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

by Mehrsa Baradaran

neighborhoods in long-established communities.

On the other side of the color line, government-fueled mortgage markets offered the white middle class an escape from the cities even as it trapped the black poor within them. Consequently, race became the pr...

These maps had four color categories based on perceived risk: A (green), B (blue), C (yellow), and D (red), green being the most desirable and red being the least.

In making judgments about a home’s potential to appreciate, HOLC mapmakers, like individual appraisers before them, used the race of residents as a proxy for desirability. Green neighborhoods were homogeneous and white.

At the other end of the scale, the red neighborhoods were predominantly black. In fact, race was a greater factor in a neighborhood’s predicted decline than other structural character...

centers, creditworthiness of residents, transportation opportunities, public park...

The HOLC appraisers did not create the ghetto, and they were no more racist than the broader American public. Nor were they wrong when they labeled black neighborhoods undesirable—whites simply did not want to live near blacks. But they did institutionalize racial segregation in housing and made it a formal feature of the mortgage credit markets.

This not only meant that blacks could not buy homes and build capital in the “undesirable” inner city; it also meant that they were trapped in neighborhoods in rapid decline, having been defined as such by the self-reinforcing judgments of government bureaucrats. The reason these maps lingered for so long was that private banks

used them as models when creating their own “residential security maps” and deciding where to lend. Even this discriminatory practice might have abated with time had the Federal Housing Administration and the Veterans Administration (V...

The FHA did more to shape American life than any other government agency created during the New Deal. It is also unparalleled in the injustice its policies wrought on the black population. The FHA was created by the National Housing Act of 1934 and was supplemented and expanded through the 1944 Servicemen’s Readjustment Act (the GI Bill), administered by the VA. Between 1934 and 1968, the FHA and VA programs operated to open a spigot of mortgage lending that flowed through the banking system.18 The FHA did not lend money itself, but it created a large insurance fund backed by the U.S. Treasury that would guarantee all approved mortgage loans, which shifted ...

The prosperity fueled by the abundant flow of mortgage credit stopped firmly at the red lines around

the black ghettos. The protocols and standards of the FHA pushed whites up and out of the slums into the suburbs, but they held blacks in.

The FHA’s 1939 Underwriting Manual explicitly prohibited lending in neighborhoods that were changing in racial composition.

In a 1941 memo, the FHA unapologetically explained that “the rapidly rising Negro population has produced a problem in the maintenance of real estate values.”25 A good neighborhood, according to the FHA, was one that prevented “inharmonious racial groups,” which meant that the only groups that did not threaten property values were white families.

So neighborhood groups vigilantly enforced racial covenants. Racial covenants were promises made by homeowners that they would never sell, rent, or lease their homes to nonwhites, guaranteeing that a neighborhood association could sue any white homeowner who stepped out of line by selling to blacks. The FHA only stopped recommending racial covenants in February 1950, two years after the Supreme Court found such covenants unenforceable in the landmark 1948 case Shelly v. Kramer.27

The FHA policies resulted in some outrageous acts of segregation. Kenneth Jackson describes how, when a white neighborhood in Detroit came too close to the borders of the black neighborhood, the homes were denied mortgage approvals. The solution? A white developer built a concrete wall between the two neighborhoods. It worked, and the white mortgages were approved.

Between 1934 and 1968, 98 percent of FHA loans went to white Americans.30 In some cases, whole cities were ineligible for FHA funds.31

In his 1955 book Forbidden Neighbors, urban planner Charles Abrams said that the “FHA adopted a racial policy that could well have been culled from the Nuremberg laws. From its inception FHA set itself up as the protector of all white neighborhoods.”33 What resulted was a Jim Crow credit market.

The problem with suburbs full of homeowners and urban ghettos comprised of tenants was not just that it caused generational wealth inequality; it also affected the avenues of opportunity available to residents of these disparate communities. The disparity in community resources had to do, in part, with the operation of the American tax system, which gives local municipalities control of the bulk of their own tax dollars instead of distributing taxes nationwide or statewide. The creation of the white suburb meant that white communities had more tax revenues with which to build better schools, parks, and infrastructure, and the ghettos did not.

As black neighborhoods became overpopulated, blight and crime rose. The largest wave of the Great Migration, spanning from 1940 to 1970, involved an exodus of several million blacks out of the South, which further concentrated the population of the ghetto.34 Harlem, which had been in full bloom in the 1920s, had by the 1950s become dilapidated and rat-infested—so bad was the rat problem that specific coalitions were formed to address the problem, and it was a repeated topic of conversation in Congress.35 Asthma, disease, drug addiction, and tuberculous were rampant. By 1952, nearly fifteen times as many African Americans in Harlem were dying of tuberculosis than among the all-white residents of Flushing, Queens.

Such a stark disparity between the races led some observers to conclude that the black community was suffering as a result of some cultural failing such as family breakdown or lack of education.37

It seemed

incomprehensible to some Americans living amid postwar prosperity to believe that there were any economic or systemic barriers that might have been responsible...

A black businessman in Chicago lamented that the banks refused to lend to qualified black borrowers on the one hand, and then turned around and blamed the black community’s credi...

As harmful as the government-produced segregation was, it is only half the story. Into the void created by the FHA’s red lines came high-cost lenders and contract sellers. Deprivation is often linked with exploitation.

Because blacks were deprived of the mortgage bounty created by government guarantees, they were ripe for exploitation by the sharks.

Contract sellers took what little equity remained in ...

an abusive innovation that looked a lot like a home mortgage. By the 1950s, 85 percent of the homes sold to blacks in Chicago were sold ...

Speculators bought properties for a few thousand dollars with private capital and then “sold” the home to a black buyer through contract for three to four times the price they had paid.40 But the sale was a ruse.41 These were contractual arrangements and not mortgages, which made a world of difference. Practically speaking, the...

Blacks were paying much more than anyone else in the country on a mortgage, and they were not even ...

As soon as they missed a payment, they lost everything—house, down payment, and all the work the...

But zooming back out to consider the entire nation, it became clear that the government was absorbing all mortgage market risk except for mortgages in the ghetto.

Even blacks who managed to leave the ghetto were caught in the Jim Crow credit market. In a few racially mixed or black suburbs in Atlanta, Memphis, New Orleans, Long Island, and Philadelphia, the black middle class was able to buy homes and find a “good living,” according to the Chicago Defender. Though these families could obtain mortgages, they were paying much more for them than their white neighbors even when they were buying the same amount of home.

The FHA cared more about the race of the borrowers than their creditworthiness, so the black middle class was left to find mortgage loans in the private market.

After the original exclusion from the low-cost FHA loans, the debt cycle became self-reinforcing. While the small black middle class may have been earning incomes similar to the white middle class, their upward mobility carried much higher interest.

Over 70 percent of suburban black families had to borrow just so they could purchase cars, appliances, furniture, and other life necessities. Because the black middle class had more debt, they were charged higher interest on each new loan. More debt begets higher interest and vice versa.

White families had twenty times more wealth than black families.48 Even the lowest-income whites had average wealth greater than the highest-earning black families.49

Research reveals, however, that black families were not buying more than whites, they were just paying much more for the same amount of household goods.

Black families in the ghetto, with low wages and wealth, relied almost exclusively on installment loans to buy appliances and furniture.

Black banks were created to offer mortgages to the black community and to fill the void created by government credit policy, but their exclusion from the federally subsidized mortgage markets made their mission much more difficult than that of any other bank operating at the time.

Commercial banks and life insurance companies were even worse.59

When white Americans had been given land through the various Homestead Acts, blacks were left out, he reasoned.

Before becoming pastor, Moran had worked as a real estate broker. He noticed that white banks refused to lend to blacks even when they held substantial deposits at that bank, and he came to believe that these “white bank officers hadn’t understood that we were persons.”

The black banking industry essentially lay dormant for the decades spanning from the New Deal reforms and postwar era prosperity until the civil rights era. This was a direct consequence of the exclusionary federal mortgage bounty.

Italian, Irish, Polish, and other European immigrants who had each been deemed inferior races decades earlier came to be accepted as white Americans. Italians for the most part could not attend college before the war, but most gained entry afterward through the GI Bill.108 Black GIs were not given similar access. Education was still highly segregated, and there were not enough black-only colleges to accommodate them.109 Education led to economic mobility, which led to more social and political power and control.

When the first study of black business was conducted in 1898, it found that the average capital investment in the average black business was $4,600.120 By 1944, that capital investment had actually decreased to $3,260. The vast majority of these businesses (90 percent) were divided equally between small retail stores and small service establishments.121 Many ghetto businesses were small mom-and-pop shops that were barely profitable—still pebbles on the seashore.122

In reality, the injustice was ongoing. From the New Deal and through the Cold War era, unparalleled U.S. prosperity bypassed blacks through purposeful exclusion.

President Kennedy urged Congress to pass a sweeping civil rights bill in 1963, “not merely for reasons of economic efficiency, world diplomacy and domestic tranquility—but above all because it is right.”

The financial isolation of the urban black population was a result of years of racism, but there were no ready villains, no Bull Connor or whites-only water fountains. “The segregated practices in the South are kind of public butchery,” noted Saul Alinsky. “It’s visible. There’s bleeding all over the place. Up here [in the North] we use a stiletto, it’s internal bleeding, it’s not visible, but it’s just as deadly.”

Blacks were still unemployed at twice the rate of whites, they occupied low-wage jobs, had little wealth, and these momentous laws provided no conceivable path out of poverty.8 Abolishing racist laws was not the same thing as achieving equality. Ending segregation was not the same thing as integration. Ending job discrimination was not the same thing as having jobs. Ending credit discrimination was not the same thing as providing credit. A legal right to equality was meaningless to the destitute and marginalized unless it could open a path