On October 16, 1975, New York City was deep in crisis. At 4 P.M. the next day, four hundred and fifty-three million dollars of the city’s debts would come due, but there were only thirty-four million dollars on hand. If New York couldn’t pay those debts, the city would officially be bankrupt.

At the Waldorf-Astoria, in Midtown, seventeen hundred guests were gathering for the Alfred E. Smith Memorial Foundation benefit dinner, a white-tie fund-raiser for the Catholic charities named in honor of Al Smith, a former governor and the first Catholic candidate on a major-party Presidential ticket. As day turned to night, the bad news continued to come in. Banks were refusing to market the city’s debt, which left New York unable to borrow. Federal help was repeatedly refused by President Gerald Ford and his advisers. The only hope left was pension funds. And the only one that had committed to buying the city’s bonds—the Teachers’ Retirement System—was now pulling back.

The mood was grim as New York’s financial and political élite settled in at the hotel to hear the evening’s featured speakers, Robert Moses and Connecticut’s first female governor, Ella Grasso, try their hands at political comedy.

Abraham Beame, who was in his second year as the mayor of New York, was no stranger to the city’s budget and its challenges. During two stints as comptroller, he had seen the drop in manufacturing jobs, the wave of middle-class families moving to the suburbs, and the massive growth of the city’s labor force. He was aware of, and at times condoned, the gimmicks that were used to mask widening budget gaps, such as borrowing against city pension funds to run operating deficits for the city’s buses and subways.

Yet while Beame was described by allies and adversaries alike as kind and honorable, he also seemed paralyzed by the intensifying challenges of his office. Ed Koch, who was serving in Congress at the time and would go on to succeed Beame as mayor, later said, “Abe Beame is an accountant, you know, but it’s hard to understand that he has that title.”

A few months before, in mid-April, the city had run out of money for the first time. Governor Hugh Carey was willing to advance state funds to allow the city to pay its bills under the condition that the city turn over its financial management to the state. This led to the creation of the Municipal Assistance Corporation, which was authorized to sell bonds to meet the city’s borrowing needs. (Its detractors referred to it as “Big MAC,” because of its authority to overrule city spending decisions.)

The MAC, which was chaired by the financier Felix Rohatyn, insisted on significant reforms, including a wage freeze, a subway fare hike, the closing of several public hospitals, charging tuition at the previously free City University, and tens of thousands of layoffs.

But the financial picture continued to deteriorate. Koch remembers hearing testimony before Congress about the city’s fiscal situation and thinking that “it was like somebody escaping from the Warsaw ghetto and saying they’re killing people there. Nobody believed it.”

At the Al Smith dinner, diners were working their way through what was being called a “bicentennial menu,” featuring Maryland terrapin soup and baskets of Colonial sweets. Speeches that had been loaded with humor in past years sounded notes of gloom.

Mayor Beame used his turn on the five-tier dais to excoriate Washington for refusing to bail out New York: “The problems were simpler and less complex in Smith’s day, and there even seemed to be a greater sense of responsibility on Washington’s part.” He then left the dinner to return to the debt negotiations.

Robert Moses, who had previously referred to the city’s leaders as “third-rate men,” simply paid tribute to Governor Smith. Only Governor Grasso tried to infuse some humor, joking that she must have been chosen to speak to the dinner because she was Italian, and that the cardinal and all the bishops “have been working for my people for many, many years.”

By ten o’clock, Rohatyn and others had learned that the Teachers’ Retirement System wouldn’t invest in more MAC bonds. The Teachers’ trustee, Reuben Mitchell, said, “We must watch that investments are properly diversified, that all our eggs aren’t put in one basket.” Governor Carey left the dinner and phoned state and federal leaders with a simple message: Default was imminent.

The governor placed another call that night, summoning to his office a developer named Richard Ravitch, who had been serving as a minister without portfolio for the governor. When Ravitch arrived at the governor’s office, Carey was still in white tie. He told Ravitch to find Al Shanker, the powerful head of the teachers’ union, and convince him to buy the bonds that would save the city. A car and driver were waiting outside.

In his memoir, Ravitch would later write that when he got to Shanker’s apartment, Shanker “was genuinely distressed by his decision not to buy MAC bonds. He knew the risks to the city, but he believed his primary obligation was his fiduciary responsibility to his teachers. As city employees, they had already been put at risk by the city’s fiscal crisis. It was no small thing to make their pension money subject to the same risk.” They talked until five o’clock that morning, but reached no consensus.

At the same time, Mayor Beame, convinced that there would be no stay of financial execution, had assembled a small team in the basement of Gracie Mansion. Ira Millstein, then a young lawyer at Weil, Gotshal, & Manges, prepared the legal filing.

Sid Frigand, the mayor’s press secretary, recalled the point at which the conversation turned not from if the city would go under but how. “We needed to figure out which services were essential, and which weren’t,” he said. “It was an interesting exercise because when you think of what is essential and what is not essential that there are functions of public service that we don’t know about that are very essential. Bridge tenders who raise and lower bridges were essential. Teachers weren’t life-or-death. Hospital services and keeping the highways open were essential.”

As the mayor’s team was making the list, Sid remembers looking over and seeing Howard Rubenstein writing on a pad of paper. Rubenstein was a sort of unpaid booster for New York City who was making his living doing public-relations work for many of the city’s real estate developers and unions. This magazine would later describe him as “ubiquitous, trusted, a kind of gentle fixer for those who run New York.”

Rubenstein and Beame were friends. At one point in the late sixties and early seventies, Rubenstein had lived across the street from Beame, in Belle Harbor, Queens. One of Rubenstein’s more vivid memories is seeing Beame on the beach, tucking a series of folded papers into his bathing suit. Rubenstein asked what they were, and Beame showed him that each was covered with tiny handwriting: he was writing a platform for his mayoral run. Here’s my program,” Beame said. Rubenstein’s response: “What happens if you go in the water?”

In 1974, on the power of that platform, Beame became mayor. And now, less than two years later, Beame was about to announce the bankruptcy of America’s richest and largest city.