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Chapter Five— The Default of Cleveland: Constructing Municipal Reality
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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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