The conflict between the objectives of black bankers and civil rights leaders led socialist black intellectual E. Franklin Frazier to paint black businessmen as the villains in the cause of black progress. Frazier, a Baltimore native, was awarded Howard University’s top scholarship and received his Ph.D. in sociology from the University of Chicago in 1931. Frazier taught at Fisk University from 1929 to 1934, and then at Howard from 1934 until his death in 1962.88 In his 1957 book, Black Bourgeoisie, Frazier took aim at the striving black elites, whom he believed to have a “deep-seated inferiority complex” because they felt superior to the black masses while suffering from “the contempt of the white world.” Frazier denounced Booker T. Washington for deluding the black community with the theory that business success would lead to acceptance and respectability, which he called “a world of make believe.”89 Black leaders and the black press were creating a misplaced faith in black businesses and exaggerating their success and influence, which he said was actually irrelevant to the American economy.90 He also believed that since the propaganda campaign of the Freedmen’s Bank, the black bourgeoisie had become obsessed with black banking as a symbol of business success, and that “it was mainly in the field of banking that the new spirit of business enterprise manifested itself.”91
Frazer condemned whites who, on the one hand, promoted black business while, on the other hand, they refused to admit black businessmen into the corridors of power.92 Yet his harshest judgment was reserved for the black bankers and businessmen, who he believed were exploiting “the Negro masses . . . as ruthlessly as have whites.”93 Frazier compared black business leaders and the black bourgeoisie to the “house slaves” who he claimed benefited from the exploitation of the “field slaves.” This class division between the house slaves, the Uncle Toms, and the black bourgeois versus the field slaves, the black masses, and the exploited became a common theme picked up by Malcolm X and the Black Panthers. After World War II, there emerged a tense divide between the black elite who enjoyed a modicum of upward mobility and the masses who had been left to languish in the ghetto, but the divergence was not as clear-cut as Frazier portrayed. Black bankers were not making exorbitant profits off the backs of the black masses. In fact, they were hardly making profits at all—as they were all suffering from the same Jim Crow credit market.
Critics of black businesses often tended to inflate their success. According to the U.S. Department of Commerce, there were a total of fourteen black banks in 1951, most of which were survivors from the previous era.94 Given the obstacles to making mortgage loans, which is the mainstay of banking, it is unsurprising that only a handful of black banks were formed between 1940 and 1965.95 What is jarring, however, is the paucity of the black banking sector in the context of the broader banking landscape. This was the unparalleled heyday of American banking. Never have banks been so numerous, nor the banking sector in America so profitable and safe. For example, between 1934 and 1980, there were 23,564 new charters for credit unions.96 Total commercial bank branches grew from around 3,000 in 1935 to 40,000 in 1980. There were 11,000 S&Ls created in the 1930s, and many more were added over the years.97 This makes the anemic scale of black banking a glaring anomaly.
The black banking industry essentially lay dormant for the decades spanning from the New Deal reforms and postwar era prosperity until the civil rights era. This was a direct consequence of the exclusionary federal mortgage bounty. The golden era of American banking, especially the surge in credit union and S&L charters, was also a direct result of New Deal credit and banking reforms. Though the S&L and credit union movements were rooted in progressive and populist ideals of cooperative ownership, self-help, and grassroots community building, it was only after they were plugged into the robust government-backed credit markets that these small marginal institutions became growth industries. These banks boomed because of and only because of FHA loans. Without them, these community-based enterprises would have withered on the vine, which is where they were headed before the New Deal.98 It was so easy to run a profitable bank, thrift, or a credit union during this era that the adage was that bankers followed a 3-6-3 rule—3 percent interest on deposits, 6 percent interest on loans, and be on the golf course at 3 p.m .99
So monumental were the New Deal reforms that banking history can be divided into the Before New Deal and After New Deal eras.
Before, banking law was primarily governed state by state, and each state determined which banks would be granted charters. The New Deal banking reforms imposed federal governance, including new restrictions, rules, and chartering requirements. In return, banks got access to federal networks of deposit insurance, loan guarantees, and other buffers and protections. Most significant was federal deposit insurance, which effectively ended runs on bank deposits. FHA insurance on loans created a torrent of investor capital. Deposit insurance had the same effect on customer deposits. Confident savers entrusted their money to the banking system to be deployed in the great lending markets.
Once the federal deposit insurance scheme was established, it was impossible for a bank to operate without it. In order for a bank to be viable, it had to be sanctioned by the FDIC and had to follow a standard set of federal rules and norms. It had to hold a minimum amount of capital, avoid certain activities, and submit to routine examination by regulators. Certainly, under the state-by-state chartering regime, black banks had been denied charters as a result of discrimination, but under the new regime black banks rarely had enough capital to obtain charters. Black banks were almost categorically too weak to be granted FDIC insurance.
There were other shifts, more substantial but harder to notice, that would affect black banking. Specifically, the New Deal reforms tilted the scales toward small, community banking as opposed to large, nationwide bank conglomerates. The debate in the banking industry between large and small banks mirrored the North-South divide as it put industrial interests and agricultural interests on opposite sides. The North, home to J.P. Morgan, Chase National Bank, and Wall Street, wanted more permissive banking laws that allowed larger banks to operate across several regions. Bankers in the South and West feared that large and powerful conglomerates would attract capital from across the country, increase their market share, and drive them out of business. This was a legitimate fear and would soon become a reality, but Roosevelt sided with the South and protected small banking through anti-competitive banking laws.100 The South pushed for FDIC insurance, which made small banking possible. They also demanded provisions in the Glass-Steagall Act of 1933 and the Banking Act of 1935 that prohibited bank conglomeration, mergers, or even bank branching across state lines.101
These laws went against natural market forces and favored the small and the weak against the banking market’s natural winners, the large and the well-capitalized.
The rationale of community banking is that capital stays put within a region. The peril of this arrangement before the New Deal was that the fate of a community’s banks was linked to the community’s prosperity or decline. Small community banks were inherently more vulnerable to runs and less stable than larger conglomerates, which could diversify their risks and count on liquidity and capital from robust financial markets. Federal deposit insurance fixed this problem by providing a federal subsidy that enabled these weaker community banks to compete. This is why the small bankers fought for it. With deposit insurance, they could make profit from their control over a community’s resources while being protected from the constant failure and runs that had besieged their industry up until that point.
The New Deal banking reforms favored these small community banks not only because they protected the banks from runs, but also because they shielded the banks from competition from banking conglomerates. They had a monopoly on a region’s deposits and loans, but thanks to a nationwide insurance fund, they were protected from the downside risk of the community banking model. So regional banks, especially in the South and West, thrived after the New Deal to an extent that they had not b
een able to previously. The FHA guaranteed their loans, FDIC insurance prevented runs, and federal reserve liquidity protection saved them from a regional credit crunch. “Community banking” worked because of federal government support.
The decision to favor small community banks over larger bank networks was not racially motivated, but it did negatively affect the prospects for black banking. The unanticipated effect was that the black community, with little stored wealth and little access to credit, could not thrive in a system that tied all its deposits and loans only to those within its community borders. Black communities, now thoroughly segregated and relegated to living outside the systems of credit, were paralyzed by this structure. They did not have the federal government mortgage support and yet had to rely on their own community’s meager resources to operate.
Before the New Deal reforms had taken shape, Abram Harris had suggested that the best hope for black banks going forward was for them to become a branch of a large national bank, or in other words, to cease being stand-alone black banks. The arrangement would benefit white banks, which could profit from black customers without having to integrate their bank branches. As a subsidiary of a large holding company, black banks could dock into the mainstream banking network and benefit from the large capital base they could not access on their own. The bank holding company ownership structure would at least enable credit to flow down occasionally instead of always up and out. Though Harris, like the New Deal progressives, was wary of the “un-slackening growth in the size and power of white financial and industrial organizations," he recognized that this was the only way black banks could overcome their impoverished and segregated communities.102 It was better to join forces with a powerful bank, even a Wall Street “money trust" powerhouse, than to go it alone. He knew that black banks would lose their autonomy and independence, but Harris was skeptical that they could ever operate successfully as stand-alone entities. But riding on the wave of backlash against big banking, the New Deal reforms cut off this potential structure in its prohibition against conglomerates.103
The frustrating dilemma of black banks is highlighted when contrasted with banks created by Italian, Jewish, German, and Irish immigrants that they are often compared to. Though these immigrants were never segregated to the extent that the black community was before the Great Depression, they were discriminated against by the white banking sector and had been forced to create their own banks.104 “No Italians" and “No Irish" signs were prevalent during the era when racial dogma deemed these groups inferior and unworthy races. The plight of these other marginalized immigrant groups parted ways significantly from blacks only after the New Deal reforms and the end of the world wars. These immigrants would eventually leave their overcrowded ghettos and settle in white suburbs where blacks were still barred entry.
Their banks reflected these immigrants’ own integration. For example, the Bank of Italy was formed in San Francisco to serve Italian immigrants who could not get loans from white banks. The bank was founded in 1904 by Italian immigrant Amadeo Giannini for the same purpose that black banks were created—to serve a population that was being discriminated against by the mainstream banks.105
Giannini’s bank would have a drastically different trajectory than Binga’s, and the divergence would mirror the disparities between the assimilation of America’s immigrants and its native blacks: 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.106
The Bank of Italy’s transformation into the Bank of Ameri ca was directly financed by the FHA. Bank of America was able to expand its consumer lending market to take advantage of the FHA consumer credit guarantees. FHA loan guarantees allowed Bank of America to increase profits by 40 percent from 1935 to 1936 and establish branches across the state of California. In May of 1937, Giannini told the Los Angeles Times that these new loans had “trebled and quadrupled activity in our branches."107 Before the New Deal, Bank of Italy was a bank for Italians, and after the New Deal it became a bank of Americans because Italians too became American.
Italian, Irish, Polish, and other European immigrants who had each been deemed inferior races decades earlier came to be accepted as white Americans. Italians for the most part could not attend college before the war, but most gained entry afterward through the GI Bill.108 Black GIs were not given similar access. Education was still highly segregated, and there were not enough black-only colleges to accommodate them.109 Education led to economic mobility, which led to more social and political power and control.110 The immigrant groups were able to move “up and out" of the ghetto with the help of federal government programs. Certainly, discrimination remained, but legal segregation of the immigrant groups was erased by the end of World War II, and their full integration was a direct result of FHA and VA credit policies for them.
There is a pervasive myth that immigrant success was based purely on individual work ethic.111 Certainly there was a lot of hard work and perseverance, but left out of this popular narrative was the significance of the FHA-GI Bill combination, the government subsidy that bolstered the work and turned it into capital-producing assets. Hollywood legend Frank Capra’s family, for example, immigrated to America in 1903 and landed in “the sleazy Sicilian ghetto of Los Angeles.”112 Capra enlisted in the army, was naturalized, and, with a boost from the GI Bill and the FHA, moved out of the slums and into the American middle class. He went on to make films that defined America, and in his 1946 It’s a Wonderful Life, Capra immortalized the myth of self-help community banking through George Bailey’s fictional Building and Loan. The fiction that poor communities can pool their resources and bank themselves into prosperity like the upstanding and tireless George Bailey was thereafter cemented in American culture and policy. In reality, most immigrants’ bootstraps had been provided by the government. Indeed, blacks were working hard too, but their wages were going to exploitative contract sellers, landlords, or much more expensive mortgages, instead of helping them build wealth. The black population was left out of the capital-building and prosperous decades of the 1940s to the 1960s.113
However, change was coming. Seeds of the national civil rights movement were beginning to take root as the black community began pursuing various strands of protest during this era. There was no coordinated national struggle yet, but each fight paved the way for future coalitions as well as future divisions. The movement that most resembled King’s own occurred in 1941 when A. Philip Randolph organized what was to be the first large-scale act of civil disobedience aimed at getting the attention of the federal government. He proposed a march on Washington to protest discrimination in government defense contracts. The prospect of the expected 100,000 demonstrators alarmed the White House enough that it led to a preemptive executive order. Roosevelt signed Executive Order 8802, which forbade government military contractors to discriminate “because of race, creed, color or origin.”114 Black leaders were elated and described it as the “gateway to the millennium for millions of blacks.”115 Randolph compared the Order to the Emancipation Proclamation and the black-owned Amsterdam News declared it “epochal to say the least. . . . If President Lincoln’s proclamation was designed to end physical slavery, it would seem that the recent order of President Roosevelt is designed to end, or at least, curb, economic slavery.”116 Although the order was never sufficiently enforced by the administration, it was fateful, for it became the l egal framework on which civil rights laws were founded. Randolph was instrumental in organizing the 1963 March on Washington, during which he spoke next to Dr. King twenty years later. This strand of the movement, which would be the successful one, was focused on coordinated and peaceful protests meant to result in federal legislation focused on equal rights and nondiscrimination.
Meanwhile, in another precursor to what was coming, the first urban riot led by
blacks against white businesses occurred in Harlem in 1935. The spark was lit when a teenage shoplifter was beaten by a store owner. Over several nights of violence, rioters destroyed white business establishments in Harlem—while sparing black-owned businesses.117 Though resorting to violence was still rare in this era, collective action was beginning to coalesce around specific economic demands in northern ghettos. These protesters were not demanding national legislation, but were objecting to their perceived exploitation by white shop owners operating at high markups in the ghetto. The Harlem protests were focused on economic justice at the local level.118
One side of the protests focused on encouraging more black businesses and called for “Bigger and Better Negro Business."119 This movement was being waged by local black organizations that spanned the political spectrum from radical black nationalists to the conservative National Business League. There was a widespread perception that white businesses were extracting profits from the ghetto and a frustration that, after a century of effort, black businesses were still hardly in a position to compete. The latter was certainly true. When the first study of black business was conducted in 1898, it found that the average capital investment in the average black business was $4,600.120 By 1944, that capital investment had actually decreased to $3,260. The vast majority of these businesses (90 percent) were divided equally between small retail stores and small service establishments.121 Many ghetto businesses were small mom-and-pop shops that were barely profitable—still pebbles on the seashore.122
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