The Color of Money
THE COLOR OF MONEY
BLACK BANKS AND THE RACIAL WEALTH GAP
MEHRSA RARADARAN
THE COLOR OF MONEY
Black Banks and the Racial Wealth Gap
Mehrsa Baradaran
The Belknap Press of Harvard University Press Cambridge, Massachusetts London, England 2017
Copyright © 2017 by the President and Fellows of Harvard College All rights reserved
Printed in the United States of America First printing
Library of Congress Cataloging-in-Publication Data Names: Baradaran, Mehrsa, 1978- author.
Title: The color of money : black banks and the racial wealth gap / Mehrsa Baradaran. Description: Cambridge, Massachusetts : The Belknap Press of Harvard University Press, 2017. | Includes bibliographical references and index. Identifiers: LCCN 2017011011 | ISBN 9780674970953 (cloth)
Subjects: LCSH: African Americans—Economic conditions. | African American banks—History. | Discrimination in banking—United States—History. | African Americans—Finance. | Wealth—United States—History.
Classification: LCC E185.8 .B24 2017 | DDC 330.9/008996073—dc23 LC record available at https://lccn.loc.gov/2017011011
Jacket design by Tim Jones
Photograph: The Dunbar National Bank Building in Harlem, New York City circa 1925, by General Photographic Agency / Hulton Archive / Getty Images
To be a poor man is hard, but to be a poor race in a land of dollars is the very bottom of hardships.
—W. E. B. Du Bois
Table of Contents
Introduction
Forty Acres or a Savings Bank
The New Deal for White America
Civil Rights Dreams, Economic Nightmares
The Decoy of Black Capitalism
The Free Market Confronts Black Poverty
The Color of Money Matters
Epilogue
THE COLOR OF MONEY
Introduction
“All too often when there is mass unemployment in the black community, it’s referred to as a social problem, and when there is mass unemployment in the white community, it’s referred to as a depression," said Martin Luther King in 1968. “But there is no basic difference. The fact is, that the Negro faces a literal depression all over the U.S."1 Today, across every socioeconomic level, blacks have significantly less wealth than whites.2 Over a third of black families have either negative wealth or no assets at all.3 The 2008 financial crisis devoured more than half the wealth of the black community, proving once again the adage that “when Wall Street catches a cold, Harlem gets pneumonia." To the extent that media and politicians focus on the racial divide, it is through its most urgent and salient features such as police shootings, burning cities, white supremacists, crime, and violence. Underneath it all is a deep and growing financial fault line between black and white. Though hard to detect, it is nonetheless the defining feature of America’s racial divide because it is intimately linked to so many other problems. The wealth gap is where historic injustice breeds present suffering.
This book tells the story of how the wealth gap was created, maintained, and perpetuated. To tell the story, this book lifts the hood on the engines that the black community has used to fight this gap for generations—black banks. Banks are the drivers of wealth creation for any society, and banking policy is integrally tied up with politics and power—and yet scholars have all but ignored the black banking industry’s unique role in black wealth development. What this history reveals is that black and white Americans have had a separate and unequal system of banking and credit. However, for over a century, black communities have been urged by black and white leaders to rely on these segregated black banks in order to reach individual and community prosperity. What comes into stark focus as we study these banks over time is the tangible barrier to prosperity presented by segregation, racism, and government credit policy. The effects of these forces on black banks demonstrate that successful banking and wealth accumulation would remain perpetually elusive in a segregated economy. Housing segregation, racism, and Jim Crow credit policies create an inescapable economic trap for black communities and their banks. Black banking has been an anemic response to racial inequality that has yielded virtually nothing in closing the wealth gap.
Despite these grim economic realities, each of the following leaders has championed black banking: Frederick Douglass, Booker T. Washington, President Lincoln, W. E. B. Du Bois, Marcus Garvey, Carter Woodson, Martin Luther King, Malcolm X, Jesse Jackson, the Black Panthers, President Johnson, President Nixon, Alan Greenspan, President Carter, President Reagan, President Clinton, and President Obama among others. On issues of race, there is likely little else that these leaders would have agreed on. Black-owned banks represented something different to each of them, but to all they held the promise that a successful black bank would lead to prosperity for blacks regardless of external circumstances.
Pushed outside the main arteries of American commerce, the black community turned inward and created its own institutions. The first black banks were formed less than a decade after slavery ended, in the hostile climate of racism and Jim Crow segregation. Most blacks could not save or borrow at white-owned banks, so they established their own. The creation of the black ghettos led to a surge in black banks in northern cities. As black bankers rose to the challenges of banking in a segregated economy, the community celebrated each hard-won success.
These banks were created to respond to racial hostility, but in spite of and because of this, they came to signify racial pride, black unity, and protest. For Booker T. Washington, black banking was salvation itself; he said it was by owning a home and “bank account” that the black man would eventually “find his way to the enjoyment of all his rights.”4 To Washington, money had no color and it was the only path toward racial equality.
Likewise, black banks galvanized the black community during the civil rights struggle. In 1968, Martin Luther King exhorted the black community to “take your money out of the banks downtown and deposit your money in [a black-owned bank]. We want a ‘bank-in’ movement.”5 To black nationalists, black banking was a necessary step toward asserting independence from white society. “Why should white people be running the banks of our community?" asked Malcolm X. Black banking became a symbol of resistance, black power, defiant self-determination, and active resistance to white racism.6
Black economic power and autonomy had a natural appeal in the face of segregation and racism, but also constitute a political diversion and a proxy for more meaningful reform. President Nixon threw his weight behind black banking so that he could oppose controversial desegregation programs and woo white moderates and conservatives unwilling to push any further on racial reforms. Presidential candidate Nixon’s civil rights platform was centered on “black capitalism." He urged “more black ownership, black pride . . . and yes, black power."7 The deceptively vague formula of black capitalism was a neutralizing racial detente amid an unprecedented and violent black insurgency and a hostile white backlash. Nixon co-opted the rhetoric of the radical black power movement to create a path through a political quagmire that would disarm black radicals and the white base on which his southern strategy relied. But what he meant by black capitalism was a cheap knockoff of white capitalism.
So politically successful was the promise of black capitalism that every administration since President Nixon has adopted it in one form or another. Presidents Carter, Reagan, Clinton, Bush, and Obama disagreed about many things, but they each sought to promote black banks and businesses through programs called “community capitalism," “enterprise zones," or “minority enterprise." President Reagan called black business and black banking the “key to black economic progress."8 Bill Clinton
even created robust legislation to promote “community empowerment" through banking—an infrastructure that Presidents Bush and Obama bolstered and maintained. President Trump has made promises along similar lines. Instead of meaningful financial support, the urban ghetto would get bankers.
The idea of community self-help, valuable as it was when there was no other choice, has been deployed cynically at several pivotal historical moments to thwart other, more direct answers to the racial wealth gap. The Freedmen’s Bureau, for example, initially proposed to give freed slaves an allotment of the land their labor had enriched. Instead, they got a bank. Northern industrialists came out in support of Booker T. Washington’s plan for a segregated black economy even as other black leaders were pushing for full integration. The New Deal programs that would have sent aid to build housing in the urban ghetto were instead used to create white suburbs that reinforced and perpetuated racial segregation for the rest of the century. And as soon as the civil rights coalition began to demand some form of wealth redistribution or poverty aid, President Nixon embraced black capitalism. Support for black banking and black capitalism have been consistent policy band-aid solutions, a decoy response to the fundamental challenge of overcoming America’s legacy of slavery.
The theory of black banking is rooted in a foundational tenet of American banking policy. Thomas Jefferson believed that banks should be small and local as opposed to Alexander Hamilton’s vision of large and national banks. Jefferson’s ideal was a locally controlled economy, agrarian in nature, with decentralized monetary policy, but he was on the wrong side of history—it is Hamilton’s centralized, national, and large banking sector that became essential to a vibrant American economy. Yet, when it comes to banking policy for poor and marginalized communities, it is Jefferson’s outdated vision that is still dominant. Small community banking has always held a special appeal when applied to poor and marginalized pockets of the economy. The promise is that a beleaguered community, having been left out of the dominant banking industry, could pool its resources and collectively lift itself out of poverty.
Black banks promised to control the black dollar and grow it. If the color of the ghetto was black, so too would be the money flowing within. Blacks must “control the economy of our community," said Malcolm X. President Reagan believed that black enterprises “are especially important in neighborhood economies where the dollars . . . spent have a beneficial multiplier effect."9 But could a ghetto, born from racism and segregation, overcome those forces through banking? Or was James Baldwin right when he wrote that “a ghetto can be improved in one way only: out of existence."10
Despite consistent bipartisan support and a few publicized success stories, there was never any evidence that the design would work. The very circumstances that created the need for these banks— discrimination and segregation—permanently limited their effectiveness and would ultimately cause their demise. The catch-22 of black banking is that the very institutions needed to help communities escape deep poverty inevitably become victims of that same poverty. Blacks were poor and, due to segregated housing, their homes were worth less. What this meant for black banks was that their deposits were costlier and their loans were less stable, which created a combustible situation over time. Housing segregation prevented the growth of black wealth and presented black bankers with an industry-crushing challenge. Not only were these banks more vulnerable to failure, but even in flush times, they were unable to perform the money-multiplying alchemy of banking. Pushed out of the mainstream, blacks needed to create their own economic engines, but their marginalization and exclusion from practically all aspects of American economic life made their engines weak and incapable of the economic growth bank financing is typically able to produce.
The truth was that segregated communities could not segregate their money. In fact, black banks, which were created to control the black dollar, became the very mechanism through which black money flowed out of the black community and into the mainstream white economy. The ghetto economy was weak, extractive, and costly. And the color of capital, commerce, property, trade, and money was white.
White, too, was the color of government credit. In America, each rung on the ladder toward prosperity consisted of bank credit—even more so in the twentieth century when homeownership became synonymous with both mortgage credit and prosperity. For blacks, the path toward wealth was closed by segregation, government policies, and economic reality. As the overall American economy grew by leaps and bounds, the urban black economy became locked in a state of perpetual depression.
The ghettos that initially trapped America’s other immigrant groups did eventually improve themselves out of existence, once they were no longer segregated from the mainstream economy. In fact, the dilemma faced by black banks is highlighted when contrasted with the viable banks created by Italian, Jewish, German, Irish, and Asian immigrants. Each of these immigrant groups faced discrimination and exclusion like the black population, but the key difference was that none of them was systematically, uniformly, and legally segregated to the extent and for the length of time the black community was. Many immigrants eventually left their overcrowded ghettos and settled in suburbs where, through viol ence, zoning restrictions, and racial covenants, blacks were barred. This divergent path is illustrated by the fates of the home loans and banks established by these various immigrant groups. One instructive example is the Bank of Italy, which formed in San Francisco to serve Italian immigrants who could not get loans from the mainstream banks. Eventually, the Bank of Italy grew and merged into the mainstream U.S. banking system—just as Italian immigrants assimilated into American society. What was formerly the Bank of Italy is now the Bank of America—the largest and one of the most profitable banks in the country.11
The success of immigrant banks should not be misinterpreted. It was not self-help and community support that allowed them to finance themselves out of the ghetto. They left the ghetto first. And they did so only after being accepted as “white"; not through segregating their money. The bootstraps they were given were government-guaranteed mortgage loans, from which black people were excluded. Doubtless, many immigrants worked hard to achieve the American dream of homeownership, but so too did blacks.
The black ghetto and the white suburb were created by heavy state intervention. A government credit infrastructure propelled the growth of the American economy and relegated the ghetto economy to a permanently inferior position. The government-created credit apparatus did not cross the red lines that policymakers drew around the ghetto, and within the color line a separate and unequal economy took root. If free-market capitalism is understood as allowing the laws of supply and demand to operate without state intervention, then the black ghetto was certainly engaged in capitalism, but at a time when white America was not. Black capitalism, as it turned out, meant capitalism only for blacks.
There has always been an attempt at justifying and explaining wealth inequality in the United States. The economic oppression of slavery was justified in the eighteenth century by a corrupted version of Christian dogma that held that the white race had a divine right to subject the black one. Then science was conscripted to do the dirty work of white supremacy as social Darwinism held that race hierarchy was nature’s will. Evolutionary theory and a sham science of eugenics and phrenology justified the wealth gap in the nineteenth century. In the twentieth century, economic theory was used to justify the wealth gap. Market fundamentalists such as Barry Gold-water, Milton Friedman, and Alan Greenspan held that the wealth gap was a natural result of market forces and that any government remedy was an inefficient market intervention. Black capitalism and its subsequent iterations became the modern era’s justification for wealth inequality. The theory held that the invisible hand had set the price of black credit, the value of black homes, and the cost of black labor. This book is a challenge to that premise and it lays bare the fact that the hand that drives black poverty is not a natural and invisible one, but rather the coerci
ve hand of the state that has consistently excluded blacks from full participation in American capitalism.
This is not just a story about the harsh realities of American racism—the violence and the repeated injustices—though these forces are an essential background to the narrative. This story peers inside the black community and studies its counterattack. But it is not a story celebrating the heroic struggles of individual black bankers who were triumphant despite the odds. There are certainly stories of inspiration to be found, but the overemphasis on Horatio Alger tales of success can lead to distraction. This is not a simple tale of bad guys or good guys—the exploiters and exploited. In fact, sometimes the exploited are the exploiters too. The story is larger than the players within.
This is a story of economics, politics, and laws that sowed the seeds of injustice into the soil of the American economy. The weeds that grew from it did not need to be fed with racism. It used the materials available—commerce, credit, money, and segregation—to regenerate inequality. It is too simplistic to blame the racists or the loan sharks for the wealth gap. We need to identify the subterranean forces that barely make a visible ripple on the surface as they perpetuate injustice over time. To examine the history and function of black banks is to shine a spotlight directly onto the fault line of economic inequality.
In 2016, in conjunction with the Black Lives Matter movement, activists renewed a focus on black banking. Yet, the industry is in distress. In June 2015, Mechanics and Farmers Bank of Durham, North Carolina, announced that it was shifting focus from specifically serving the black community to being just a standard community bank. It hired its first nonblack director, changed its name to the more modern “M&F,” and announced that it would start going after a broader customer base.12 To most banking industry observers, this change was not newsworthy; in fact, hardly anyone noticed. But the move might reflect the last gasp of a dying industry. Mechanics and Farmers Bank was the oldest and strongest black-owned bank in the country. Since 1907, it has been financing black churches, black homes, and black businesses. It survived the Great Depression, saving several other black-owned banks in the process. And for almost a century, its insurance affiliate, the North Carolina Mutual Life Insurance Company, was the largest black-controlled business institution in the world.13