The historian Thucydides wrote his famous history of the Peloponnesian War in the belief that knowledge of the past is ". . . an aid to the interpretation of the future, which in the course of human things must resemble if it does not reflect it . . ." The difficulty about arguing from history, of course, is that those disposed to agree with you immediately see the analogy and those who do not simply deny that the two events have anything in common. That being said, I would nonetheless like to suggest at least the possibility of a similarity between what we are reading about the LDCs today and what we read about New York City in 1975.

New York City ran out of dollars in April 1975; there was a liquidity crisis: i.e., not enough money in the treasury to pay the bills that were falling due. New York State came to the city's aid with loans and advances that enabled operations to continue and creditors to be paid, although for a period some holders of short-term notes were forced to delay collection of their principal. With the active cooperation of the municipal labor unions, the banks, government officials and others, the city's debt was restructured to allow time for remedial action to be taken and to take effect. The Municipal Assistance Corp. was created to refinance the city's short-term loans, using the city's own tax revenues.

An Emergency Financial Control Board was placed in effective oversight over the city's budget and spending decisions. (In effect, the Control Board was the analog of a domestic IMF program.) The city itself undertook major retrenchments, reducing the number of city employees, putting in a first-class accounting system and tightening controls. After much hesitation, the federal government provided loans and then loan guarantees. Banks and pension funds provided new loans and restructured old ones. Some vocal "experts" believed that a financial collapse in New York City could lead to a similar collapse for New York State and touch off a major credit contraction, threatening the stability of financial markets. On May 25, 1975, a columnist writing in the New York Times quoted a spokesman for the congressional group contemplating a loan plan for the city as saying that ". . . any federal efforts to help the city were doomed to failure because the city was a disaster area and a hopeless case."

"Experts" also warned us that the nation's banks might be in deep trouble. As one columnist summarized:

"The most pessimistic theory is that New York's major banks would get stuck with hundreds of millions of dollars in worthless paper in a situation that would threaten the stability of the banking system and sharply reduce bank earnings."

As everyone now knows, the city's paper currently has an investment rating, the city did not burn down for lack of firemen, nor was it inundated by a crime wave for lack of policemen. By Christmas 1983, New Yorkers found themselves in a debate about what to do with a $1 billion "surplus" -- and the crime rate was down, the budget was balanced and the outlook was good. Not too bad a result for "a hopeless case." It turned out, as some of us suggested it would, that the assets of the city as represented by its people, its government, its skills, its labor unions, its infrastructure, its banks and businesses, though hardly quantifiable, greatly exceeded its monetary liabilities. What was required was to get good people working together, and a little help from their friends to get past the liquidity crunch. New York City was not unique.

Mexico ran out of dollars in August 1982; there was a liquidity crisis, i.e., not enough dollars to pay the bills that were falling due. The Federal Reserve and the Bank for International Settlements came to Mexico's immediate aid with loans that enabled essential operations to continue and essential creditors to be paid. Although a number of other creditors were forced to delay collection of their debts, through extraordinary cooperation among government officials, banks and others, Mexico's existing debt was restructured to allow time for remedial action to be taken and to take effect.

With the support of the International Monetary Fund, Mexico developed a budget which significantly reduced the gap between Mexico's income and its expenditures. Mexico and the IMF agreed to specific performance goals and the IMF monitored both progress and problems throughout 1983. The Mexican government, with broad public support and despite obvious temporary sacrifices by its citizens, undertook major retrenchments including a cutback in real wages of public employees. Capital flight was arrested. Inflation was curbed. In due course, banks provided new loans and extended the maturity of old ones.

The spotlight which focused so harshly in 1975 on New York City now focused on Mexico. We began to read articles which began:

"Although we evidently don't want to face the fact, we are in the midst of a global banking crisis -- and the bankers who have the most to lose seem determined to push the system closer to the edge of disaster."

As everyone now knows, Mexico's paper now enjoys an improved rating, the country did not turn to revolution, nor did the world financial system plunge into disaster. Indeed, shortly after Christmas 1983, Mexico found itself in a situation where it was in a position to borrow $3.8 billion in 1984 at an interest rate whose spread was around 50% lower than that which had prevailed during the dark days of 1983.

Again it turned out, as some suggested it would, that the assets of Mexico represented by its people, its government, its skills, its labor unions, its infrastructure, its banks and its businesses, though hardly quantifiable, in fact greatly exceeded its monetary liabilities. What was again required was to get good people working together and a little help from friends to get past the liquidity crunch. Mexico will also not be unique.

Once again, the Cassandras will be proved wrong. Since the IMF meeting in Toronto in October 1982, some $100 billion of international debt of some 15 countries has been, or is in the process of being, rescheduled. Various countries have worked out adjustment programs in close consultation with the IMF which are not unlike those laid out and achieved by New York City and Mexico. With all of this, world recovery has started and already results in Mexico are confounding critics who "knew" Mexico was bankrupt. The risk of bad management, by governments, corporations, or banks will never disappear, but the results of good economic policy always appear more quickly than we remember.

If the world economy grows at a real rate of about 3% per annum for the next two or three years, the current account deficits of the LDCs will return to normal, and debt service ratios will drop sharply. Lest this be thought too wild a dream, history records that, from the end of World War II till the beginning of our global recession from which we are emerging, the real growth rate of the world economy averaged about 4% a year.

No one should pretend that all these events, from the wrenching OPEC oil shocks to the worst global recession since the '30s, are not serious; they are. But, as history has shown again and again, good people working together with an intelligent plan can still move cities, states, nations and the world forward.