The Color of Money

by Mehrsa Baradaran

  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. 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 segregation and to build an independent community. If Du Bois had sought to tear down the walls of segregation and Washington had wanted to build a respectable community within the walls and wait for the white community to take them down eventually, Garvey wanted to build the walls even higher and establish guards on top lest the whites try to exert any control within the black center.

  Blacks, whom Garvey called “a mighty race," would never be accepted by white America, so they were better off developing an independent nation. This meant either going “back to Africa" or building a sovereign nation in America from reparations he demanded as recompense for slavery. Garvey, a Jamaican immigrant, likened the black ghetto to a domestic colony. This framing resonated with blacks living in densely segregated northern ghettos. The proper response to colonialization was to demand self-determination. “Where is the black man’s government?" demanded Garvey. “Where is his president, his country, and his ambassadors, his army, his navy, and his men of big affairs? I could not find them, and I declared, ‘I will help make them!’ "85 He was called “the Black Moses," and his movement attracted millions of “Gar-veyites" out of a nucleus of acolytes in Harlem.

  The language and insignia of his movement—military apparel— made him the most incendiary of the early leaders. He founded the Universal Negro Improvement Association (UNIA) in 1914 as a step toward establishing “a country and absolute government of their own."86 In August 1920, the UNIA had four million members and held an international convention at Madison Square Garden before a crowd of 25,000 people. Ironically, Garvey’s commitment to absolute segregation and rejection of any help from whites aligned him with staunch white supremacists. He even met with the Grand Wizard of the Ku Klux Klan to oppose integration.87 The meeting infuriated other black leaders and drew harsh criticism from black labor organizer and fellow Harlemite A. Philip Randolph, who launched a “Marcus must go” campaign. Du Bois called Garvey “the most dangerous enemy of the Negro race in America.”88 Garvey, in turn, condemned Du Bois for acting like an agent for the white elite.

  Although Garvey irritated prominent black leaders, his economic road map bore a striking resemblance to Washington’s own rhetoric—Garvey was inspired by Washington’s philosophy, and the two had corresponded and intended to meet before Garvey immigrated to America, but Washington died before they could meet. Garvey enthusiastically embraced capitalism and preached a gospel of success that included self-mastery, hard work, and selfsufficiency, all of which he promised would result in black wealth and power. He echoed Andrew Carnegie when he admonished black Harlem: “Be not deceived, wealth is strength, wealth is power, wealth is influence, wealth is justice, is liberty, is real human rights.”89 Blacks needed to own “more stores, more banks, and bigger enterprises,” said Garvey. So long as blacks had “no banks of our own,” they could not survive and prosper as a race.90

  Garvey even began his own business empire, including a grocery store chain, restaurants, and laundries in Harlem in 1919. He incorporated the Negro Factories Corporation to manage a variety of subsidiary businesses—all of which relied on de facto segregation. Garvey’s Harlem newspaper, The Negro World, published the first voices of the Harlem Renaissance. His most ambitious venture was a shipping company, the Black Star Line, built to enable trade and commerce between the Caribbean, Central and South America, and the United States. The Black Star Line faltered and then failed. Garvey himself was arrested for mail fraud and subsequently deported to Jamaica in 1927.

  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.91

  Black nationalism was a distinctly political philosophy and a direct result of racism and segregation. It was in the heavily concentrated ghettos of the North that such a response was most appealing. The ghetto was predominantly black, and its business establishments were all white-owned. It felt like exploitation akin to colonization. The black nationalist solution was to create a parallel economy with rival black institutions in the ghetto. The end result, however, was not just the black institutions but complete autonomy—not Washington’s “social separation," but a revolutionary political break from the American polity. This would have required military violence and would certainly have failed, which is likely the reason the nationalists focused on creating economic institutions first. But the premise was that ownership of black institutions meant control of the black ghetto economy.

  Black bankers were not political nationalists, but they were operating under the same foundational principle that black banks would lead to black economic power and independence. Richard R. Wright Sr., founder of the National Negro Bankers Association (NNBA), articulated the goal of black banking. Wright believed that black banking would provide “a tangible start toward real financial emancipation."92 “[M]ost of the Negroes’ money is not now organized for the Negro, but actually organized against us. Millions of dollars that colored people have put in banks (probably 12 million in this city alone) are used to build up businesses for people who discriminate against Negroes. Do you think it’s about time to help organize the finances of our people?"93 Wright was born a slave in Georgia and worked to help the family survive after slavery. He told a story of giving his paycheck to his mother one day and being struck when she responded, “I’m going to take this money and put it in the bank and live off the interest." Her words surprised her son and the message stayed with him. When he walked past the bank, he told the banker, “I’m going to have money in your bank."94 Wright eventually became a college president, and in 1921, at the age of sixty-seven, he founded the Philadelphia’s Citizens and Southern Bank and Trust Company.

  He founded the NNBA in 1927 and urged all prominent black leaders to create their own banks. “We must unite all the Negro banks in the country," said Wright, “to restore confidence in our business. No bank can stand alone."95 The organization, according to its own history, was “born in hostile times."96 The mission of the league was:

  to promote the general welfare, and the usefulness of banks and banking institutions, and to secure uniformity of action, together with the practical benefits to be derived from personal acquaintance and from the discussion of subjects of importance to the banking and commercial interests of the country, and especially in order to secure the proper consideration of questions regarding the financial and commercial usages, [and of] customs and laws which [affect the banking interest of the country.97

  In 1927, the NNBA convened in Durham, and Mechanics and Farmers President C. C. Spaulding delivered the keynote address to the group. He pressed a message he would sound many times, urging black bankers to “pull together" and cooperate in order to survive. Between 1927 and the onset of the Great Depression, the most pressing topics during meetings were cooperation a
mong black banks, eliciting the support of the black community, countering discrimination by whites, and overcoming negative stereotypes. To help address the latter point, the NNBA invited the black press to their 1927 meeting and asked them for assistance in portraying a positive image of the industry to the public.98

  The bankers invited editors from the Pittsburgh Courier, Norfolk Journal and Guide, and the Philadelphia Tribune, and asked for their help convincing an often reluctant black population that black banks were just as trustworthy as white ones. Wright complained about the unequal treatment black banks received from their newspapers. “The news of a single failure of a Negro bank goes about like wildfire," he complained. “Everyone knows it and everyone talks about it. The announcement of a Negro bank failure forms glaring headlines in red letters across the pages of every Negro newspaper." Wright implored his colleagues to “change this by making our bank successes interesting news."99

  If the association’s goal was to mobilize black money into black banks, they needed the black community to trust banks—in other words, trust that they would not fail—for what banks were asking their community was no small favor. They were asking blacks to entrust black bankers with their hard-earned savings in the days before deposit insurance, when a bank failure meant that the deposits were gone. Bankers had to convince their customers that they were honest, smart, and prudent, but the pervasive racism of the era worked to demonstrate just the opposite. Many black bankers and industry observers noted that black banks were weakened by perceived racial inferiority even in their own communities. As one white banker observed, “[As to] practically every Negro bank in the country: when it opens its doors for business, only a comparatively small number of people deal with it.”100 Banking was impossible without this confidence.101 But the bankers knew that if the population trusted them with their savings, they could be of service to their customers by providing them with loans that no other banks were giving them. Trust would beget stability, which would beget sound lending, which would beget more trust. Black bankers wanted to spark this virtuous circle. This is why Wright and the other bankers pleaded with the black press to help “to dignify our banking, to organize our banks for bigger and better business and for mutual protection.”102

  The press obliged. In 1927, the Norfolk Journal and Guide wrote, “If Negro banks, selected with due regard for safety and service, were made the depositories of one half of [the black community’s] money, its circulation through the arteries of Negro trade and commerce would add wonderful strength to our economic structure.”103 The editor of the Washington Bee claimed that the black banking industry meant “more to the present and future of the Negro race in America than possibly all of the other agencies concerned with the progress and welfare of our group combined.” Pointing to the banking industry as the ship captain of black economic progress, he called on the entire black population to amass their money and support these institutions:

  With most of our business enterprises just emerging from their swaddling clothes, to rival and battle against long established and experienced competition; with the enterprising home-owners and home builders being imperiled by lack of capital, impossibility of securing or renewing loans; . . . with industrial and economic barriers being erected against the Negro every day in all parts of the country; with the facts of his forced isolation from other groups and the realization that he must work out his own problems and overcome and conquer his hazards himself, the Negro needs a strong, trained arm at the wheel to pilot him safely into the port of his dreams.104

  To help with the public relations challenge, the NNBA kicked off Negro Bankers Week on February 10, 1929, with scheduled mass meetings and education campaigns. The League called on President Coolidge to support thrift among blacks as part of his ongoing Thrift Week celebrations.105 While Coolidge did not offer any specific support for black banks, he did create the first government agency to support black businesses, the Commerce Department’s Division of Negro Affairs, in 1927. James A. “Billboard" Jackson was its first director. Jackson earned his nickname when he became the first black editor of Billboard magazine in 1920, and in his position at the Commerce Department his duties were to collect and disseminate information about black businesses. Besides Jackson’s periodic reports on the state of black businesses, however, the agency did little else.106

  The NNBA was gearing up just as the Great Depression decimated the industry. In fact, the 1928 meeting had been scheduled for Savannah, Georgia, but the two black-owned banks in the city—the Wage Earners Savings Bank and the Savannah Savings Bank—closed before the meeting could take place. The group reconvened in Louisville, Kentucky. The focus of the 1929 meeting was making it through the crisis by cooperation, and a few banks were proving just that principle. When Citizens Trust, the pillar of the Atlanta community, was suffering a liquidity shortage, Mechanics and Farmers’ C. C. Spaulding gave the bank a loan that enabled its survival.107 Citizens Trust reopened triumphantly after the bank holiday of March 6, 1933, having paid out every claim.108 Maggie Walker also arranged a merger that saved her bank along with two others.

  Most were not so lucky. The Great Depression brought down both the titans of black finance and the budding shoots of smaller black banks. After the Dust Bowl trauma settled, only eight black-owned banks survived: Citizens and Southern Bank and Trust Company of Philadelphia (Wright’s bank), Citizens Savings Bank and Trust Company of Nashville, Citizens Trust Company of Atlanta, Consolidated Bank and Trust Company of Richmond (Maggie Walker’s bank), Crown Savings Bank of Newport News, Danville ( Virginia) Savings Bank and Trust Company, Mechanics and Farmers Bank of Durham, and Charleston (South Carolina) Mutual and Savings Bank. These surviving banks were affiliated with either another commercial entity, a church, or a fraternal organization.109

  Black commercial banks in the North failed due to runs and heavy loan losses. As the saying goes, when Wall Street gets a cold, Harlem gets pneumonia. Black ghetto properties quickly lost value, creating severe loan losses for black banks holding these loans.110 When the NNBA met in 1930, Maggie Walker was the featured speaker, and she tried to restore confidence in the industry. She reminded the press and the public that bank failures were universal and that “a thousand times more Negro money is lost year after year in other banks than is lost in Negro banks."111

  This was true, but the trauma-inducing insolvency of black banks during the Great Depression could not mask their more fundamental weakness. After having visited “practically every large city where a Negro bank is operating," studying their financial statements, and speaking with management, prominent banker Arnett Lindsay concluded in 1929, months before the Great Depression, “that there are not more than half a dozen banks owned and operated by Negroes, which are actually making even ordinary bank profits by specializing in commercial loans." He added that although these banks served “a useful purpose in promoting thrift and homeownership, “this is not commercial banking in the true sense of the word."112 The truth was that even before the Great Depression, these banks could not have grown wealth for the black community insofar as they operated in a segregated economy.

  In the parlance of the later battles for school integration, not only was it impossible for black banking to be separate and equal, they could not even be separate and profitable. 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.

  The first source of weakness was the black banks’ liabilities. When a customer deposits money into a bank, she creates a loan to the bank, but a loan that the customer can demand back at any time— this is why it is called a “demand deposit.” For a bank customer or a business, a deposit is an asset; but for a bank, customer deposits are liabilities. Banks, therefore, fund their business through liabilities that can best be described as short-term, unpredictable loans. C
ommercial banks rely on the probability that not all of their customers will demand their money at one time, and therefore they do not hold these deposits at the bank—they only hold a fraction at any one time. This is called “fractional reserve banking,” which means banks hold a small amount at the bank called “reserves” and lend out the rest. Banks make money on the spread between what they pay to their depositors and how much they charge on their loans. Bank profits are made by taking these deposits and turning them into loans— called maturity transformation.

  This process is risky. If bank customers suddenly demand more money than the bank has in reserve, there is trouble for the bank— especially before the creation of federal deposit insurance. Customers knew that that the bank could not pay all depositors at once, so they would “run” the bank—sometimes literally running to the bank—to demand their deposits before there was nothing left to claim. Fractional reserve banking meant that there were only enough reserves to pay out a fraction of the depositors—the “runners” needed to make sure they got to the bank first. A run usually meant certain failure unless the bank could find enough liquidity (cash) to satisfy enough depositors so that they would leave their deposits in the bank.

  Black bank deposits differed from those in white banks—they were smaller and were more frequently withdrawn, which made them more risky.113 Most black depositors had no stores of wealth to invest in the bank and were just depositing money from their wages, keeping small amounts to live on. They put their sums into black banks for safekeeping, but also looked to those deposits as rainy-day funds during frequent stormy weather. Deposits so small and volatile are a costly liability for banks. 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.114