commercial banks so they, in turn, could multiply and re-lend it to Penn Central and other corporations, such as Chrysler, which were in similar straits.1 Furthermore, the rates at which the Fed would make these funds available would be low enough to compensate for the risk, ^peaking of what transpired on the following Monday, Burns boasted: 'I kept the Board in session practically all day to change regulation Q so that money could flow into CDs at the banks.' Looking back at the event, Chris Welles approvingly describes it as 'what is by common consent the Fed's finest hour.'
Finest hour or not, the banks were not that interested in the proposition unless they could be assured the taxpayer would co-sign the loans and guarantee payment. So the action inevitably shifted back to Congress. Penn Central's executives, bankers, and union representatives came in droves to explain how the railroad's continued existence was in the best interest of the public, of the working man, of the economic system itself. The Navy Department spoke of protecting the nation's 'defense resources.' Congress, of course, could not callously ignore these pressing needs of the nation. It responded by ordering a retroactive, 13 A per cent pay raise for all union employees. After having added that burden to the railroad's cash drain and putting it even deeper into the hole, it then passed the Emergency Rail Services Act of 1970 authorizing $125 million in federal loan guarantees.3
None of this, of course, solved the basic problem, nor was it really intended to. Almost everyone knew that, eventually, the railroad would be 'nationalized,' which is a euphemism for becoming a black hole into which tax dollars disappear. This came 1. For an explanation of the multiplier effect, see chapter eight, The Mandrake Mechanism.
2. Welles, pp. 407-08.
3. 'Congress Clears Railroad Aid Bill, Acts on Strike,'
PROTECTORS OF THE PUBLIC
45
to pass with the creation of AMTRAK in 1971 and CONRAIL in 1973. AMTRAK took over the passenger services of Penn Central, and CONRAIL assumed operation of its freight services, along with five other Eastern railroads. CONRAIL technically is a private corporation. When it was created, however, 85% of its stock was held by the government. The remainder was held by employees.
Fortunately, the government's stock was sold in a public offering in 1987. AMTRAK continues under political control and operates at a loss. It is sustained by government subsidies—which is to say by taxpayers. In 1997, Congress dutifully gave it another $5.7 billion and, by 1998, liabilities exceeded assets by an estimated $14 billion.
CONRAIL, on the other hand, since it was returned to the private sector, has experienced an impressive turnaround and has been running at a profit—paying taxes instead of consuming them.
LOCKHEED
In that same year, 1970, the Lockheed Corporation, which was the nation's largest defense contractor, was teetering on the verge of bankruptcy. The Bank of America and several smaller banks had loaned $400 million to the Goliath and they were not anxious to lose the bountiful interest-income stream that flowed from that; nor did they wish to see such a large bookkeeping asset disappear from their ledgers. In due course, the banks joined forces with Lockheed's management, stockholders, and labor unions, and the group descended on Washington. Sympathetic politicians were told that, if Lockheed were allowed to fail, 31,000 jobs would be lost, hundreds of sub contractors would go down, thousands of suppliers would be forced into bankruptcy, and national security would be seriously jeopardized. What the company needed was to borrow more money and lots of it. But, because of its current financial predicament, no one was willing to lend. The answer? In the interest of protecting the economy and defending the nation, the government simply had to provide either the money or the credit.
A bailout plan was quickly engineered by Treasury Secretary John B. Connally which provided the credit. The government agreed to guarantee payment on an additional $250 million in loans—an amount which would put Lockheed 60% deeper into the debt hole than it had been before. But that made no difference now.
Once the taxpayer had been made a co-signer to the account, the banks had no qualms about advancing the funds.
46 THE CREATURE FROM JEKYLL ISLAND
The not-so-obvious part of this story is that the government now had a powerful motivation to make sure Lockheed would be awarded as many defense contracts as possible and that those contracts would be as profitable as possible. This would be an indirect method of paying off the banks with tax dollars, but doing so in such a way as not to arouse public indignation. Other defense contractors which had operated more efficiently would lose business, but that could not be proven. Furthermore, a slight increase in defenses expenditures would hardly be noticed.
By 1977, Lockheed had, indeed, paid back this loan, and that fact was widely advertised as proof of the wisdom and skill of all the players, including the referee and the game commissioner. A deeper analysis, however, must include two facts. First, there is no evidence that Lockheed's operation became more cost efficient during these years. Second, every bit of the money used to pay back the loans came from defense contracts which were awarded by the same government which was guaranteeing those loans.
Under such an arrangement, it makes little difference if the loans were paid back or not. Taxpayers were doomed to pay the bill either way.
NEW YORK CITY
Although the government of New York City is not a corporation in the usual sense, it functions as one in many respects, particularly regarding debt.
In 1975, New York had reached the end of its credit rope and was unable even to make payroll. The cause was not mysterious.
New York had long been a welfare state within itself, and success in city politics was traditionally achieved by lavish promises of benefits and subsidies for 'the poor.' Not surprisingly, the city also was notorious for political corruption and bureaucratic fraud.
Whereas the average large city employed thirty-one people per one-thousand residents, New York had forty nine. That's an excess of fifty-eight per cent. The salaries of these employees far out-stripped those in private industry. While an X-ray technician in a private hospital earned $187 per week, a porter working for the city earned $203. The average bank teller earned $154 per week, but a change maker on the city subway received $212. And municipal fringe benefits were fully twice as generous as those in private industry within the state. On top of this
