The Color of Money: Black Banks and the Racial Wealth Gap

by Mehrsa Baradaran

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.

The myth that free-market principles were guiding political choices was further exposed as hypocrisy because blacks could not even pay “market prices” for land. White southerners simply refused to sell land to blacks. Land was sometimes sold at half the price to white buyers compared to what black buyers were offering just to avoid selling their land to blacks.

The credit arrangements of the South also had the veneer of self-determination and freedom, but this turned out to be yet another form of bondage. Without wealth or land, the majority of black southerners turned toward sharecropping arrangement to make a living.

in 1896, Plessy v. Ferguson dealt the most devastating and long-lasting blow by blessing the doctrine of “separate but equal,” which legitimatized Jim Crow laws and segregation for half a century.175 By the time the Supreme Court was finished, the Equal Protection Clause of the Fourteenth Amendment was deprived of all meaning.

Black bankers often complained that black customers expected black banks to give them more favorable deposit rates or lending terms than white institutions offered.11 The touchy relationship between these banks and the communities they served was inevitable given the paradoxical pursuit of these banks.

James Baldwin explained the dilemma with regard to black leadership, which he defined as a “nicely refined torture [of] having been created and defeated by the same circumstances.” Baldwin explained that black leaders were created by “the American scene, which thereafter works against them at every point; and the best that they can hope for is ultimately to work themselves out of their jobs.”

“the American Negro has been driven into an awkward, selfish corner, attempting to operate racial business to rear a stepchild economy.” Stuart explained that this was an “economic detour” that no other immigrant group had to pass through, as these groups were allowed passage to the “economic Broadway of America.” By contrast, blacks, despite “centuries of unrequited toil … must turn to a detour that leads he knows not where.”

Historians place the blame on white resentment at the success of black businesses in Tulsa. When blacks in Tulsa explained the riot, they did not focus on the elevator incident or the alleged assault. Instead, they claimed that they had been warned through printed cards placed in their homes months earlier to leave the state—a warning that many blacks interpreted as being linked to their economic success.

General Robert E. Lee was canonized and the Southern rebel became a national hero. The institution of slavery was whitewashed, as the slave plantation took on a romantic hue as an idyllic place where master and slave lived together in harmony. Slavery’s cruel history was muted in the name of national unity, and the victims, the black population, had to be recast in the national psyche in order to achieve peace about the past.

Both Wilson and Franklin Roosevelt relied on southern participation to pass their programs in Congress. The South controlled the Senate, a body which acted, in the words of Robert Caro, as “the stronghold of the status quo, the dam against which the waves of social reform dashed themselves in vain.

It is notable that Harlem did not have a thriving black bank sector, or at least one similar to that enjoyed by other major cities—not only because Harlem was located just a few miles from the heart of American capitalism on Wall Street, but more significantly because Harlem at the time was the focal point of a new and powerful strand of black nationalism championed by Marcus Garvey.84 Garvey was not as prominent a national leader as Du Bois or Washington, but he was undoubtedly the most influential voice emanating from the northern ghetto—a voice that would echo throughout the twentieth century.

For many in the black community at the time and thereafter, Garvey’s movement was anything but a failure. According to one contemporary, “it was an economic failure … but a psychological success … [and] created a spirit that has yet to be paralleled in any other black movement.” Earl and Louise Little were loyal Garveyites in Chicago who rejected black integration and the “Uncle Tom-ism” of the black middle class. Their son, Malcolm X, would resurrect Garvey’s vision years later, as would the Black Panthers, the Nation of Islam, Rastafarianism, and other black radical groups.

Banks spend the same amount of money in overhead and servicing costs for a deposit of $1,000 as for one of $1.50, but the larger deposit can yield more profit when it is lent out. In other words, a bank receiving three large deposits amounting to $500,000 from three big businesses spends less money and makes more profit off those deposits than a bank that receives $500,000 dollars of deposits from 5,000 people. Black banks had much higher operating costs than white banks because they spent more and earned less from their poor customers.

capitalism and the natural rules of the market were indeed responsible for the high price of the properties of the ghetto—it’s just that those rules only applied to the ghetto. Everywhere else, there was an artificial buoy undergirding the natural markets. As Du Bois had said, “to be a poor man is hard, but to be a poor race in a land of dollars is the very bottom of hardships.”45 The ghetto housing market was poor in the land of credit.

When Andrew Johnson had taken office after President Lincoln’s assassination in 1865, he halted Reconstruction reforms and set the black community back for generations. With this second accidental President Johnson, things went very differently. Lyndon Johnson made the civil rights cause his own. Together, LBJ and MLK were at the helm of the most monumental forward movement in race relations in American history. Their partnership was neither natural nor comfortable, but the timing was right and a large part of the public was with them—at least for a little while.

King knew that talk of love and unity would only go so far without cold economic realism. “When all is finally entered into the annals of sociology; when philosophers, politicians, and preachers have all had their say, we must return to the fact that a person participates in this society primarily as an economic entity. At rock bottom we are neither poets, athletes, nor artists; our existence is centered in the fact that we are consumers, because we first must eat and have shelter to live.”

Johnson’s program was also much less popular than the New Deal. During the New Deal era, poverty was seen as a systemic problem. Change the system and poverty goes away, and so do its symptoms. Not so in the 1960s, when poverty came to be seen as a moral failure. What changed? According to economic research, race has been the single most important predictor of support for American welfare programs. In other words, black poverty has been viewed as a moral failing, whereas white poverty had been viewed as a systemic problem. Therefore, once welfare came to be associated with black poverty, it was delegitimized.

“What white Americans have never fully understood—but what the Negro can never forget—is that white society is deeply implicated in the ghetto. White institutions created it, white institutions maintain it, and white society condones it.”105 The report was an unapologetic excoriation of white society, which the commission deemed guilty not just of racism, but of apathy toward black poverty.

Washington’s name became an insult synonymous with Uncle Tom.119 “We are told,” said Carmichael, “ ‘If you work hard, you’ll succeed’—but if that were true, black people would own this country. We are oppressed because we are black—not because we are lazy, not because we’re stupid (and got good rhythm), but because we’re black.”

Blacks are not choosing to be in single-parent households because they are gaming the welfare system. Poverty creates joblessness, crime, social decay, and family deterioration. To state that poverty is linked to these “cultural forces” is to state the obvious, but it is a gross oversimplification to say that culture creates poverty and stop there. Culture is as much a reflection of poverty as it is a cause.

Like President Reagan’s “welfare queen” story, this narrative paints low-income subprime borrowers as exploiters of taxpayer money and government largesse.69 It is a convenient fiction that protects banks from appropriate regulation and ignores a history of injustice.

Without malice, capital looking for yield can lead to exploitation if there are structural inequalities. Capitalism itself cannot overcome those inequalities because capital only seeks to accumulate unto itself. Without structural changes, the urban ghetto would never be a lure for wealth-building capital, only a magnet for exploitation.

Citigroup and Goldman Sachs, key actors responsible for the financial crisis, were exposed to severe losses during the 2008 financial crisis: the government bailout restored 100 percent of their shareholder value. Their shareholders lost nothing. The same Wall Street banks that were enriched by pushing black families into subprime loans now owned one of the few remaining black banks that were working to serve rather than exploit the community. And the reason they now owned the bank was that they survived the crisis they helped create through a taxpayer bailout, while Carver did not. Goldman was saved because it was deemed too big (in reality, too important) to fail. Carver was not.

The unrelenting financial depression that hit the black community infected the churches too, linking the fates of the black church and the black bank together, sometimes uncomfortably. Often a preacher advises his parishioners to deposit funds at a black bank. Martin Luther King did this. Black churches in turn borrow money from black banks. These loans, which are meant to further the goals of each institution and of the community, can nevertheless put the bank and the church at cross purposes.

Rapper Killer Mike was the most forthright advocate: “We don’t have to burn our city down,” he said. “But what we can do is go to your banks tomorrow.… And you can say ‘Until you as a corporation start to speak on our behalf, I want all my money. And I’m taking all my money to Citizen’s Trust.’ … What we’re gonna do is start to divert money away from the system.… I ain’t saying march, hold hands, speech.… I’m saying take your money out of this dog’s hands. Out of their paws. Take your money.… Don’t allow a dollar of your money to leave your community again until these dogs that ask for your vote, ask for your money, come begging for you to get back into their economic system. Don’t you spend a dollar for a dog who don’t speak up for you.”

By focusing a reparations program on geography as opposed to identity, policymakers can avoid the sacred cow of color-blindness and link reparations with combatting segregation. Moreover, a program focused on homeownership has the potential to lead to long-term intergenerational benefits as the home and land are passed down. A home can also be used as collateral for other life-enhancing loans, like consumer or student loans.

We must shed the destructive myths that separate can be equal, that a segregated economy will reach prosperity on its own, or that black banks can lead to black prosperity without fundamental economic changes.