failure to unseat Kucinich in a recall election, the banks apparently pursued default as their next strategy. As National City's chairman, Claude MacClary Blair, put it: "Default, with all its problems, might be the best thing that could happen to Cleveland if it meant the defeat of Dennis Kucinich" (U.S. Congress, House 1979b, 830).

Furthermore, Cleveland Trust's M. Brock Weir pointedly avowed that the city's fiscal difficulties were really not of grave concern to the banks. "The business climate remains healthy," Weir said. "The only problem is the little canker downtown." So although the banks could easily have rolled over Cleveland's loans (the standard operating procedure in similar instances of impending municipal default), the banks and the business community preferred to construct a political climate favorable to the destruction of MUNY as a cost competitor with CEI and to the provision of tax breaks for the banks. According to Weir, "We [the banks] had been kicked in the teeth for six months. On December 15 [1978], we decided to kick back." The congressional investigation report


noted, "Clearly the default of the city and the possibility of a forced sale of MUNY would have been a severe kick in the teeth for the Kucinich Administration" (U.S. Congress, House 1979b, 830, 829).

In addition to the banks' efforts, GCGA's taxation committee had been urging the sale of MUNY since 1977. GCGA's position is understandable in the light of a congressional investigation that uncovered strong relations between GCGA, the banking community, and CEI (see Table 11). For example, GCGA's chairman and three of the nine vicechairs were officers or directors of banks involved in Cleveland's default. Of GCGA's twenty-five-member executive committee, nine were officers or directors of banks and two were officers or directors of CEI. Of GCGA's fifty-one-member board of directors, ten were officers or directors of banks and two were officers or directors of CEI. Moreover, five of GCGA's ten-member ex officio executive committee were officers or directors of banks (U.S. Congress, House 1979b, 211–213).

The strong presence of bank representatives at GCGA is all the more significant because the association knew as early as 1975 that Cleveland's budget and accounting books did not accurately assess the city's fiscal condition. A GCGA report recommended that Cleveland refrain from relying on short-term notes and attempt instead to raise operating revenues from the sale of city assets (U.S. Congress, House 1979b, 214). Yet the banks continued to lend short-term money to Cleveland until 1978 without demanding greater accountability or improved ledger management. Apparently motivated by CEI's major interest in forcing the sale of MUNY, the banks' easy lending policy and tolerance of the city's fiscal mismanagement placed the city at their mercy three years after the association's report. Kucinich repeatedly charged that Cleveland Trust insisted on the sale of MUNY as a precondition for renewing Cleveland's loans and rescuing the city from default.

Faced with Cleveland's deteriorating economic prospects, Kucinich offered to put the MUNY sale issue on a referendum ballot. Part of that proposal also called for an increase in the city income tax from 1 to 1.5 percent. After much battling, the city council approved Kucinich's referendum proposal. When the referendum came to election, voters agreed to raise the city's income tax by 50


TABLE 11. Greater Cleveland Growth Association's
Ties to Banks and CEI, 1978


Bank officers

Bank directors

CEI officers

CEI directors






Vice chairs (9)





Executive committee
(25 members)





Board of directors
(51 members)





Ex officio executive committee (10 members)





Source: U.S. Congress, House (1979b), 211–213.

percent but rejected the sale of the public utility (New York Times , 20 Dec. 1978, 16; 23 Dec. 1978, 1; 28 Feb. 1979, 1).

The Struggle Continues

While intense struggles ensued over the sale of MUNY, Kucinich appealed to the city council to approve an ordinance to get the six local banks to refinance Cleveland's defaulted $15.5 million. Cleveland Trust finally agreed to wait until after 27 February 1979 before instituting measures to collect $5 million on which Cleveland had defaulted (New York Times , 26 Dec. 1978, 16; 29 Dec. 1978, 10).

Meanwhile, in a move to raise more revenue, CEI requested a 25 percent rate increase for wholesale power it sold to Cleveland. Kucinich strenuously opposed the request (New York Times , 10 Feb. 1979, 8). In a federal setback, the U.S. Supreme Court refused to review Cleveland's appeal in a "dispute over its authority to pay off some electric bills," letting stand the Ohio Supreme Court's ruling that the city did not have the authority to issue bonds to generate revenue for payment of its debts to CEI (New York Times , 22 Feb. 1979, D5). This decision made it even harder for Cleveland to access the national bond market and increased the city's dependence on its creditor banks.


The city continued to suffer from the banks' collective definition of a crisis when it lost its largest annual convention. The Pittsburgh Conference, which annually brought 15,800 scientists and around $6 million to Cleveland, decided to hold its 1980 conference in Atlantic City for the first time since 1968 (New York Times , 3 May 1979, B8). Furthermore, as Cleveland's image plummeted, more and more firms moved out, including Diamond Shamrock Corporation, which moved its headquarters from Cleveland to Dallas, Texas (New York Times , 30 May 1979, D19).

Finally, after protracted feuding over the sale of MUNY almost destroyed the city financially, city council leaders and the Kucinich administration agreed on a six-step fiscal rehabilitation plan to offer to the banks. The plan required that the council approve legislation to establish "an escrow account for income tax money from about 20 of Cleveland's biggest companies," to be used for payments to the banks holding Cleveland's loans (New York Times , 10 June 1979, 31).

In July 1979 Cleveland avoided a second default when the city council unanimously passed a measure that gave the city an additional year to repay $7.6 million it borrowed "from its own agencies." Kucinich also requested that the council repeal the city law requiring the approval of a bond lawyer to refinance municipal notes, an approval the bond lawyers had refused to give (New York Times , 7 July 1979, 6).

Although the city avoided defaulting on loans by its own agencies, it headed into another default on 31 August 1979. After more squabbling over MUNY's sale, Kucinich and the city council finally agreed on a proposal to begin overdue repayments of loans, and the council approved Kucinich's repayment schedule of $3.75 million to Cleveland's six local banks (New York Times , 26 Sept. 1979, 16). The council later approved a plan to refinance $14.4 million in municipal debts, helping the city avoid a third default in less than a year (New York Times , 6 Oct. 1979, 11).

Kucinich became the most visible political victim of Cleveland's fiscal crisis when the Republican lieutenant governor of Ohio, George V. Voinovich (heavily supported by business interests), defeated him in a bitter 1979 mayoral election.[3] The election of


Voinovich smoothed the way to the governor's mansion and access to finance capital: "With Kucinich turned out of office, Governor James A. Rhodes, State Senate leadership, and the City Council [were] prepared to enact legislation that would allow the city to enter the debt market and gain some relief from a series of defaults that [had] plagued it for the last year" (New York Times , 8 Nov. 1979, 20). Unfortunately, that cooperation did not come soon enough. Cleveland's officials noted that despite the 50 percent increase in the city's income tax rate, the city ended 1979 with an even larger deficit than the previous year (New York Times , 15 Nov. 1979, 26; 18 Dec. 1979, 14).

Shortly thereafter, Cleveland hired a Wall Street banking firm and investment company, Lazard-Freres and Company, as its financial adviser. The firm had a reputation as an effective adviser to cities needing fiscal rehabilitation (New York Times , 18 Feb. 1980, D2). But in the fall of 1980 Voinovich announced the disheartening news that Cleveland faced another $7.1 million budget deficit for that fiscal year (New York Times , 10 Mar. 1980, D8). Cleveland's Financial Planning and Supervision Commission approved the mayor's financial bailout plan (New York Times , 30 Apr. 1980, 20). By June 1980 Cleveland had reached an agreement with the banks to refinance $36.2 million in debt, including the $10.5 million on which the city had already defaulted (New York Times , 8 June 1980, 24). In addition, the city council approved Voinovich's agreement to sell $36.2 million in fourteen-year bonds to eight banks to repay the city's overdue debts.

This plan would essentially convert Cleveland's debts from short-term notes to long-term bonds (New York Times , 9 Oct. 1980, 22). Ironically Voinovich had to ask voters once again to increase the city income tax from 1.5 to 2 percent to raise revenues to support the city's recovery (New York Times , 18 Feb. 1981, 12). These measures apparently worked. Cleveland managed to balance its budget in 1980 "for the first time in years," generating a $3.9 million surplus (New York Times , 13 May 1981, 28). Standard and Poor's, which had suspended Cleveland's bond rating in July 1978, resumed the city's bond rating in August 1981 with a


BBB (New York Times , 16 Aug. 1981, 35). Moody's Investor Service gave a Ba rating to the city's general obligations bonds (New York Times , 9 July 1981, D9), up from the Caa rating in 1979 (Moody's Municipal and Government Manual , 1979). This made the national bond market accessible to Cleveland once again. Finally, by 1982 Cleveland's downtown had begun to revive along with the "growth of the skilled service industry" (New York Times , 5 Feb. 1982, 10). This service sector expansion began well before 1982 and was strong even under Kucinich. The trend suggests that Cleveland's economy was fairly healthy under Kucinich, and that the critical factor in the city's fiscal crisis and default was not simply economics, but political economics.


The struggles between the city of Cleveland and the mayor, on the one hand, and the banking and business communities, on the other, illustrate the power of the unified control of capital flows to compromise the political process and the relative autonomy of the state. When the interests of the business and banking communities lined up against the populist municipal government, the banks' collective control of lending capital was more powerful than legal and electoral mechanisms and resolved the conflict more in favor of the private sector's interests. The power of collective purse strings enabled the banks to collectively define the city's cash flow shortage as a crisis, thereby precipitating Cleveland's default.

Cleveland's fiscal problems were not caused by extraordinarily low revenues or excessively high expenditures. Whereas Beck (1982, 216) speculated that a long history of municipal mismanagement caused Cleveland's default, I argue that the cause was the control of the city's critical capital flows by an organized banking community. Political concerns and interests in the business and banking communities took precedence over the needs and interests of the city and its working-class constituents. Moreover, the behavior of the business and banking communities set the stage for Cleveland's default. In particular, because CEI provided inefficient and expensive interconnections for MUNY, the public utility provided an unreliable and inefficient service to its customers. MUNY's subsequent anti-trust suit against CEI resulted in CEI's countersuit


to recover back payment of MUNY's overdue bills to the private utility. The legal tussle pushed the city along the path to default. Cleveland was forced to pay its CEI bills in full, and the payments generated a cash flow shortage. Because of the sharp reduction in cash flow, the city could no longer make payments on its loans. But the downgrading of Cleveland's bonds locked the city out of the national bond market and intensified its dependence on those loans. The banking community, which had significant interests in CEI (including stock ownership, pension fund holdings, CEI deposits, voting rights on CEI stocks, loans, and interlocking directorates) refused to renew or renegotiate the city's loans unless Kucinich agreed to sell MUNY to CEI. Such a sale would have eliminated any further pursuit of the anti-trust suit against CEI and would have solidified the private utility's control of the city's electricity business by absorbing the competition from MUNY.

In an analysis of Cleveland's crisis, Swanstrom (1985) argues that default and urban decline have a political as well as an economic cause (see also Monkkonen 1984). He also insists that municipal fiscal crises are produced not by capitalist development but by the "political practices chosen by each society" (Swanstrom 1985, 104). His analysis implies a nearly unlimited range of possible practices and urban political leaders with the unbridled discretion to choose among them. Swanstrom ignored the constraints that capitalist relations impose on the range of possible choices. He viewed capitalism as an economic structure separate from the political structure. A political-economy analysis clarifies the limits on political leaders' discretion that render them "able to act only in the terrain that is marked out by the intersection of two factors—the intensity of class struggle and the level of economic activity" (Block 1977, 27). Hence Kucinich's terrain included the struggle over MUNY, the loss of the city's access to the national bond market, and the extent of bank hegemony in Cleveland.

Cleveland's case is consistent with Whitt's assessment that urban elites strongly influence municipal policy formation and expenditure decisions (see Whitt 1979, 1980, 1982). Despite conflicts within the business and banking communities, these urban elites unify around specific issues. The case of Cleveland highlights the structural bases of consensus formation. Elite consensus in Cleveland developed through the structural mechanisms of the


lending consortium, GCGA, interlocking directorates between the banks and the business community, and stockholding. Although these structural bases do not necessarily ensure absolute domination of municipal decision making, they have a critical influence on urban policy.

Clearly the banks wielded tremendous influence in Cleveland's fiscal crisis. They made the availability of loans to the city contingent on the sale of MUNY to its private-sector competitor. Although the city's default was a fiscal crisis in that government expenditures exceeded revenues, the roots of that crisis were deeper than simple economics. Cleveland could not meet its expenditures because it no longer had access to finance capital. For political reasons the financial community had cut Cleveland off. Indeed, the coffers opened once again when the business and banking communities unseated Kucinich, and Voinovich took office. Although MUNY remained municipally owned, the new mayor openly sympathized with business and banking interests, and they reciprocated by renewing the flow of finance capital to the city. This result is consistent with O'Connor's conclusion that the financial community enforces the state's role of assisting capital accumulation by influencing the state to allocate funds to activities that do not compete with private interests (see O'Connor 1973).

The banking and business communities never did convince the voting public to sell MUNY to CEI, primarily because Kucinich had successfully identified the issue as a symbol of class struggle. But they still got their money's worth out of supporting George Voinovich for mayor. Part of Voinovich's bailout plan involved an 8 percent increase in MUNY's rates to support CEI's expensive interconnection and electricity service. The new mayor also straightened out Cleveland's accounting procedures and opened the city's books to the banks, laid off 650 municipal workers, and held down the wages of the remaining city employees (New York Times , 30 Apr. 1980, 20; 11 May 1980, 24). In other words, the working class paid for the city's bailout in lost jobs, decreased pay, and increased income taxes. Indeed, the increased revenues from income taxes were devoted to paying back the overdue loans instead of preserving workers' jobs and services. So although the collective power of the banks was not absolute, it was strong enough to


influence the electoral process and to punish the working class (which had thwarted the banks' ultimate goal) by declaring the city in default and by then pressing for a bailout plan that disproportionately hurt labor.

MUNY's history demonstrates that Cleveland's 1978 default was an extension of political economic issues rather than personality clashes. Turn-of-the-century Cleveland was the mirror image of Cleveland in 1978–1979. Comparable struggles between Cleveland's mayor and the private utilities date back as far as 1905, when Mayor Tom Johnson battled to create a municipal utility (see Rudolph and Ridley 1986). Johnson accused two city council members of accepting bribes from the old Cleveland Electric Lighting Company, which strenuously opposed the proposed municipal utility. Voters supported the creation of MUNY, as they supported the public utility in 1979, but the private utilities managed to convince the city council to vote against it. Johnson's accusations of bribery were significant because "one of the choicest plums of public office . . . was the granting of franchises for electric power, the new industrial heartblood" (Rudolph and Ridley 1986, 23). Johnson based his campaign for mayor in 1900 on a promise to break the utilities' hold on the city council and to take over two major private utilities, including CEI.

Like Kucinich, Johnson fought against formidable corporate opponents. A large, powerful private utility had emerged from the consolidation of many small companies. This large firm was "connected to a regional or national holding company, [and its] board of directors often interlocked with those of banks, brokerage firms, insurance companies, or other interests with whom the city's officials had to do business" (Rudolph and Ridley 1986, 37). For example, Cleveland Electric Lighting was a subsidiary of General Electric and was supported by J. P. Morgan. Faced with such strong opponents, both Kucinich and Johnson turned to the electorate of Cleveland. Frustrated by their failure to turn voters against MUNY, financial interests sought to defeat it by pulling the purse strings. Morgan, for example, tried to choke off the city's access to construction funds by "advising investors not to buy Cleveland's bonds for the [MUNY] plant" (Rudolph and Ridley 1986, 37). But this effort failed, and by 1914 MUNY was providing electricity at rates


70 percent lower than the private utility's. Thus Kucinich's struggles to preserve MUNY in 1978–1979 were a direct extension of Cleveland's earlier struggles to develop the public utility.

Although Kucinich's forceful personality clearly took center stage in Cleveland's later struggle with the business and banking communities, it is inaccurate to conclude that the city's problems arose because of him. Although business interests have long dominated Cleveland's politics, the city also has a long (if inconsistent) history of populist politics in which leaders in community action organizations, unions, and city hall have struggled against business interests (Clavel 1986). In the fight to preserve MUNY, Kucinich had the support of the United Auto Workers; the American Federation of State, County, and Municipal Employees; the Cleveland Planning Commission; the Ohio Public Interest Campaign; and various local community organizations (Clavel 1986; Plain Dealer , 28 Sept. 1978). The list of supporters and opponents of the sale of the utility has lead many observers to attribute the struggle to class issues.

Once again the banks' collective action was not a last-resort effort to remedy intractable financial difficulties. As we have seen, Cleveland's economy remained fairly good throughout the crisis. But default was a last-resort effort to remedy a political problem: a populist mayor who stubbornly opposed business and banking interests.

Municipal cash flow shortages do not necessarily lead to default, as they did in Cleveland. When New York City suffered a similar shortage in 1976, the banks bailed it out. The critical difference between Cleveland and New York was the willingness of the cities' mayors to comply with the banks' definition of appropriate austerity programs. Whereas Kucinich steadfastly resisted selling MUNY, New York City Mayor Ed Koch sold valuable city property to private interests, sharply reduced the city's work force, slashed social welfare expenditures, and forced the municipal workers' pension funds to purchase "Big Mac" bonds (that is, municipal bonds) to support the bailout (see Lichten 1980, 1986; Tabb 1982). New York allowed a "significant transfer of public power to the private sector" by creating the Emergency Financial Control Board, through which "the major banks and corporations were granted a direct veto over government decisions," including the negotiation of municipal workers' contracts (Berkman and


Swanstrom 1979, 297). In contrast to Kucinich's refusal to compromise the interests of his working-class constituents, Koch instituted an austerity plan that hurt labor the most. The banks responded to the different mayors with different definitions of their cities' situations and different social contructions of municipal reality. They bailed out New York and pushed Cleveland into default.[4]

This tale of two cities parallels the tale of two corporations discussed earlier. Chrysler's willingness to make labor bear the brunt of its austerity program enabled the firm to access federal loan guarantees. The banks refrained from defining the situation as a crisis and instead bailed Chrysler out. In contrast, Saul Steinberg's overt opposition to the banking community's interests set Leasco against an array of forces that successfully defined the firm's situation as a crisis. These parallels between corporate and municipal experiences reveal that control over capital flows allows the banking community to socially construct economic reality for governments and corporations alike. Whereas the structures of bank hegemony over corporations include lending consortia, institutional stockholdings, pension and trust fund portfolio holdings, and interlocking directorates, the main source of bank hegemony over municipalities is the lending consortium. That loans from a unified private banking community are the primary source of external capital for municipal governments empowers the banking community to dominate the affairs of city governments just as it dominates corporate affairs.


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Chapter Five— The Default of Cleveland: Constructing Municipal Reality
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