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May 10 - May 15, 2020
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
Over a third of black families have either negative wealth or no assets at all.
The wealth gap is where historic injustice breeds present suffering.
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
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The first black banks were formed less than a decade after slavery ended, in the hostile climate of racism and Jim Crow segregation.
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.
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.
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 coercive hand of the state that has consistently excluded blacks from full participation in American capitalism.
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
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.”
President Andrew Johnson, the accidental president who assumed office after Lincoln’s assassination, joined the white southern backlash and rolled back Lincoln’s promises. He thoroughly undermined the Freedmen’s Bureau bill, including the land grant, and fought the black rights movements, asserting that America would remain a “white man’s government.”46 Though the southern rebels had expected to be hanged for their treason, Johnson welcomed them back into the fold, pardoned them, and restored their confiscated land.
Union General Oliver Otis Howard, who had the unpleasant task of taking the land back from the freedmen after he had helped administer the order, nevertheless reasoned that the “freedmen should have land, but they … must pay for their land.”50 President Johnson said that the Freedmen’s bill was advantaging blacks over whites and that it was time for blacks to fend for themselves. “It is earnestly hoped that instead of wasting away, they will, by their own efforts, establish for themselves a condition of respectability and prosperity.” Johnson claimed that the laws of capitalism and free trade
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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.
An 1865 South Carolina law declared that “no person of color shall pursue or practice the art, trade, or business of an artisan mechanic or shopkeeper, or any other trade, employment or business … on his own account and for his own benefit until he shall have obtained a license which shall be good for one year only.”56 One black veteran remarked of these laws, “If you call this Freedom, what do you call Slavery?”
By the end of the Reconstruction era, most freedmen were left landless, voteless, and with practically every profession blocked to them—their only choice was to grow cotton. Of course, that was the point.
As Martin Luther King Jr. echoed a century later, “the Emancipation Proclamation freed the slave, a legal entity, but it failed to free the Negro, a person.”
Frederick Douglass celebrated the bank, stating that the “mission of the Freedmen’s Bank is to show our people the road to a share of the wealth and well-being of the world.”79 What the bank eventually did, according to Du Bois, was “not only ruine[d] thousands of colored men, but taught to thousands more a lesson of distrust which it will take them years to unlearn.”
The whole point of banking is to collect money and to put it into productive use through lending. Yet the Freedmen’s Bank was purposefully set up as a savings bank, a teaching institution, rooted in a paternalistic and condescending mission of instructing blacks in the ways of thrift and capitalism. But the bank left out the most important part of capitalism—the part where capital is able to grow and multiply through credit.
The bank changed from a savings bank into a highly leveraged investment bank. In fact, Henry Cooke was using the funds to invest in the riskiest of all investments—railroad finance. As war bonds were no longer profitable, Jay Cooke turned toward financing the railroad, and in 1869 the Cookes used the Freedmen’s Bank’s deposits to bet on the railroads’ westward expansion. Without their knowledge or consent, the freedmen’s deposits were being used to finance what was essentially the first postwar asset bubble.
Any unwelcomed behavior, like voting Republican or speaking out in any way, could imperil one’s access to a loan.
Thomas Watson, leader of the southern Populist Party, explained that white supremacy was a deception that blinded the poor and pitted them against each other in order to perpetuate “a monetary system which beggars you both.” The Populists urged “color tenants” to stand with white tenants and promised that the People’s Party would “wipe out the color line and put every man on his citizenship irrespective of color.”158 The Populists went further than all the other parties, including the Republican Party, with respect to racial equality. “I am in favor of giving the colored man full
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They failed because the established political parties of the North and South had already understood that sowing animosity between poor whites and poor blacks was the easiest way to maintain the status quo and to reject the costly and disruptive demands of a coalition of the poor. In the end, a racial hierarchy was preferable to class revolt.
Since 2,000 blacks would be lynched over the next several years for alleged crimes without any due process, it was premature to declare that their rights were being protected by ordinary modes of justice.
Booker T. Washington and W. E. B. Du Bois, urged contrasting paths toward progress, with Washington focusing on building a segregated black community and Du Bois demanding full integration and equal rights.
W. E. B. Du Bois, a Harvard Ph.D. born free in the North, had no patience for Washington’s moderation; he wanted blacks to fight for integration and full legal rights, without which equality would never be achieved. Du Bois cofounded the National Association for the Advancement of Colored People (NAACP) in 1909 to dismantle Jim Crow and to confront the South’s racial violence.
The resurgent Klan reached its peak year in 1920, with a membership of 4 million members nationwide. In 1925, 40,000 hooded members of KKK marched in front of the White House.
President Woodrow Wilson, an acknowledged racist and a college classmate of Dixon’s, aired the film at the White House, the first movie shown there. The audience marveled at the new technology and soaked in the film’s racist dogma. Wilson founded his candidacy on both southern progressivism and white supremacy. According to Wilson, “Negro rule under unscrupulous adventurers has been finally put an end to in the South and the natural, inevitable ascendancy of the whites, the responsible class has been established.”126 Wilson purged the federal bureaucracy of any blacks who had managed to secure
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The Great Migration, which lasted roughly from 1910 until 1970, radically transformed the country.1 During this seismic shift, approximately six million blacks left the south. In 1900, ninety percent of black Americans lived in the rural areas of Southern states. By 1970, 80 percent of black Americans lived in urban areas and nearly half outside the South.
All the other banks that belonged to this clearinghouse were given aid and survived the Great Depression.28 W. E. B. Du Bois noted that the bankers’ association “could have saved the bank and saved it easily without loss or prospect of loss. Yet the Binga Bank was allowed to fail because owners and masters of the credit facilities of the nation did not care to save it. Binga was not the kind of man they wanted to succeed.”29 On July 31, 1930, Illinois bank auditors closed Binga’s bank, and his depositors lost most of their savings.30
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. Unlike Du Bois and Washington, Garvey was not interested in the South’s problems, nor did he care to speak to the black middle class or whites. His primary concern was for the “poor black masses” living in northern ghettos. His answer for them was to embrace
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Malcolm X, would resurrect Garvey’s vision years later, as would the Black Panthers, the Nation of Islam, Rastafarianism, and other black radical groups.91
As the saying goes, when Wall Street gets a cold, Harlem gets pneumonia.
Three specific features of the black condition impeded even the strongest black banks in the pre-Depression era from their central aim of wealth accumulation: poverty, housing segregation, and the centripetal pull of the money multiplier to the dominant banking sector.
In 1920, the mean capital ratio for white banks was 18 percent; black banks had an average capital ratio of 32.9 percent.117 This meant that the bank owners invested more of their own money and earnings in the bank to keep it secure, but this severely restricted their profitability and lending capacity.
Black banks were lending with one hand tied behind their back. What weakened these banks is the paltry wealth of the communities they served, which was also the reason they were created—to provide financial services to a poor population.
With a 50 percent down payment required for a home purchase at the time, the only buyers of black property were the black upper class—only 2 percent of the black population in the North in the 1920s.126
In 1930, a realtor turned University of Chicago economist, Homer Hoyt, created an economic model based on extensive real estate data that revealed that real estate in a neighborhood declined as soon as a few blacks purchased property there. The lower market values were a result, he explained, “due entirely to racial prejudice, which may have no reasonable basis.”129 This declining property value did not affect the home prices of most immigrant groups—only blacks and Mexicans. This is why whites were so vigilant in keeping blacks out of their neighborhoods. They were motivated not only by
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Because black homes were not increasing in value, black homeowners were excluded from the clearest path to wealth creation available to the middle class. On the flip side, through racial violence, whites retained the racial purity of their neighborhoods, and their home values increased precisely because they were not in black neighborhoods. The ability to retain property value—even through violence—was a uniquely white privilege.
The underlying problem for blacks was that whites started with all the property and blacks with none of it. This basic economic reality created a positive feedback loop for whites and a negative one for blacks, cycles that continue to have profound effects to the present day.
The bulk of the New Deal reforms can accurately be described as “white affirmative action” because state resources were used to provide direct financial advantages to white Americans at the expense of other racial groups.1 And this outcome was no accident. The only way Roosevelt could enact his progressive platform was with the backing of the Senate’s southern Democrats. And this strong, influential, and coherent political wing of the party was adamant that their economic structure and racial hierarchy be protected.
most blacks in the South were farmworkers and domestic workers. In devising legislation that regulated work hours, enabled unions, set minimum wages, and established Social Security, the southern bloc excluded both groups, and thus the majority of black southerners, from the protective legislation. The purpose of these exclusions, as expressed by southern legislators, was tomaintain the inferior status of black laborers in the southern economy.
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.52 Whites too were financing middle-class life through mortgage and consumer debt, but the black middle class was paying more for the same life.
Roy Wilkins famously quipped that if Eisenhower “had fought World War II the way he fought for civil rights, we would all be speaking German now.”
In its distilled form, King’s dream was interpreted as a color-blind utopia, the liberal ideal of individual equality. This is unfortunate because in the same speech, there was a forceful indignation in the face of past injustice. He was asking the nation for redress of past wrongs—specifically in economic terms:
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.83
Johnson, looking back on the loss, lamented, “I don’t think I lost that election. I think the Negroes lost it.”107 Even though Johnson was involved in the country’s most unpopular war, the administration believed that the nastiest public backlash they faced was on the race issue.108
Most importantly, in a nimble political move that has gone largely unnoticed, Nixon co-opted the black power movement’s rhetoric of economic self-determination to push for a segregated black economy, thereby justifying his neglect of other proposals for meaningful reform. Capitalism, specifically “black capitalism,” became yet another rhetorical weapon used to rationalize economic inequality.
Nixon put it bluntly when he promised southern Republicans that he would retreat on civil rights and “lay off pro-Negro crap” if elected president.11
Romney, who admitted that he was not as astute a politician as Nixon, had underestimated white suburbanites’ fear and racism. Nixon had understood it—the government “can’t force blacks into housing,” explained Nixon, “or we’ll have a war.” Nixon was so sure that integration was a losing issue that he urged his staff “to nail every Democratic senator and congressmen to the cause of ‘compulsory integrated housing.’ ” Integration was “political poison.”
Theodore Cross, understood that black banking had become a diversion. He wrote in 1971 that black banks were still just “toy banks” or “specks of gold dust in the $1 trillion private capital and credit markets of America.” Yet they had become magnets for government money and press, for, as he explained, “when the heat is on the temptations are great to build a few monuments to black affluence.”187 Shining a spotlight on a few successful black banks obscured the true problems of the wealth gap and the ghetto economic trap. At best, black capitalism was being used as state paternalism, but at
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