The Untold History of Black Banking in America
Professor Mehrsa Baradaran is the author of The Color of Money: Black Banks and the Racial Wealth Gap, a history of black-owned and black-oriented banks in the United States. It’s not a happy story.
Baradaran’s narrative spans the post-Civil War Reconstruction years to the present day and in it she tracks the government’s basic failure to equip former slaves with trustworthy wealth-building institutions in the 1800s, the disastrous effect poverty and racist economic segregation had on black banks’ ability to serve their community, the cynical use of “black capitalism” rhetoric by mainstream politicians (particularly Richard Nixon) to diffuse demands for meaningful economic justice reforms, and the impossible situation many black financial institutions found themselves in as a result of the Great Recession.
Throughout, Baradaran doesn’t shy away from tough questions about whether economic success is meaningful without corresponding political power, whether banks created only to serve black communities could ever succeed, and what white America’s current responsibility is to an entrenched and growing racial wealth gap.
As a student of history and finance myself, I was fascinated by her book (read my review here), which exposed a side of capitalism and finance about which I know very little. Baradaran and I had a great discussion recently.
Interview has been condensed and edited for clarity.
Make Change: I want to have you explain some of the history of the Freedman's Savings Bank, which I had never heard of, and which is maybe the most awful story you tell. But I suspect, unless you were a scholar of black banking, most people don't know this story.
Mehrsa Baradaran: It's surprising that we don't know this story…
The Freedmen's Bureau was created by [President Abraham] Lincoln. It is meant to help freed slaves transition into capitalism. You've gone from being capital to becoming capitalists. So you have to get wages for your employment and transition into the populous. Everything, basically, that is meant to alleviate the transition ends up getting vetoed by [Andrew] Johnson after President Lincoln is assassinated.
So 40 acres and a mule, labor protections against exploitation, all of that stuff is vetoed. The Freedmen's Bureau ends up becoming this failed effort. And the reason it's a failed effort is because the South sort of violently overthrew their efforts.
The one thing that survives Johnson's veto is this Freeman's Savings Bank. The thinking here is ‘we're not going to give you land because that becomes politically impossible. But we're going to give you a savings account, and you're going to save up your wages and buy land yourself.’
This is not a commercial bank, so there won't be any loans—which defeats the purpose of banking because the way banks create wealth is to give loans.
It's basically a glorified piggy bank. It's created by Congress at a time when we barely have a national banking system. But it is not linked with the government. It looks like it is, because on the notes of the bank it's got Abraham Lincoln's face. It's got the American flag on the building in Washington, D.C. It is advertised as an appendage of the Treasury. But it is not.
It's really dangerous when it looks like it's full faith and credit [linked with the federal government] but it's actually not. That is the worst combination because you've got private gains and public losses. So, this is essentially this bank. You have a private president. This is Henry Cooke, and he is brothers with Jay Cooke, and Jay Cooke is a notorious railroad speculator. Consider railroad bonds as the mortgage-backed securities, the derivatives market of the day. Huge upside, huge risk.
What happens is Henry Cooke says is “I've got millions of dollars ($1.5 billion in today's money) and it's just sitting here. Why don't I take this money and invest it in the railroad speculative market?” Although he’s just supposed to safeguard it, like a piggy bank.
MC: I think you said in your book he had early success. His first investment worked.
M: Jay Cooke's first investment did work.
MC: It reminds me of the aphorism that the worst thing that could happen to an investor is to have early success.
M: Right, but that's speculative markets in general. You know what you're getting into, and sometimes you win, sometimes you lose. But the problem is, these depositors did not know what they were getting into. These freed slaves thought their deposits were going into like a locked safety deposit box.
But what was happening was Henry Cooke just takes that money, puts it in Jay Cooke's venture, and the whole thing goes bust. And the freed slaves lose half of their deposits. It just goes poof, gone.
MC: All this is prior to 1933 and FDIC reform.
MC: You said they recovered half?
M: They recovered about 40 percent of their deposits. But as W.E.B. Du Bois and Frederick Douglass say, this is a huge blow to the community because not only had they trusted the federal government, but these wages did not come easy to these people. Think about what it was like to make a living in the post-Reconstruction South. This was before the Great Migration largely. These are sharecroppers, people who are barely scraping by. They are working really hard to get these wages into this bank, and then it just goes away.
You have black intellectuals, black bankers, black businessmen for 100 years after the Freedman's Bank talk about its failure, and the distrust and the bitterness it put in the community that reverberated through time. But this was celebrated as the one success of Reconstruction. And it is an utter failure. Not only does it take away all of this money, but it also creates a sense of distrust in institutions that is not conducive to growing capital. Taking it to today, looking at the unbanked or underbanked: 60 percent of blacks in the South don't have a bank account.
MC: Still today?
M: It's shocking that it's a current number. I don't know if you can draw a direct line to the Freedman's Bank, but a lot of black Southerners and those across the nation will say in surveys, ‘I don't trust banks. These institutions are not for us. We cannot depend on white institutions. We're going to create our own.’ And you do see a blossoming of these [black-owned] institutions afterwards as well.
MC: Which gets into the theme that comes back over and over again throughout your book, this tension between integration versus separation. “We're going to create our own banks,” has in theory its own strengths and reasons behind it.
On the other hand, as you point out throughout the book, the separation itself brings with it a series of problems, like not being sufficiently interconnected to or supported by the majority banking system. When push comes to shove when a crisis hits, who gets saved and who doesn't get saved is one of the things you highlight.
But, also if you don't have the diversity of the white middleclass depositors as well as the ability to lend to that mortgage market, you end up … having costlier deposits and less profitability. The separation creates a lot of problems….
There’s an anecdote you told towards the end of your book about OneUnited Bank, which is a black-owned bank, formed in 1968, and its PR problem with the Charles Street AME Church. I think it explains a lot of [this].
M: What happens is that the Charles Street AME Church is one of the oldest black churches in the country, it has a history of being central to the abolitionist movement, the Civil Rights movement, and it needs a loan to create a new rec center/community center. Boston's best and only black-owned bank is the OneUnited Bank. It started as Unity Bank in 1968 as a Civil Rights-era way for the community to organize, to self-finance. Now it's become OneUnited.
OneUnited gives the church a loan of, I think, $7 million, and then some more. It ends up becoming $10 or $12 million. And after the financial crisis [that started in 2007], both the bank and the church struggle. As I demonstrate in the book, because of higher levels of poverty, black communities are hit much harder during financial crises. This one was no exception. The black community lost 50 percent of its wealth. The black banking industry was decimated.
So, when OneUnited Bank needs funds, like a ton of banks, they were saved during the fiscal crisis with TARP funds. Then the church fails. But OneUnited has these TARP funds to pay back, and so OneUnited decides to foreclose on the Charles Street AME Church. They have this foreclosure auction, sort of on the church steps, and it becomes this huge fiasco PR-wise, because between a foreclosing bank and a black church the community is going to side with the church.
A ton of black pastors from around the country, and press, come in defense of the church to say ‘how dare you foreclose on this church. And ironically, you're this black bank. Shouldn't you understand the importance of this black institution? Plus the fact that you have gotten these TARP funds.’ One of the pastors talks about the parable of the ungrateful servant who gets his debts wiped out from the Lord, and then turns around and makes his debtor pay. And so they're saying this bank is essentially the ungrateful servant here.
But OneUnited has to pay back its TARP funds. It's having a huge struggle to be solvent. And the irony isn't that they foreclosed. The irony is that they were the only bank that was basically willing to give this black church this loan. And that's across the board the case, where these black banks are giving a lot more loans to black churches. They're much more willing to modify the loan and work with the churches and save them in their times of trouble.
So you know, you're damned if you do, damned if you don't as a black bank. You have to lend to these institutions because there's pressure from the community. But you also have to serve your bottom line because you're a bank….
And black bankers really struggle to remain profitable because of the forces of segregation and concentrated poverty, and all of the things that these banks are essentially created to fight become the very seeds of the banks’ destruction. They become victims of that poverty that they're trying to alleviate.
MC: We don't generally think of banks as victims, but you make a strong case. OneUnited Bank is in a moment of incredible weakness having taken TARP funds in an incredibly politically charged moment. They're doing what banks do, which is when the loan ultimately can't be paid, and the bank can't come to an agreement with the borrower, then they're going to do what banks have to do. And then that black bank looks like the exploiter.
M: That's right. This theme of exploitation, in my first book [How the Other Half Banks] I talk about payday loans, check cashers, and this kind of exploitation, where they're concentrated in poor communities. Black banks also suffer this charge, that you're exploiting because you're charging more for these loans. You're supposed to be helping but because of this high interest, and because you are profiting from these loans, you're an exploiter. And it's the same with payday lenders. There's the other side, maybe the libertarian or right-wing view that this is the cost of lending. If you have high risks, you have to charge high interest… I agree with both sides. It is too much to pay. It's unfair in our society that the poor pay more for these services. It's unfair that black communities have to pay more for these services. But it's also not exploitation. It can be the cost of lending because you have concentrated risk and concentrated poverty that creates these high-interest loans.
In the finance world, you talk about risk diversity and getting a broad pool of customers. Segregation leads to concentrated risk by race. So you have these communities that are pockets of poverty, which are also pockets of risk. And so these banks, these payday lenders, these other "exploitative" institutions are not actually exploitative. They're just charging higher rates to meet this higher risk.
But I think the reason why that [risk] was created was because of racist government policy, and there needs to be a public response to match that. There are market forces at play, but market forces didn't create the systems. What created the systems was anti-market, sort of government forces that pooled people by race…
MC: You did get into something [in your book] you essentially call a myth, at least in the hands of President Richard Nixon, which is black capitalism. You meditate on black capitalism as it was used in his administration…as a decoy to defang what was going on in terms of black power, and to make the whites comfortable that we're “doing something.” We're really doing very little.
M: This is the most interesting part of the book to me. If you're going to pick one chapter, chapter 6 is the part where I did the most work. It's stuff that I didn't know. I think it's not well known at all.
I think we need to write volumes more explaining what happens to America and to civil rights specifically, between 1965 and 1969 a lot happens [politically]. …What happens with the civil rights era is everyone—all the principals of the civil rights era, Lyndon B. Johnson, Martin Luther King Jr., Robert Kennedy—all of these people who want forward motion, understand that you can't just get these laws on the books. You also have to change past injustices. You've created these ghettos. You've created concentrated poverty. You've got this huge wealth gap.
Those things have to be addressed proactively through affirmative action. That's the origins of that term, affirmative policy to change a history of racist policy, racist state action. There is this movement going on along these fronts, but there's also this white backlash, specifically in the South but also across the country.
What Nixon does is he uses law and order as this racial dog whistle. But he also uses black capitalism. This idea is that it's taking the fangs out of Black Power but also the civil rights movement that King was starting, this poor peoples' movement. This idea is that we've just gone the first step in civil rights. Now we've got to address economic injustices, and we've got to come up with these programs.
Richard Nixon's response to all this is absolutely no economic aid, absolutely no integration, no reparations, all of these things that these groups are putting forward. His response is we're going to do black capitalism. What black capitalism means is we're going to put some deposits in black banks. We're going to have these black businesses. And it's all going to be voluntary. It's going to cost [the government] nothing. It's essentially a decoy.
It takes the rhetoric of the Black Power Movement which was saying we want black ownership. But what they meant is political ownership and capital and a real stake in capitalism. Nixon subverts it and says, ‘you're going to own businesses, and you're going to own this problem of poverty,’ and this pivot point is crucial, and I think understudied and under-discussed.
When Nixon starts black capitalism, it's so politically successful, it's so vague—how can you be opposed to black capitalism. Are you racist or are you opposed to capitalism? (This is during the tail end of the Cold War.)
So it seems very promising. This is the tactic that is used by every president after Nixon, but it doesn't get called black capitalism anymore. Clinton famously change it to community capitalism or community economic development. Ghettos become enterprise zones.
And it's ongoing. President Trump's [recently] deemed October 22 the start of Minority Enterprise Business Week. This is straight from the Nixon playbook. If you listen to Trump's speech, he talks about black business as being the lifeblood of these institutions. This is the least controversial thing that this president has done. Obama did it. Clinton did it. Reagan did it. And this is all from Nixon's playbook.
I think this is something we've missed. What it did was it took the sting out of every other real meaningful demand for economic justice. Now we have this myth of color blindness and black capitalism, but it's doing nothing.
This is where I want to pull the veil off of this rhetoric that we've all become so comfortable with.
Nixon talks about integration, busing, as too much state intervention. The South wants to maintain white supremacy, and they can't say white supremacy anymore. They can't say the N word, as Lee Atwater says. So they start saying tax cuts. And they start opposing these civil rights laws using this free-market ideology, using this rhetoric of capitalism. They're saying we're not going to do anything for civil rights, except deregulate and the market will take care of it…
This is where black capitalism is the ultimate lie. When black people say finally, ‘hey, we've got these civil rights laws, now can we participate in capitalism?’ Richard Nixon said, ‘you get nothing. Good luck with your free market.’ Meanwhile, whites have been getting these subsidized mortgages and all of these state benefits up until that era. And now it's like, none for you, just capitalism of the hardcore variety. .. …What we've tried to do is pretend you can have separate economic institutions without separate political institutions. The myth of black capitalism is if you do not have political power you can get economic power and sort of work your way into political power just by separating institutions.
MC: I feel like your book definitively says that's not what you've observed. That's not what you've been able to document.
M: Right. This goes back to Booker T. Washington who says if the black community can gain enough wealth, then it will gain respect and political power from the white community.
He has all these very hopeful but naive predictions. He says white men whose mortgages are owned by a black man—a black bank owns your mortgage—that white man is going to respect you. If you're a black man that has a house, the white people are going to respect you.
Actually historically, what happens when a black person gets a house that's bigger than a white person’s is they [whites] will actually burn it down. This is Tulsa [site of a massive racially-motivated riot in 1921 that decimated the wealthiest black neighborhood in the United States]. When black institutions have been more powerful than white institutions, instead of respect what they've garnered from the white society was resentment and some violence and backlash.
You have to get political power to protect your assets. The idea is, if whites control all the political levers, if all you have is economic power, the white majority is naturally going to use their political power to deprive you or not protect your assets. This is the history of black property ownership and it is not a pleasant history.
Obviously, that's not the case today for the large part, but it has created a bifurcated property ownership regime in this country, where whites owned way more property than blacks and those things self-perpetuate without any violence needed today….
After hundreds of years of state discrimination against blacks that was explicit, that was legal, we've never had an era where we've reversed that. Now if you say let's at least have some slight thumb on the scale toward blacks, that's [perceived by some as] anti-capitalist, that's anti-free market…
I think sometimes when people talk about reparations or black activism they talk about slavery. But you don't need to go back to slavery to draw a line to modern black poverty. You can just go to the New Deal. You can go to Federal Housing Authority loans. You can go to the creation of the ghetto and the perpetuation of that. And that's relatively recent, and its effects certainly are ongoing.
MC: I don't have any kind of way of suggesting a remedy for these things except maybe we have to read more history. I'm really glad to have read your history. I learned a ton.
M: Thank you.