The Color of Money

by Mehrsa Baradaran

  The Depression only ratcheted up the hardships faced by the black community because Jim Crow segregation concentrated and intensified poverty.141 Starvation and disease were rampant, and infant mortality and premature death were much higher in the black community.142 In 1935, W. E. B. Du Bois said, “No more critical situation ever faced the Negroes of America than that of today.”143 Gunnar Myrdal called the economic situation of blacks “pathological” in his momentous 1944 study of the state of the black population, The American Dilemma. He concluded that, “except for a small minority enjoying upper or middle class status, the masses of American Negroes, in the rural South and in the segregated slum quarters in Southern and Northern cities, are destitute. They own little property, even their household goods are mostly inadequate and dilapidated. Their incomes are not only low but irregular. They thus live from day to day and have scant security of the future.” Myrdal concluded that America’s professed creed of equality and freedom did not match the unjust and immoral treatment of its black citizens—this was the American Dilemma.144

  The initial optimism of the Great Migration and the promise of the “kinder mistress” of the North went unfulfilled as the black migrants faced the hardening walls of segregation. Meanwhile, many blacks in the South lost their land, which led to more migrants flooding the northern ghettos. Racial hostility in the South had not abated. Black children were being denied education in the South and black men were still being lynched without even the fiction of legal process. It was clear that Booker T. Washington’s hope that whites would come to respect blacks after seeing their industriousness was only a pipe dream. Du Bois quipped, “The colored people of America are coming to face the fact quite calmly that most white Americans do not like them.”145

  Having lost hope that whites would eventually yield to black integration, Du Bois doubled down on black business, arguing again that the only path forward for blacks was to build a separate economy. Du Bois warned blacks that to “await the salvation of a white God is idiotic.”146 This was no time for black leaders to retreat into a resigned despair over their lack of economic progress. He urged the black community to deploy their “political power, their power as consumers, and their brainpower” to bolster their segregated communities without waiting for white help. He promised that by “voluntary and increased segregation” and “by careful autonomy and planned economic organization,” blacks could build a strong com-munity.147 He sounded a lot like his foe Washington with this advice, but lest one overemphasize the similarities, Du Bois displayed a characteristic distrust of black capitalists and the profit motive. In a 1942 newspaper column, he described black entrepreneurs as a group without ethics or concern for their people. “What American Negro businessmen have got to remember is that a new economic morality is facing the world, and the emancipation from unfair private profit is going to be as great a crusade in the future as emancipation from Negro slavery was in the past."148 While he still championed black business, he urged black businessmen to seek the economic interests of the entire race instead of their own profits.

  Not only were black bankers stuck in a perpetual money pit, but they were often cast as the villains when things went wrong. That their loans went primarily to the black middle class and were out of reach of the majority of blacks sometimes made black banks the targets of criticism.149 Abram Harris was one of these critics. Harris was the first nationally renowned black economist and the first to do a comprehensive study of black banks, called The Negro as Capitalist (1936). Harris headed the Howard economics department from 1936 to 1945, when he became the first black economist at the University of Chicago. He was recruited there by Frank Knight, a founder of the famed Chicago School of Economics who fostered the likes of Milton Friedman and George Stigler. Harris had held Marxist sympathies while at Howard, but with his move to Chicago, his economic philosophy became more traditional. Harris was close friends with sociologist E. Franklin Frazier and was one of the handful of black “insiders" who helped shape Gunnar Myrdal’s formative study.

  Harris claimed that the bankers’ success was made possible by the “skillful exploitation of the Negro masses."150 His argument was that because black banks were run on the deposit base of the masses of low-income savers and their loans were real estate loans to black elites, they were enriching the elite and themselves on the backs of the poor. Put another way, the losses of these banks were primarily borne by the small depositors and the gains rarely benefited them, particularly because bank loans did not address the problem of the “appalling housing needs" of lower-class black citizens.151 However, Harris’s criticism overstated the gains made by middle-class blacks and black banks. The poor certainly lost their hard-earned savings, but the bankers lost their banks as well. Apart from his claims of exploitation, Harris’s study was also the first to challenge the notion that a segregated black banking system could work. As a trained economist and without the burden of being a black political leader, Harris was able to confront and challenge one of the central tenets of black self-help—that black banks were a good idea. Harris had understood the trap of segregated banking and had tried to explain the flawed assumptions underlying the enterprise.

  Carter Woodson rejected Harris’s blasphemy. Woodson, a prominent scholar and historian, believed that community self-help in the form of supporting black business and black banking was the only path forward. In The Mis-Education of the Negro, Woodson criticized the skeptics of black banking and business, explaining that “the ‘highly educated’ Negroes who have studied economics at Harvard, Yale, Columbia, and Chicago will say that the Negro cannot succeed in business because their professors who have never had a moment’s experience in this sphere have written accordingly."152 According to Woodson, those who argued that blacks could not operate a separate financial system had been misinformed by white hegemony and “miseducated" to hate themselves.153 He did not name Harris specifically, but he hardly had to because Harris was alone among the “highly educated" critics of black banks.

  Woodson had his own explanation for why black banks had failed. “Negro banks, as a rule, have failed because the people, taught that their own pioneers in business cannot function in this sphere, withdrew their deposits. An individual cannot live after you extract the blood from his veins. The strongest bank in the United States will last only so long as the people will have sufficient confidence in it to keep their money there. In fact, confidence of the people is worth more than money."154 Blacks had avoided black enterprise because they believed whites would serve them better—a complaint lodged by many other black leaders and bankers.155 He recounted a few stories about blacks frequenting a white restaurant that would only serve them through the back door, when they could have received much better service by several black restaurants in the same area.156 To Woodson, black businessmen had “made mistakes," but “the weak link in the chain is that they are not properly supported and do not always grow strong enough to pass through a crisis."

  Commerce Department official Billboard Jackson also blamed the black community for their lack of support of their banks. After a survey of the black banking and business landscape, Jackson noted with dismay that the average deposit in black banks was only $70, compared with $365 in white banks, and said “in the larger cities, especially, much of that larger figure is the money of the Negroes which ought to be made available for their businessmen.”157 He did not consider that perhaps smaller deposits were the norm because the black population had less money to save.

  Despite the failure of the industry and despite the only thorough economic research showing the fundamental problems with black banking, most prominent black leaders continued to urge the community to support black banks and businesses. As long as Jim Crow dominated the South and segregation the North, what choice did they have? “If the whites are to continue for some time in doing drudgery to the exclusion of Negroes, the latter must find another way out.” Woodson explained “that under the present system of capitalism the Negro
has no chance to toil upward in the economic sphere” except by building their own economy.158 Moreover, economic self-sufficiency provided a way to resist the powerlessness of living in a racist society and to maintain a glimmer of hope, or, as Du Bois explained, “a hope not hopeless but unhopeful.”159 This is not to say that black leaders were not fighting for civil or political rights—that fight had never ceased. But it had yet to yield meaningful fruit. While equality, integration, and acceptance into white society were not forthcoming, what else was there to do but rely on your own community and hope for a radical change? In fact, just such a change was coming.

  The New Deal for White America

  The New Deal changed America’s legal and political landscape in myriad ways, but perhaps nothing changed more radically than the nation’s banking and credit markets. Unfortunately, most of the significant New Deal policies were administered in such a way as to maintain the South’s racial hierarchy, which meant an almost categorical exclusion of blacks from government subsidies. 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. Though southern legislators were a minority, their unified bloc gave them outsized influence in their own party and allowed them to hold most of the senior committee positions in Congress—nothing could get done without the blessing of the southern wing. Roosevelt had to make a difficult choice: equal treatment of the races or large-scale historic social reforms. He chose the latter, and the choice had long-lasting effects.2

  Without explicit racial exclusions, the laws were crafted in such a way as to exclude most blacks from the social welfare programs. For example, 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 tomain-tain the inferior status of black laborers in the southern economy.3 Speaking in opposition to setting a minimum for farm wages, Florida Representative James Mark Wilcox explained, “[T]here is another matter of great importance in the South and that is the problem of

  our Negro labor. There has always been a difference in the wage scale of white and colored labor . . . [fixing wages] might work on some sections of the United States but those of us who know the true situation know that it just will not work in the South. You cannot put the Negro and the white man on the same basis and get away with it.”4 Most often, southern senators did not even have to speak against the legislation. They used their seniority positions on Senate committees to make sure bills were drafted in such a way as to exclude blacks; otherwise, a bill would never reach the floor for a vote.5 According to the NAACP, the legislation aimed at protecting workers against hostile labor conditions was “like a sieve with holes just big enough for the majority of Negroes to fall through.”6

  Where blacks could not be left out, the southern bloc ensured that the laws would be administered locally, where officials would allocate benefits in accordance with the racial order. One administrator of the Federal Emergency Relief Administration (FERA) said that “he had to tailor relief . . . to accommodate the demands of southern plantation owners for cheap farm labor by curtailing [the level of] relief payments to agricultural laborers and sharecrop-pers.”7 This was done across the New Deal programs to exclude the large majority of blacks from relief measures and the newly created social safety net, a result characterized as “a form of policy apartheid.”8

  One pivotal outcome of these labor-protecting exclusions, and specifically regarding the right to collective action, was that they left black workers powerless to organize and demand better working conditions. The result not only hurt black workers; it gave white workers a leg up as the union movement achieved monumental improvements in workers’ rights for their members. Through collective action, white workers gained a voice and a seat at the bargaining table, while black workers were effectively silenced.

  These exclusions drove a wedge between black and white working classes as black workers became a point of contention between labor and employers. Often, when a union and an employer were in a labor dispute, black workers were recruited to cross the picket line to fill the whites’ places. Black workers thus came to represent strikebreakers who posed a threat to union negotiations, which resulted in acts of open hostility and violence by union members toward the black workers. As a measure of goodwill to boost labor relations, it was customary for companies to charter trains to ship blacks back south. As more blacks left the boll weevil-infested cotton fields of the South for the promise of work in northern industry, they faced factories infested with racial animosity. Where they could have joined together and drawn more strength from numbers, blacks were scapegoated in industrial labor struggles because they were left out of union membership.9

  Even as the South’s grip on Congress ensured that the New Deal would be passed along racial lines, southern progressivism and populism assured that the New Deal was a rejection of unrestrained capital markets. The New Deal was a radically progressive reordering of American business regulation. Its centrally controlled economic planning, Keynesian stimulus programs, and foundational social welfare infrastructure made it the closest Americans came to democratic socialism.10 That too was led by the South. The South had long fought the northern “money trusts" and advocated more government intervention in breaking up monopolies, loosening credit, and regulating financial markets. The New Deal achieved all of these aims by restructuring financial markets to achieve specific policy goals.11

  This combination of progressive banking reform and a regressive racial hierarchy meant that postwar American prosperity was propelled through a mortgage and consumer credit apparatus that was exclusionary. The modern credit system created by New Deal reforms segregated access to loans based on race. The alphabet soup of new credit and banking agencies, the Home Owners Loan Corporation (HOLC), the Federal Home Loan Banks (FHLB), the Federal National Mortgage Association (FNMA or Fannie Mae), the Federal Housing Administration (FHA), and the Federal Deposit Insurance Corporation (FDIC), were all geared toward the rapid and effective dissemination of low-cost credit to new homeowners. These agencies coupled with postwar economic growth created a robust homeowning, capital-creating, and predominantly white middle class. They also made the black ghetto a permanent feature of the twentieth century.

  This result was not inevitable. There was another route available to the Roosevelt administration, which would not have resulted in such stark inequality. During the era of big government spending programs, Roosevelt could have used public funds to build low-income housing and a much-needed infrastructure for the urban poor. He almost did just that. One of the most robust New Deal programs was the Public Works Administration (PWA), which was run by Secretary of the Interior Harold Ickes, a committed civil rights advocate and former president of the Chicago NAACP. The PWA was the federal government’s largest construction effort to date, with a $6 billion budget used to build thousands of bridges and roads that put millions of Americans to work. But the initial plan of the PWA’s housing division was to use funds to build homes and infrastructure in poverty-stricken areas, including inner-city ghettos. The motivation was not the housing per se; rather, as with many New Deal programs, the point was to provide a job-creating economic stimulus while offering a benefit to the public.

  Ickes believed that the financial stimulus should be used to address Ameri ca’s economic and social probl ems, including urban poverty. He warned that if t
he slums were not rehabilitated, they would continue to perpetuate poverty and inhibit economic recovery in America’s cities.12 No less than “the future financial stability of many of our urban centers" depended on “the prompt reclamation of their slum areas," said Ickes. By 1933, Ickes had set aside $485 million to build low-cost apartment buildings across the country. This plan was fiercely opposed by critics who said that it was not the responsibility of the federal government to deal with inner-city housing problems.13 The opposition believed that the goal of the PWA should be to get private investors on board by offering them a share of the profits. Investors were not interested in rebuilding the slums, so the plan was scuttled.14

  However, investors were interested in revamping the single-family mortgage market, so this was the route the reforms followed. Not only did this choice not help the ghetto, it would work directly against it in both predictable and unexpected ways. For example, many PWA grants in major cities like New York and Chicago were used to route roads and bridges over and through the ghetto, a decision that favored suburban car commuters, left public transportation in a state of neglect and disrepair for decades, and bifurcated neighborhoods in long-established communities.15 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 primary determinant of homeownership for the next century.

  Before banks pumped mortgage credit into America’s suburbs, the Home Owners Loan Corporation fatefully mapped out America’s racial geography. The HOLC permanently changed mortgage lending in the United States by simplifying and streamlining the home mortgage. Part of the streamlining process was the creation of standardized home appraisals. HOLC appraisers used census data and elaborate questionnaires to predict the likelihood of property appreciation in neighborhoods across the country. The HOLC then used this data to create meticulous maps giving each metropolitan region and neighborhood across the country a value. 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.