The wealth gap between white Americans and black Americans is stark. The median white family has somewhere between 10 and 16 times the net worth of the median black household, depending on who you ask. Between 2010 and 2013, as white households began to recover from the recession, black and Hispanic families saw their net worth drop an additional 20 percent.
Mehrsa Baradaran, a law professor at the University of Georgia, researches banking law, and how the U.S. government, in conjunction with the financial sector, has exacerbated economic inequality. In her new book, The Color of Money: Black Banks and the Racial Wealth Gap, she tracks the persistence of the racial wealth gap, from the end of slavery to today. Baradaran thoroughly diagnoses the ways the U.S. government and white-owned banks have historically shut out black Americans from prosperity, while boosting white Americans into the middle and upper classes. I talked with Baradaran about the structural causes of inequality, the cynical political messaging around black entrepreneurship by white politicians, and Jackie Robinson’s foray into banking.
This interview has been edited and condensed for clarity.
Let’s start at the beginning. What is the genesis of the racial wealth gap?
It all starts with slavery. When we fought over slavery and, as an institution, it dissolved, we never confronted the justifications around it. Those things lingered, and so did this desire, this need—especially in the South—to use blacks as labor and not capital. Black bodies were capital, but blacks themselves could not control capital. They had to be labor. That lingered well after slavery.
In order to create wealth, you need capital. And if you are capital, and if you’re only subscribed to labor based on Jim Crow laws—which is exactly the purpose for Jim Crow in the southern economy, post-slavery—then you can’t build wealth. So that’s the genesis of the wealth gap. What I show in the book is that it doesn’t resolve itself. From the Civil War until today, the wealth gap has barely budged. In fact, the total amount of wealth owned by the black population has not grown at all appreciably—not noticeably—in the last 150 years.
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You don’t actually need laws—and you don’t even need racists—for these things to work. You don’t need outright racism, you don’t need outright slavery for the wealth gap to perpetuate. Once you block a group of people from the mainstream arteries of commerce, they can’t create wealth. I show how the economy of segregation, the economy of exclusion, how that self-perpetuates. You don’t actually need racists for this gap to get wider and wider.
Especially now, when economic inequality is so strident, that just makes it that much more exacerbated for black people who have faced these economic injustices for centuries.
When you’re on the margin, any economic collapse hits you much harder. There’s this old adage that “When Wall Street gets a cold, Harlem gets the flu.” When you’ve got people who live in communities of concentrated poverty and generational lack of opportunity, when you add a general financial crisis to that, it really provides a shock that’s much harder to recover from. Yes, there is this trend of economic inequality, with the 1 percent separating from the 99 percent, so to speak. But this is also a separate and distinct problem apart from economic inequality. Just as inequality is tied up in banking and credit policy, black exclusion and the racial wealth gap is tied up in racial exclusion. From the channels of credit and banking that the rest of Americans were able to get generational wealth through. Post-New Deal until the late ’70s, the way that middle-class Americans gained wealth is through homeownership. All of that was given through banks and through credit facilities that were only open to certain classes of people. And they were always closed off to blacks, at first expressly, and then effectively.
OK, let’s talk about the flip side of that: racial inclusion. How historically, middle-class white people were included in these sweeping government programs that helped them get a business loan, get a college education, get a house. I feel like that’s something that gets left out of the conversation, is delineating how many sweeping government programs there have been with the express purpose of building up white wealth.
To the extent that white Americans became middle class, it is through the credit infrastructure that was bolstered and sponsored by the federal government. Starting in 1934, there are all of these agencies and programs—the Home Owners Loan Corporation, the Federal Housing Administration, the FDIC insurance program—that loosened up credit and capital. All of a sudden, mortgage credit was abundant. Anyone could get mortgage credit. Blue-collar workers could afford a mortgage. A mortgage became much more affordable than renting in the city. So they all moved out to the suburbs.
The most important distinction for who could get these mortgages or not was race. They mapped out the country through racial zones. This was explicit, through government programs. This created the white suburbs, and created generational prosperity. It also created the black ghetto. The wealth gap existed before then, because of Jim Crow and segregation, but in the 20th century, these government credit facilities cemented the wealth gap for our generation.
Even as we have the Civil Rights Era, and the Civil Rights Act outlaws de jure Jim Crow, all of these economic cycles and processes remain intact. Banks are the engines of the economy. And when you dissect these engines—and I do it through looking at their loans and their deposits—you see exactly how white banks create wealth, and you see exactly how black banks are stuck in this trap of segregation, of concentrated poverty.
And then there’s this cynical and ironic twist that happens in the post-civil rights era. Martin Luther King Jr. is assassinated. JFK is assassinated. Lyndon B. Johnson is out of office. And you have Nixon confronted with this new civil rights coalition, which is the Black Power movement. And this awkward, weird thing happens with black banks, is that they become this decoy, where Nixon says, ‘OK, you want black power? You want wealth? Here, I’m going to give you black capitalism.’ And what that means for Nixon is, ‘You own the problem of poverty now.’ After a generation of white Americans gained wealth through these federally subsidized credit structures, all of a sudden Nixon points to the free market, and says to the black community, ‘Best of luck.’
How has that ideology of black capitalism—of individualism and bootstrapping as an effective measure, rather than government support—persisted since the Nixon era?
This is something that goes back to Frederick Douglass. This is not new, this idea that black communities are engaged in self-help. There is a robust history of blacks saying, “OK, fine. You’re going to do Jim Crow. You’re going to impose segregation. We will mobilize our resources, as little as they are, and we will help ourselves.”
This starts from the second that the Civil War ends. I talk in the first chapter of the book about the Freedman’s Savings Bank. That was the first bank, post-slavery. Frederick Douglass told slaves to invest their money, once “forty acres and a mule” was vetoed by Andrew Johnson, they said, ‘OK, save your money and then you can get land.’ But the white owners of the bank took all of these deposits by these freed slaves, their hard-earned money—imagine how hard it was to earn money as a freed slave—and they speculated them in railroad ventures, and they lost them. The money was not backed by the full faith and credit of the federal government. The slaves thought it was. So the money was just gone. Poof.
You see that again with the Bank Black movement. It’s a worthy cause. It’s a fantastic movement, to say, “Let’s mobilize black wealth.” But I want to tell the white community, we all created this wealth gap. We all—non-blacks—benefit from this wealth gap. And the only policy solution we’ve ever offered is that blacks bear the burden of it themselves.
Why should black banks solely be focused on this wealth gap? Why don’t white banks also take this on? The federal government has been bolstering white banks not just since the New Deal. Look at the recent financial crisis of 2008. Did not the Federal Reserve and the American taxpayer save these five to eight huge too-big-to-fail banks? That was taxpayer money. Why is that taxpayer money only going to banks that are serving the white community, where banks that serve the black community are relying on the support of just the black community?
Who do you hope reads this book and maybe comes away from it with a different perspective?
I wrote it for people who are curious about the wealth gap, who are curious about how to make a better democracy. I wrote it with black people in mind. I try to put the voice of the black leaders and the black bankers forefront. But this is not an exhortation to the black community. This is an explication of a problem. I’m in a liminal space; I’m neither black nor white, I’m sort of this outsider, but I have the perspective of an observer of the banking industry, and I’m speaking as someone who understands how banks work, and who understands money is made and how wealth is created.
I hear a lot of blaming the black community. I hear a lot of, “Oh, it’s the law of the markets. It’s supply and demand that’s created this wealth gap.” And I hear a lot of, “Well, if only education, if only family values, if only blah blah blah.” And I don’t hear a lot of self-reflection, and a historically accurate understanding of the forces at play here. So I’m mythbusting in this book, and I hope that it is read by people who are interested in understanding something about America.
This line of argument arises so often when talking about race relations in America. Look at policing. Rather than saying, “You know, we do need to address white-on-black police brutality,” you see the reaction of, “Well, what about Chicago? Look at all the violence there!” As if black Americans don’t deserve to live productive and safe lives until black people single-handedly fix every social problem—that for some reason are defined only as their own problems.
Martin Luther King says, when there’s mass unemployment and lack of wealth in the black community, we consider that a sociological problem. We don’t call it what it is, which is a depression, a recession. When there is mass lack of wealth in the majority community, we say, “Oh, this is an economic problem. We need to deal with it.” I don’t talk about policing and criminalization, but I see all that wrapped up in the economics of it. Why was Walter Scott running? Because he owed this debt, and the police was coming after him. Why did he owe this debt? Blacks owe way more in debt, than whites. They much more resort to payday lenders. Blacks are 60 percent unbanked or under-banked, which means that they rely on fringe lenders, compared to 15 percent for whites in that same category. So all of these problems blend together: the school-to-prison pipeline, over-policing of these neighborhoods. Yes, let’s reform police, but let’s also figure out, what is the root of these problems?
After the Great Depression, when we had mass unemployment and wealth inequality, we didn’t blame poor people and say, “Hey, how did you get yourself in this position? Why is there crime? Maybe it’s because of lack of family values.” We said, “This is an economic issue. Let’s offer an economic solution.” This is what we need to do with the black community.
Going back to what you were saying about looking at things from a structural level. Human brains are wired for narrative—for one person’s story. How do you get someone to shift their thinking about an issue in terms of personal bad actors, and start thinking about it more structurally?
That’s part of the problem, the personal narratives that we use to tell these societal stories. We need to think in a broader, more nuanced way. This also goes back to the Nixon era and fighting the Cold War. They would say, ‘Look, we’ve got Jackie Robinson!’ We use these stars: Barack Obama is one, Lebron James, Oprah, Tyler Perry. We take these stars, or on the reverse, these Willie Hortons, and we draw narratives from individuals. It’s very natural, and I want us to resist that. Jackie Robinson had a bank. He said it was the hardest thing he ever did, was to run this black bank. But I think we lose the big picture when we focus on these individual stories, because I think individual stories half-conceal and half-reveal the problem. You’ve got presidents saying, ‘Look at these black banks that are doing this great thing in these communities.’ And I say in the book several times, microcredit and these micro-lending institutions can’t fix these macro problems.
It still seems to fall into that same kind of ghetto mentality.
Right. Everyone in business understands that small business is not a way to wealth. That’s just not how the economy is run, and it hasn’t been for decades. Small business has more bankruptcies than anything else. Yet, when it comes to marginalized economic players, like black communities, we keep offering small business and small banking. This is a myth that has been present since Thomas Jefferson. Thanks to George Bailey and It’s A Wonderful Life, we’ve bolstered this idea that these tiny banks can help poor communities pool their resources and be the Henry Potters of the world. It has never been the case that small banking could survive on its own. And it is still not that case. Yet, when it comes to poor, marginalized communities, those are the solutions we keep offering instead of real, systemic aid—and real accounting of the problem.
Let’s talk about House Speaker Paul Ryan. He has talking points about this.
I bet he does.
He talks about the “poverty trap,” and how it’s not really centuries of American history and racism that has caused the wealth gap, instead blaming “complacency and dependence,” calling the safety net a hammock.
This is Ryan’s progeny. The genealogy of Paul Ryan is this Barry Goldwater-Milton Friedman-Alan Greenspan-Ayn Rand line of thinking. But this line of thinking stems almost directly from black demands for inclusion into capitalism. Blacks aren’t saying, ‘We refuse capitalism.’ They’re saying, ‘We have been excluded from capitalism.’ The neoliberals respond with, ‘Any help, any reparations or integration is anti-capitalist.’ That is the genesis of this idea.
I talked about how slavery was justified by, ‘God deems blacks to be the lower caste.’ Racial inferiority—scientific or divine or whatever you want to call it. Starting in the 1960s, we can’t rely on God, and we can’t rely on science anymore because those are debunked. So what is the new theory that justifies black inferiority? It’s free-market capitalism. It’s another theory that is just that: It’s a theory. It stems from the brains of Ayn Rand and Milton Friedman, and the mouth of Paul Ryan. And what it says is that this poverty is a result of laziness or free market. It’s complete amnesia. Literally just a decade prior to these ideas coming forward, we’ve got heavy state intervention in the mortgage market. Still do. But we have this new ideology that comes, that completely erases the past, where nobody even understands, ‘Well how did Grandpa buy that house?’ It wouldn’t have been without that FHA loan, without that GI Bill loan. And those things were not available to Black Grandpa.
How do you have the things that you do? Well, it’s because Grandpa had a house, so Dad could go to college because of the wealth that was trapped in that house. And then Dad went to college and married Mom who was in college. And you get to be born middle-class. Black Grandpa didn’t have that home, and was stuck in the ghetto. Couldn’t leave the ghetto because of racial covenants and because of lack of mortgage access. And so Black Dad had to raise you in the ghetto, where crime was high and drugs were prevalent, your schools were crap because of our tax policy. Our tax policy says only the property taxes of that region pay for the schools. so we’ve got these resource-poor regions that recreate poverty. And then we say, ‘Oh, it’s because blacks are lazy or can’t work.’ Look at this history of black capitalism. The only area in our whole country and economy and history where it’s been pure capitalism has been in the black sector. No white communities have been dealing with pure capitalism. It’s always been government-subsidized capitalism.
Can you expand on that idea of “pure” capitalism?
Pure capitalism as in no government support of credit. Credit is the way that Americans build wealth. Bank credit through mortgages, through student loans. And all credit facilities since the New Deal, and even before that, were bolstered by a federal infrastructure. In 2008, you saw all the banks fail. But they didn’t fail, right? Because the federal government was there as a backstop. And the truth is, the federal government has always been there as a backstop. When you have this partnership, and then the banks and the government policies are excluding blacks, blacks are the only ones that have to find credit and capital on their own without these federal infrastructures.
One of the most fascinating epochs in black banking history was between 1934 and the 1970s. This is the most robust banking era for white banks. Tens of thousands of credit unions and community banks are created to sell mortgages to the American white middle class. There are only five black banks created during this time, because there just is no mortgage credit to be had for blacks. There’s just none, because there’s no capital. And the federal infrastructure refuses to lend into the ghetto. This is a decision that was made by policy. You’ve concentrated these borrowers who can’t get mortgage credit. They have to pay rent. Not only that, they don’t have access to consumer credit, so they’re paying for all of their housing goods—like their furniture and their appliances—through installment lenders. So they’re paying much more for the average necessities, and the regular middle-class can now get a credit card. In the ghetto, there was no credit card.
So you’ve got this sucking of wealth from the black ghetto, and then it leads to discontent and rioting. In the ’60s, white Americans are like, ‘What’s happening? We just passed the Civil Right Act, and now Watts and Harlem and Detroit and Chicago are blowing up.’ And you see in these riots that they’re targeting the white lenders, the white property owners, and there’s this frustration with exploitation. That, I think, is what pure capitalism does. Without any government help, it creates these two different markets. You’ve got this robust credit and capital market outside the ghetto in the white middle class, and you’ve got a really costly and extractive economic system in the ghetto.
I’m glad you touched on “rioting,” and the economic angle of that. We’ve seen that recently with the terrible storms in Texas and Puerto Rico: People scolding others for looting, and it tends to only be black people who get scolded for “looting.”
And why do we call it looting when the white-collar criminals take from our pensions and put them in their own pockets? They’re creating these dark pools where they’re front-running our trades. They’re messing around with Libor. They are creating these CDOs and mortgage-backed securities where they’re literally looting from our pension funds and from our savings accounts. And what happens when the banks loot and they don’t have the money to give it back to us? The federal government comes in. We don’t call that looting. We call it a financial crisis. We call that white-collar crime. But that’s “looting” that affects, literally, all of us. It’s a double standard.
I’m not condoning violence or looting, but I do understand the frustration There’s this recent study that showed that blacks are four times as likely as whites to be taken to court over small debts. It’s not even racism. It’s just that blacks have less wealth, and so when they get into debt, the debt collectors come after them more often. It’s expensive to be poor. You run against the sharp edges of the law and the economy. I think we are just starting to understand—even just psychologically—the effect that that has on someone, to live so close to the edge. Paul Ryan will never have the empathy to really put himself in that position. I think that’s the tragedy of politics, is that you’ve got people that say, ‘Because I am not poor, it must be that someone else is poor because they are not as hard-working or as smart as I am.’
Or as virtuous.
Or as virtuous! Or haven’t read these books—Rich Dad, Poor Dad. I’ve read countless self-help books, because I’m a masochist, that talk about, ‘Oh, if you just save your money on lattes and avocado toast, it all adds up.’ That’s not how people gain wealth. There’s no amount of lattes and avocado toast that you can forego that will take the place of a FHA mortgage to your grandfather.
How do you see the idea of reparations factoring into this conversation about wealth equity?
You can’t participate in capitalism without capital. And since we’ve deprived the black community of capital—or access to capital—for generations, we’ve got to fix it. We absolutely need to have a conversation about reparations, or looking at how white Americans gained wealth at the expense of black Americans, and using those same methods—these Progressive Era credit facilities that excluded blacks—now turning them backwards, going back in time and saying, ‘What worked?’ and, ‘Let’s try that for the black community.’ We’re so deluded when we talk about race. We saw Civil Rights as a fait accomplit.
You said you’re not explicitly anti-capitalist. Can you envision a version of American capitalism that is not colored by unequal treatment of nonwhite people?
We’ve lost the meaning of capitalism. When I say “capitalism,” I just mean market pricing. When Adam Smith talks about capitalism, what he means is there is no artificial exclusions. Even Karl Marx says money should not discriminate based on race or who your dad is. Capitalism in its pure form doesn’t discriminate. I don’t think we’ve ever had true, full democracy or robust capitalism in the nondiscriminatory context. I don’t think we need to replace the system. We just need to stop lying about it. We’ve been deluding ourselves into thinking that we’ve always had free-market capitalism, or that we’ve ever had free-market capitalism. We were excluding wide swaths of the population. That was the state’s hand, not the invisible hand of the market.
I know your book is about thinking about these things on a structural level, but what can a white, middle-class person like myself do to start shifting the status quo?
What I think that we can do is understand the economic reality of racism plus capitalism equaling wealth inequality. And I think once we understand it, I think then we are well-prepared to talk about it in the right way. My response to everything is: read, read history, and then act. What I’m proposing requires a big shift in thinking. And I hope that my book offers at least a first step here. Here’s a way to think about this differently, and here’s a way to dispel some myths so we don’t keep making the same mistakes.
You can purchase The Color of Money: Black Banks and the Racial Wealth Gap here.