The Bonds of Inequality

Debt and the Making of the American City

Destin Jenkins

• Publisher: University of Chicago Press
• Year: 2021
• ISBN:
  9780226721682
• Topic: History
• Subtopic: World History
• Index: History

Indebtedness, like inequality, has become a ubiquitous condition in the United States. Yet few have probed American cities' dependence on municipal debt or how the terms of municipal finance structure racial privileges, entrench spatial neglect, elide democratic input, and distribute wealth and power.In this passionate and deeply researched book, Destin Jenkins shows in vivid detail how, beyond the borrowing decisions of American cities and beneath their quotidian infrastructure, there lurks a world of politics and finance that is rarely seen, let alone understood. Focusing on San Francisco, The Bonds of Inequality offers a singular view of the postwar city, one where the dynamics that drove its creation encompassed not only local politicians but also banks, credit rating firms, insurance companies, and the national municipal bond market. Moving between the local and the national, The Bonds of Inequality uncovers how racial inequalities in San Francisco were intrinsically tied to municipal finance arrangements and how these arrangements were central in determining the distribution of resources in the city. By homing in on financing and its imperatives, Jenkins boldly rewrites the history of modern American cities, revealing the hidden strings that bind debt and power, race and inequity, democracy and capitalism.

Part I

Rule of Experts

1.

Management

Municipal finance officers assumed the unenviable task of managing the fallout from the Great Depression. By any measure, the early 1930s were brutal. Gross national product slumped, the durable goods industry saw a sharp downturn, and iron and steel production fell by 60 percent from precrash levels. Foreclosures on defaulted home mortgages reached epic proportions—250,000 in 1932 alone. By 1933, nearly thirteen million workers were unemployed.1 To make matters worse, the Great Depression delivered a significant blow to the municipal bond market, which had been a key means by which cities delivered on the infrastructural promises of progressivism. In the early twentieth century, political candidates had run on a platform of spending “vast sums for drainage, for streets, for the protection of life and property, for schools, for museums, for galleries, for parks.”2 With bonds treated as a tool of civic progress and issued in aid of real estate speculation and overdevelopment, “every ten years brought practically a doubling” in municipal debt between 1903 and 1932.3 Suddenly, the virtual collapse of the banking system disrupted the ability of cities to improve water and sewage systems, schools, and roads. Highly rated municipal bonds fell into default, bond offerings were canceled, and bond sales were delayed.4

Borrowing difficulties were compounded by questions over how to distribute the shrinking pie of municipal resources. Large taxpayers went on strike; real estate interests and other owners of real property, many of whom had convinced local governments to essentially borrow on their behalf during the 1920s, no longer thought it fair to pay taxes.5 Tax delinquencies depleted the pot of funds from which bondholders were paid, which, in turn increased the likelihood of default. Compared to other classes of debt, the percentage of municipal bonds in default was relatively low: by 1932, 2 percent of the $18.2 billion in outstanding municipal debt was in default, compared to 19 percent of the $7.5 billion in foreign bonds. Nevertheless, when a municipal government defaulted, its finance officers were forced to negotiate with attorneys working on behalf of bondholders. There was “no lack of organization among creditors. Approximately two hundred bondholders’ protective committees were functioning in 1935.”6

Fiscal difficulties, bondholder pressure, and the absence of intergovernmental support effectively meant that municipal finance officers had to choose between fulfilling their obligations to creditors, on the one hand, and maintaining educational activities and local health, fire, and police services, as well as extending relief to ordinary Americans, on the other hand. Each option came with severe consequences: payments to bondholders meant a curtailment of government services, and directing funds away from bondholders toward city services would damage the borrowing reputation of the defaulting city.7 But for many bankers, this was not a choice at all. One journalist rightly noted that as major bondholders, bankers had “a stake in the entire field of public credit.” Many of the nation’s leading bankers, themselves seeking to stay afloat, thus concluded that bondholders must be paid and unbalanced budgets met by “paring expensive expenditures.”8

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City reliance on the private bond market had proven extraordinarily disruptive, and whatever the decision, the choice between retrenchment and incurring the wrath of bondholders threatened the long-term viability of cities themselves. Yet during capitalism’s greatest crisis, New Deal banking reforms rekindled this public-private partnership and provided a number of lifelines that would shape the arc of postwar urban governance and the reconfiguration of the built environment.

The Glass-Steagall Act of 1933 still let commercial banks behave like investment banks, but only when investing in, and buying and reselling, certain classes of government debt. The Home Owners’ Loan Corporation not only aided the revival of the housing market but also, through loans, helped to remake the credit standing of municipal governments dealing with unpaid taxes.9 The Reconstruction Finance Corporation lubricated the municipal bond market by helping defaulted borrowers refinance older debts and, in some cases, selling debt to banks that might benefit from tax-exempt interest income in the short run and profit from resale in the future. Finally, the Public Works Administration (PWA) pushed the progressive use of debt in Keynesian directions. Beginning in 1933, the PWA stimulated employment and economic development through large-scale infrastructure projects and encouraged a new form of “statebuilding” through the creation of public authorities with the power to issue debt.10

Through the Municipal Finance Officers’ Association of the United States and Canada (MFOA), municipal technocrats underwent something of a modernization process. Founded in 1906, after a few name changes, the Chicago-based organization emerged as MFOA in 1932. By January of the following year, executive director Carl H. Chatters claimed a sizable membership of controllers, accountants, and other public finance officers from twenty-five to thirty states and nearly two hundred cities.11 In addition to the quarterly publication of Municipal Finance, MFOA sponsored conferences throughout the United States and Canada. Through the organization, those in command of the public purse could read extensive histories of municipal bond defaults.12 They could discover alternative sources of municipal revenue.13 When the organization did not propose legislation, or its members were not before Congress offering expert testimony, MFOA helped to standardize the accounting and management policies of local governments. In 1938, for instance, MFOA published a manual describing San Francisco’s finance and accounting procedures. The City by the Bay was selected “because its finance and accounting procedures are clean cut, complete, and effective; because lines of authority are clearly defined; and lastly because it is one of the few public bodies which has already reduced departmental instructions to written form.” Through a close collaboration with controller Harold J. Boyd, his chief assistant controller Harry D. Ross, and senior accountant Raymond J. Rock, MFOA highlighted a particularly strong model for other cities.14 San Francisco finance officers learned from their colleagues around the country and contributed to the development of the profession by explaining the intricacies of borrowing, accounting, and city management.15

In no small part, technocratic knowledge was also shaped by the advice of creditors. One of the social consequences of permitting financiers to underwrite the infrastructural provisions of the state was that bankers, credit analysts, and bond attorneys explained debt administration, as well as the likes, wants, and demands of lenders. They did so as contributors to MFOA publications and as invited guests to its national conferences. It was not uncommon for members of MFOA to draw on reports penned by the credit reporting agency Dun & Bradstreet. A. M. Hillhouse, a leading voice in the modernization project, welcomed “a closer relationship . . . between debt administrators and reliable investment banking firms.” The “counsel of dealers,” as well as the “advice of fiscal agents in New York, or some other center, should also be sought,” he said.16 Indeed, the idea of a public-private partnership does not begin to capture the modernization of municipal debt; the citation practices and revolving door of personnel make it hard to figure out where “the public” ended and where “the private” started. The coronation of bankers and credit analysts as experts, and the reliance of city technocrats on their advice, furthered the centrality of creditors to the remaking of the built environment.

Modernization, Reconversion

There were important local inflections of debt modernization. The San Francisco Charter of 1932 modernized management of the purse, providing the controller’s office with “sweeping powers over all public agencies.” So long as the controller held the support of four of the eleven members of the Board of Supervisors, he could not be removed. This meant that controllers did “not serve at the pleasure of the mayor and they are not reachable by the ballot; in reality, they have life tenure.”17 From an administrative standpoint, the job was meticulous. It fell to the controller to manage records of all city financial transactions. His task was to determine the cost of city infrastructure and to develop and deploy systems to manage the collection and disbursement of money. The charter also gave the controller “wide power to control the execution of the budget.” But no one person could possibly manage the transactions, departmental accounts, and revenue estimates of such a dynamic entity. The office had multiple divisions and a growing technocratic workforce that handled revenue flows and payrolls, managed bond interest and redemption payments, audited the transactions of the city’s utility projects, and advised on legal matters. None of this technical work would have proceeded without the secretarial unit that functioned “as a central stenographic pool for the entire Controller’s office.”18

Through bondholder protective committees and reporting on the latest default and fiscal troubles of borrowers, creditors had demonstrated that missing a principal or interest payment would not soon be forgotten. Within the controller’s office, technocrats in the Division of Accounts and Statistics developed a dry system of accounting to make sure this did not happen. Staying in the good graces of bondholders meant sticking to a manual, double-entry system of crediting and debiting payments, closing accrual accounts at the end of the fiscal year and beginning anew on July 1. The controller’s office kept card records “in vi...