In 1975 New York City was so close to declaring bankruptcy that Mayor Abe Beame had written a speech to announce it, and asked the police to stand by in order to serve the default statement to the local banks stuck with Gotham’s nearly worthless notes. A year later, despite the invaluable intervention of Governor Hugh Carey, Beame, while visiting Jerusalem, left a note at the Wailing Wall with a one-word message – “help.”

The fiscal source of the crisis was clear enough. Between 1969 and 1975 the size of the city’s economy had shrunk by 11% while government spending had grown by 30%. The city paid for the difference by borrowing against the future, while “delaying maintenance” on the city’s infrastructure. Even when the West Side highway collapsed and cables snapped on the Brooklyn Bridge, the city’s political class and entrenched interests refused to confront the cost of their folly.

When Beame, forced to the fiscal wall, announced limited layoffs, the sanitation workers walked out, others engaged in sick-outs, and City Hall itself came under siege. Laid-off cops hurled beer cans at those still in uniform and blockaded the Brooklyn Bridge by letting the air out of car tires to force a giant snarl.

After more than decade of rising crime and rolling racial riots, it was, many concluded, time to give up on New York. But by 1981 the city, under the leadership of Mr. Carey and Ed Koch, who had been elected mayor in 1977, had turned the fiscal situation around. That year the city achieved a balanced budget 12 months ahead of the schedule laid out by state fiscal monitors.

An engaging new exhibit at the Museum of the City of New York, imaginatively laid out by Gregory Dreicer and Charlotte Brook of Chicken and Eggs Public Projects and Museum of the City of New York curator Sarah Henry, celebrates that turnaround. For those who are new to New York or too young to remember the period, it is a marvelous introduction. For those who lived through the crisis, it will bring back vivid memories.

When visitors enter the museum’s second-floor gallery from the stairs (don’t take the elevator), they are greeted by a life-size cutout of Mayor Koch asking his trademark question, “HOW’M I DOIN?” For me, the experience triggered memories of ascending from the subway at West 4th Street one day in the late 1970s to see a big, bald man with the chirpy voice of a small man startling everyone by shouting out gleefully, “HOW’M I DOIN? HOW’M I DOIN?”

Mr. Koch’s greatest accomplishment, argued the lively panel assembled by Daily News columnist Michael Goodwin to open the exhibit, was to restore the city’s morale. In his keynote presentation before an overflow audience of more than 500 people, Pete Hamill, long a literary fixture in the city, captured Mayor Koch’s appeal to the average New Yorker.

Mr. Koch, he said, was “some mad combination of a Lindy’s waiter, Coney Island barker, Catskill comedian, irritated school principal, and eccentric uncle. … He seemed to be everywhere at once.” Despite his reputation as a Greenwich Village liberal, he came off as a tough guy – because, as Mr. Hamill noted, he was a tough guy, a veteran of WWII combat who had earned two battle stars. And if he couldn’t always solve the city’s problems, notes Mr. Goodwin, he certainly kept people entertained while he tried.

The exhibit features two brief videos. One does an excellent job of explaining the fiscal crisis in accessible terms; the other is on the crucial 1977 mayoral campaign. Despite the crisis, the city’s perpetually parochial politics meant that the campaign was, like most city elections, completely disconnected from the New York economy. The only question seemed to be: How much did the competing candidates want to give the different interest groups?

The initial front-runner in the seven candidate race was Bella Abzug, the flamboyant left-wing congresswoman from the Upper West Side (or is that redundant?). Abzug, who once told a crowd that the way to deal with subway fare hikes was to “jump the turnstiles” campaigned in her trademark wide brimmed polka-dot hat, championing the right of public employees, including cops, to strike.

But the looting that accompanied the blackout in the summer of 1977 changed the tenor of the campaign. Mr. Koch and Mario Cuomo, famed for settling a bitter and racialized Queens housing dispute, came to the fore. Mr. Cuomo campaigned as a conciliator, Mr. Koch as the guy who could say no to the interest groups.

For those who remember Koch the mayor, the tummler with a wisecrack for every situation, the ads will be a surprise. Master political consultant David Garth crafted ads that caught the mood of the alienated middle class, depicting Mr. Koch as a no-nonsense guy with substantive policy proposals. Some ads took dead aim at the unionized police force that had more people out sick on an average day than out on patrol, and at the unionized teachers who were paid “$26,000 in salary and benefits, to work [indignant look from Koch] 161 days a year.”

The former congressman even went after New York’s holy of holies, the oft-unanswered prayer that the federal government would ride to the city’s rescue: “Bella Abzug says, if she becomes mayor, Washington will take care of us. Bella, you should know better.” Mr. Koch’s scorn for self-pity, noted Mr. Hamill, “struck a chord with the children of immigrants.” Fellow panelist Victor Gotbaum, a former labor leader who clashed bitterly with Mr. Koch in the 1970s and 1980s, went further when he insisted that Mayor Koch’s “enemies made him.”

Mr. Goodwin, co-author of the standard work on the former mayor, “I, Koch,” has edited “New York Comes Back: The Mayoralty of Edward I. Koch” as a companion to the exhibit. Rich in striking photos from the Daily News archives, there are also number of interesting essays. In “A Changing City,” CUNY professor John Mollenkopf describes how Mr. Koch, governing in the wake of the breakup of the black-Jewish alliance created a new coalition organized around ethnics in the boroughs outside Manhattan – one which anticipated the Giuliani vote.

In “Governor Koch,” Joyce Purnick of the New York Times describes Koch’s unparalleled ability to alienate upstaters. During his 1982 primary race for the state house against Mario Cuomo, Mr. Koch told a Playboy interviewer, “this rural America thing – I’m telling you it’s a joke. … You have to drive 20 miles to buy a Gingham dress or a Sear Roebuck suit.” There are also essays on the fiscal crisis, court reform, the revival of Times Square and the scandals of Mr. Koch’s third term, among others.

Perhaps the most intriguing essay is “Riding the Wave of Economic Development,” by Joe Rose, who was the chair of Mayor Giuliani’s planning commission. Mr. Rose quotes Peter Solomon, Mr. Koch’s deputy mayor for economic policy, who said that, “the greatest single contribution of our administration to economic development was no specific project or policy. It was atmosphere, an attitude…. We wanted to show that part of society that was not relying on government that we cared … we were going to be supportive of them making a living … that was a sea change” from the liberal Lindsay years of the 1960s and 1970s.

The Museum of the City of New York and Michael Goodwin have done New York a service with this exhibit and book. But New York tends to judge itself only on its own terms. The next public discussion of the Koch years should take a wider ambit that places the period in the context of national trends. It’s not just that New York’s financial sector was a major beneficiary of President Reagan’s deregulation of financial markets; it’s that even as New York enjoyed a stock market and real estate boom, it declined relative to the rest of the country.

The 1980s were the period when, New York area companies like IBM and AT&T, which had dominated their industries, lost out to Silicon Valley. It was a time, notes urban analyst Joel Kotkin, when the Port of Los Angeles surpassed the Port of New York as trade with Asia overtook trade with Europe. When informed that New York’s population had been surpassed by Texas, Governor Mario Cuomo, in a gesture typical of our political class, shrugged it off as no big deal. But it was. Texas was no longer the sticks, and we were no longer an Empire. Since then Florida has also passed us. Perhaps the next program on Mr. Koch will help us try to come to grips with our diminished situation.

Mr. Siegel is the author of “The Prince of the City: Giuliani, New York and the Genius of American Life” (Encounter).