The Color of Money Read online

  While the demise of black banks across the country may have been a foregone conclusion, their loss is significant because these institutions represented something more than their vulnerable balance sheets. These are the institutions the black community has repeatedly relied on to achieve prosperity amid forceful economic headwinds. Their loss is a tragedy not because it is surprising, but because no other institution is in a better position to illuminate the complex and persistent obstacles to creating black wealth.

  Black banks are the engines of promised prosperity in the black community and it is by inspecting them that we can know most about the self-reinforcing nature of black poverty. In fact, poverty is the sand destroying these engines. Noting the “striking” trend of black bank failures, a recent study linked the epidemic to the “deep poverty” of the black community.14 In other words, the very poverty that these banks have been trying to fight for generations is the main obstacle to their survival. But the poverty rut is perpetuated when communities lose access to banks. As a group, blacks are more unbanked than any other race—60 percent of the black population is unbanked or underbanked, while only 20 percent of whites are in the same category.15 What this means is that blacks disproportionately rely on fringe banks, leading to a debt trap. Blacks pay higher interest on mortgages and small loans. They pay more fees on basic services than similarly situated whites and they are taken to court disproportionately by creditors for very small debts.16

  All of this is both due to and contributes to the wealth gap. Without a cushion of wealth, black families pay more for credit and financial services and fall harder when they hit a bump. Wealth provides a layer of financial security, and this shock absorber is missing for many black families. Especially for families on the bottom rung, owning a home provides a substantial buffer against the harshest edges of poverty, a stable foundation that can be passed down to the next generation. It can determine whether your neighborhood has decent or failing schools, whether you will be able to go to college, whether you will face eviction, or whether you can meet unexpected costs without having to resort to a payday loan. A store of wealth is self-reinforcing, as is its absence. As Billie Holiday sang, “Them that’s got shall get. Them that’s not shall lose."17

  Historian Manning Marable has lamented that “the most striking fact about American economic history and politics is the brutal and systemic underdevelopment of black people."18 When the Emancipation Proclamation was signed in 1863, the black community owned a total of 0.5 percent of the total wealth in the United States. This number is not surprising; slaves were forbidden to own anything, and the few freed blacks living in the North had few opportunities to accumulate wealth. What is staggering is that more than 150 years later, that number has barely budged—blacks still own only about 1 percent of the wealth in the United States.19 When Martin Luther King stood on the steps of the Lincoln Memorial in 1963, he said that “America has given the Negro people a bad check, a check which has come back marked ‘insufficient funds.’ "20

  This bad check was, in large part, the consistent faith in and promotion of segregated black banking. The promise of black banking is that the color of money does not matter and that black banks can control and multiply black money in the same way that white banks multiply white wealth. Yet despite a century of honest toil, the check has continued to be marked “insufficient funds." Whether the next century yields a different result will depend, in part, on understanding the nature of the failures of the last.

  Forty Acres or a Savings Bank

  Slavery, “America’s original sin," according to James Madison, created the foundation of modern American capitalism.1 It was slavery and the “blood drawn with the lash" that opened the arteries of capital and commerce that led to U.S. economic dominance worldwide.2 The effects of the institution of slavery on American commerce were monumental—3.2 million slaves were worth $1.3 billion in market value, almost equal to the entire gross national product.3 Slaves were also a valuable store of capital because they were liquid assets that could be exchanged on markets more easily than other forms of property. Slavery’s unparalleled bounty is what caused many Americans to tolerate such a barbarous institution. Growing international demand for cotton fueled the growth of slavery, and the legal and political arms of the state maintained and protected it. More cotton led to more profits, which led to more demand for slaves, which led to more legislation supporting slavery, and then even crueler methods of oppression to extract more work from slaves.

  The institution of slavery was so at odds with the liberal notions of equality avowed in America’s founding documents that a theory of racial hierarchy was used to explain away the dissonance. Blacks had to be seen as subhuman so that they could be treated as chattel. In the antebellum era, Christian religious principles were exploited to provide the rationale for racial subjugation.4 Not only were slavery and white supremacy condoned by God, but it was seen as God’s will that white men exploit the labor of the black race. In The Christian Doctrine of Slavery, a Presbyterian minister concluded, “It may be that Christian slavery is God’s solution of the problem [of labor] about which the wisest statesmen of Europe confess themselves ‘at fault.’ "5

  The stark wealth distortion caused by slavery and the longevity of its effects cannot be underestimated. Blacks were “articles of commerce," as illustrated by the Constitution’s three-fifths rule. Slave bodies were assets, credit, debt, currency—forms of capital and wealth. Between 1820 and the Civil War, banks across the South issued notes with images of slaves printed on the money.6 The currency of the South was the slave. Slaves were not just the labor in the cotton production process; they were the collateral used to finance the operations. Slavery modernized credit markets, creating complex new forms of financial instruments and trade networks through which slaves could be mortgaged, exchanged, and used as leverage to purchase more slaves. In highly profitable, speculation-based markets, many white men built fortunes trading in slave-backed securities.7 As is true of property ownership in any era, those who held slaves had the ability to grow exponentially richer because they could use their property to create more wealth.

  For all the economic gains created by slavery, the slaves themselves could never profit. During the 246 years of institutionalized slavery in America, enslaved individuals could not participate in the economy as buyers and sellers. In order for slavery to function, the slaves needed to serve as cogs in the machine and not its drivers. They were therefore not permitted to own assets or offer their labor for pay in any form. These prohibitions, which included ownership of land and trade of any kind, were often cemented in law and enforced through violence.8

  And since slavery was premised on white supremacy in a racial hierarchy, an ideology avowed across the country and not just in the slaveholding South, even freed blacks were restricted from full participation in commerce. Small numbers of blacks in the North and small populations of free southern blacks did manage to participate in the economy, but they were tightly constrained. In virtually every aspect of northern life, blacks were segregated from whites. Jim Crow laws mandating segregation in practically all spheres of life began in the North and West well before the Civil War.9 Alexis de Tocqueville, who came to marvel at America’s democracy, was shocked at the level of racial prejudice he observed in the North. “The prejudice of race,” he wrote, “appears to be stronger in the states that have abolished slavery than in those where it still exists; and nowhere is it so intolerant as in those states where servitude has never been known.”10

  Many states legally prohibited free blacks from owning property, testifying in courts, or practicing professions or trades above menial labor.11 Black businessmen typically could not sue white debtors in courts and were often restricted from engaging in finance.12 Similarly, an 1852 Maryland statute excluded blacks from membership in thrift or building and loan institutions.13 Where there were no legal barriers, there were social forces that blocked blacks from organizing banks and businesses. �
�A mere legal grant of a thing," explained a black businessman, “does not mean that it will be immediately enjoyed. Public opinion is often more binding than law."14 And public opinion relegated blacks to the lowest economic stratum.

  During this era of exclusion, free black businessmen relied on their own race for capital and credit. Black banking began as a private affair.15 There were several black men of means who lent their own money to other blacks, but the group was so small that their names could be recounted by historians writing about them half a century later.16 To the extent that there were any formal banking structures, they operated through philanthropic societies and churches. The center of the free black community in the North was the city of Philadelphia, and as early as 1788, prominent black clergy and business owners had organized “mutual aid societies."17 Mutual aid societies usually orbited the black church, the central pillar of the black community. The most prominent and long lasting of these was the African Methodist Episcopal Church (AME Church) in Philadelphia, founded by Richard Allen and Rev. Absalom Jones in 1787 with the governing slogan “To Seek for Ourselves." It did just that. Between 1847 and 1904, the church gave over one million dollars to educational programs for blacks, and by 1907 it had supported twenty-two schools. The collective power the black community harnessed through church membership also made black churches a target for racial hostility and social control. After Nat Turner’s slave revolt in 1831, southern legislators passed laws forbidding blacks from preaching or congregating in their own churches. South Carolina even prohibited groups of black individuals from meeting together “for the purpose of mental instruction or religious worship."18

  By the mid to late 1800s, free blacks began to press against trade restrictions by forming a financial sphere of their own. In 1851, leading black businessmen and ministers gathered in New York City “for the purpose of making plans for improving the Negroes’ economic status." They decided that blacks needed their own banks if they were going to succeed in business.19 The group resolved that “a mutual savings bank be established by Negroes" in order to “encourage savings and thrift and . . . assist Negroes who wished to enter business."20 A constant preoccupation among free northern blacks trying to operate businesses or buy property was their inability to secure any type of credit. Abram Harris, a prominent black economist in the 1930s, listed the barriers to black enterprise before the Civil War in the following order: “(1) The Difficulty of Obtaining Capital and Credit; (2) Low Wages, Competition for Jobs, and Immigration; (3) Mob Violence; (4) Occupational Restrictions; (5) Prohibitions against Owning Certain Types of Property; (6) Denial of the Right to Sue; (7) Restrictions against Settlement in the West; and (8) Civic and Educational Handicaps." Harris emphasized that “the greatest handicap was, without a doubt, the difficulty of obtaining capital and credit."21 Thus, on the eve of the Civil War, there was a vibrant ongoing discussion among free blacks in the North on how they might establish credit and banking associations.

  The bank envisioned by this group of business leaders would be organized as a cooperative society and would rely on black investors in New York who, it was hoped, would invest their total accumulated wealth in the bank to be used as starting capital. It was crucial that the bank have access to the entire black community’s resources—it was said that northern blacks held between $40,000 and $50,000 in Wall Street banks—so that it could lend to black entrepreneurs and would-be property owners. This was the first of many attempts by black leaders and businessmen to convince blacks to harness the collective power of black capital in support of black banking. The bank ultimately failed to attract enough capital and was never formed.22

  The black community knew that it needed banks if blacks were ever going to advance economically. Alexander Hamilton, the first treasury secretary and the father of American banking system, explained that it was banks that could create the “augmentation of the active or productive capital of a country." Gold and silver, he said, “acquire life" and only through the operation of a bank. “Banks in good credit can circulate a far greater sum than the actual quantum of their capital in Gold & Silver." Explaining bank lending and the money-multiplying magic of banking, Hamilton explained that bank “credit keeps circulating, performing in every stage the office of money."23 In other words, it was through banking that American wealth would be created.

  Bank credit creates wealth, which is why the isolated free black community kept trying to create its own segregated banking system. Bank credit was needed to “augment” capital, but could a bank be created without capital? Could bank lending lead to wealth creation, or did banking only work to multiply already accumulated wealth? In a circular economic rut that would be repeated throughout history, there was too little available capital to create a bank that could extend credit so that more capital could be produced. And blacks’ access to capital was limited because they did not have any political power.

  Hamilton had emphasized that successful banking required a strong partnership with the federal government. He told Congress in 1790 that a bank is “not a mere matter of private property, but a political machine of the greatest importance to the state.”24 A healthy government needed a bank to survive, and strong banks relied on government support. In order to thrive, banks needed government charters, free and open access to enforcement of contract laws, and the orderly maintenance of capital and credit markets. Though government intervention in the economy was limited in the antebellum era, government’s hand was most apparent in banking and currency markets, and it kept blacks out of both. If Hamilton was right in saying that only successful banking could multiply wealth and that strong central government support was needed for a healthy banking system, could a people on the margins of the economy ever create wealth through banking? Black banks would try to answer this question for two centuries.

  Black leaders continued to discuss the bank even as the slavery question was being hotly contested on the national stage.25 These were interdependent questions, for freedom would be severely restricted without the ability to fully participate in the economy. Black leaders stressed that emancipation would have to be followed by the accumulation of wealth if the black community was ever to achieve meaningful political equality. Frederick Douglass remarked that “the history of civilization shows that no people can well rise to a high degree of mental or even moral excellence without wealth. A people uniformly poor and compelled to struggle for barely a physical existence will be dependent and despised by their neighbors and will finally despise themselves.”26 The debate over a black bank became moot, however, when free blacks lost their political status as a result of the 1857 Dred Scott case, which held that no black individual, free or enslaved, could claim American citizenship. The case was the last gasp of the South, which was increasingly under pressure to release its grip on its profitable and abusive institution of slavery. The Industrial Revolution significantly changed the nature of the economy and unleashed forces that would eventually lead to southern secession, the Civil War, and ultimately emancipation.27

  Even though the Civil War decimated the South, the ill-gotten spoils of slavery remained and grew in the former cotton empires in America and Europe for generations. The theories of racial superiority spun to justify centuries of enslavement stuck around too. These theories, so infused in American culture, could not be shed easily, and their long-lasting effects would lead to economic distortions that constantly impeded those formerly enslaved from participating in the white-dominated economy.

  The freed slaves had to make the transition from being capital to becoming capitalists—from being chattel to owning it. They had to do this having “neither money, property nor friends," as Frederick Douglass explained.28 The road to wealth presented severe obstacles during the terrible confusion and upheaval in the Reconstruc-tion-era southern economy.

  The victorious Union army granted the slaves their emancipation, and for a transitory moment the Union came close to giving them a share of the land. After his famous march f
rom Atlanta to the sea, General William T. Sherman remained in Savannah as the war wound down. There, he consulted with several black leaders who told him that the ex-slaves, worried about lingering racial animosity, preferred to take care of themselves on their own land.29 Black minister Garrison Frazier explained that the “way we can best take care of ourselves is to have land and turn it and till it by our own labor."30 Blacks had already begun to establish self-governing communities in several places in the South.31 After emancipation, black communities formed hundreds of mutual aid societies to work toward economic self-sufficiency. They set up charities to take care of the poor and sick and to educate each other. “We have progressed a Century in a year," said one freedman.32 During the first year of freedom in 1866, a “Negro convention" held in Greene County, North Carolina, suggested that blacks could raise their economic status by creating joint stock companies and patronizing black businesses.33

  The black community’s main objective, which it sought through political means, was acquiring land. Emancipated slaves and their northern Republican supporters believed that land ownership was the only way to achieve a free market in the South. Without land, they would be at the mercy of their previous owners.34 Sherman signed Field Order 15 in March 1865, which set aside 400,000 acres of confiscated land for freed slaves.35 Sherman’s plan was to create a territory exclusively for ex-slaves where they could live free of white control and manage their own economic and political affairs.36 In justifying this action, Sherman borrowed from Thomas Jefferson’s populist view of land as usufruct. The basic idea was that landholders owned property only due to the benevolence of the federal government, in which all land rights resided. The southern Confederates’ traitorous act of secession forfeited their land rights.37