But they were the wrong targets. In fact, these lenders were not even making high profits on the backs of the poor. The poor paid more and the sellers made less. To repeat, the poor paid more, but it was not because someone was profiting from their exploitation. Poverty, segregation, and exclusion from robust credit markets meant high costs, low profits, and higher risks for everyone. The vortex of these forces created the money-pit economy of the ghetto—prices were high, quality was low, and profits were deceptively scarce. This is not to say that merchants were not taking advantage of the poor. They were. There was predatory behavior, misleading advertisements, misrepresentation of prices, bait-and-switch advertising and sales, and fraud to be sure, but everyone was affected by the ghetto’s destructive economic undertow.57
Because their customers had too little wealth, these lenders had higher loan losses and collection costs, including hiring repo men and taking their customers to court. These collection tactics and the “unbelievably" high prices these lenders charged for their merchandise caused much suffering for borrowers, but they also cut into the lenders’ margins. They had to hire more staff, lost more money on default, and paid more to finance their own businesses—all costs that were borne by their customers. Historian Louis Hyman found that “between bad debt losses, lawyers’ collection fees, higher insurance premiums, more accounting staff, and higher sales commissions, the higher costs of ghetto retailers accounted for 94 percent of the difference in the gross margins."58
Situating these lenders in the broader framework makes the disparity even more striking. Because of the high defaults and loan losses of ghetto lenders, they could not participate in the robust credit markets that were driving down credit prices in the suburbs. These lenders paid more for capital because they could not sell their loans into the secondary market. They could not sell these loans to a secondary market because they were too risky. They were too risky because they did not have access to the network that lowered risks, and on and on. They were stuck in an ancient debt market while the rest of the country had taken off into the modern world of risk sharing, secondary markets, and large finance companies that all worked to lower the risks and the costs of debt. Lower-cost debt meant a lower burden for customers outside the ghetto, which also meant lower default rates. A virtuous cycle of credit had taken hold in American suburbs (at least until it was no longer sustainable for the country as a whole). The network did not work without all of the pieces in place. The black ghetto was not part of this infrastructure, so they were on their own. Americans lived in two different worlds of credit—separate and unequal. But the civil rights laws had not been designed to address the Jim Crow credit market.
In the aftermath of the riots, the Banking and Currency Committee in the Senate held two separate hearings to discuss the problem of the poor paying more and what could be done about it. The hearings were led by Senator Proxmire, a Democrat from Wisconsin who did more to shape the legislative response to credit inequality than any other senator. His moral zealotry earned the senator a reputation as a maverick lawmaker and a righteous crusader against excess government spending. He won Joseph McCarthy’s seat in 1957 when the infamous senator died, and he called his predecessor a “disgrace to Wisconsin, to the Senate, and to America.” Proxmire famously created the “Golden Fleece Award,” a dubious honor he presented monthly to projects he viewed as self-serving and wasteful of taxpayer dollars.59 He spent only $200 on his Senate campaigns as a protest against corrupt political spending and never missed a roll call vote in over twenty years of service in the Senate, setting a record that has yet to be broken.60 Proxmire was an incorruptible reformer who was as committed a policymaker in the cause of fixing inequalities as any other.
Proxmire expressed “outrage” at the injustices faced by consumers in the ghetto, and he believed that the government needed to play a role in alleviating the suffering.61 Proxmire and the other members of his committee expressed genuine puzzlement that market competition had not brought down prices in the ghetto. But many witnesses testified that these lenders were not making money, even though they were charging exorbitant prices. The legislators seemed to understand that the ghetto lending economy created a vicious cycle of high prices and lack of competition. They understood that the cycle had to be broken somehow and that the “economic illness of the ghetto” needed a strong cure. Yet when they began discussing the antidote, they homed in on getting more black banks, credit unions, and lenders in the ghetto.62
During the hearings, the senators converged on a diagnosis of the problem as one of white institutions exploiting the black ghetto. While “white-owned stores were burned and looted,” said New York Republican Senator Jacob Javits, “ ‘soul brother’ establishments were spared.”63 Indeed, this was the case. Many black businesses had even put signs up in their windows during riots positively identifying themselves as “soul brother” establishments.64 And certainly, many rioters felt that they were protesting white exploiters. Based on this framing, the solution to the ghetto money pit was to throw more black businesses into it, which is exactly what was proposed. But what was causing the misery was not necessarily the race of the installment lenders, but their interest rates. The misreading of the problem as a lack of enough black lenders would lead to decades of misguided policy. But at first, these programs were meant to work alongside other antipoverty measures.65
Javits put forward a plan to spur black-owned small business, but he emphasized that only a robust federal intervention aimed specifically at the ghetto could reverse the trend of decline because “no conceivable increase in the gross national product would stir these backwaters" without targeted assistance.66 President Johnson’s Small Business Administration director, Howard J. Samuels, said that the “inner cities of this country will be dead economically" and would remain “forever ghettos" unless blacks became “owners of American businesses."67 The SBA’s response was a small business lending program called Project OWN, which ran alongside a larger War on Poverty program. Samuels promoted a program of “compensatory capitalism" aimed at the “economic emancipation" of the black population.68 John Jacob of the Washington Urban League believed that credit card issuers were discriminating against blacks and suggested instead a “credit card for the poor—extended by a black credit card company in the black community."69
Proxmire himself, an avid believer in small business, put his faith in credit unions.70 Following the hearings, he introduced a bill that he said was “designed to help the poor break out of this vicious cycle" by “authorizing a strong federal program to encourage the formation of credit unions and consumer counseling programs for the poor."71 The bill was a continuation of Project Moneywise, which had created 218 credit unions in poverty-stricken areas with the help of “indigenous leaders."72 The director of the program said that the goal was for these credit unions to use consumer education and rely on the “latent savings in the community" to build wealth.73 Of course, there were few savings, and such a plan had been tried for a hundred years without any results.
By 1968, most of these credit unions were struggling to remain viable, and the program was nearing its end, but Proxmire still believed. As he told the credit union industry representative, “we really count on credit unions heavily to solve a large part of this problem." After all, he said, “this is one of the purposes for which credit unions were initially established, in order that people with modest incomes could establish credit and be able to operate in this free enterprise economy."74 The myth of the credit union was that through local control of money, a marginalized community could eventually gather enough capital to join the economy. But this was not actually how credit unions had created the middle class—they had done it through federally subsidized mortgage loans. However, so strong was the allure of this banking model as an answer to poverty that even the learned chair of the Senate Banking Committee, an honest reformer who understood the forces of this deviant ghetto market, could not break the spell of the credit union as th
e answer to poverty. He knew that these ghetto lenders were not making money, a fact he repeated many times during the hearings. He also understood that the heart of the problem was concentrated poverty and not the profitable exploitation of a few mischievous lenders. Yet he believed that locally owned credit unions would break the “vicious cycle." Perhaps it was because any other solution was politically impractical or cost too much, or perhaps he believed that credit unions could overcome these obstacles through their commitment to the community. To Proxmire’s credit, this was only his first proposal, with many more to follow in the years to come.
Just a few years later, Proxmire would home in on eliminating credit discrimination and would push for passage of the 1970 Fair Credit Reporting Act (FCRA) and the 1974 Equal Opportunity Act (ECOA). It was the advocacy of feminist groups that ushered in equal credit laws, which eliminated race and gender identification from loan applications and forced lenders to use credit scores based purely on financial information and data. Before their passage, even affluent women could not get a credit card. These antidiscrimination provisions also applied to minorities, but women and other minorities were not similarly situated. Creditors were indeed discriminating against creditworthy women and blacks based solely on negative stereotypes. But for blacks, discrimination had created a plethora of other conditions that actually affected their default risk.
This was not a straightforward matter of racism that could be fixed by the same laws that effectively mandated the removal of “whites only" signs. Racism was the root cause of the problem, but it was the segregated and undercapitalized ghetto that was responsible for much of the disparity. Unable or unwilling to eliminate the ghetto credit market in its entirety, legislators focused exclusively on discrimination in credit applications. But mandating nondiscrimination would not change the fundamental ghetto economy. Lenders soon found another fairly obvious way to avoid lending to blacks after these laws were imposed—they used zip codes as a proxy for race. Zip codes were perfect indicators of a community’s racial and economic makeup because segregation had almost perfectly correlated geography and race.75
Misunderstanding the problem entirely, the FTC admonished lawmakers to create “financial education” programs so that blacks would not enter into exploitative contracts. However, their own study found that the poor knew they were paying too much for credit, but that they had no other options.76 Caplovitz ended his study with a proposal for financial education, suggesting that ghetto consumers should be taught to avoid buying in the ghetto and should try to shop at outside retailers.77 Ultimately, Caplovitz conceded, however, that all these suggestions are limited and futile “until poverty itself is eradicated.”78 Financial education is useful insofar as consumers are making bad choices as a result of their ignorance of better options. However, high-cost borrowing is usually a result of a lack of better choices. In a survey of ghetto consumers, only 15 percent thought it was a “good idea” to buy on credit. The rest said it was only a good idea in certain circumstances, or a bad idea. When asked why, more than half of those surveyed said “it costs too much” or “you pay too much in carrying charges.” Though these consumers seemed to understand the exact nature of their problem, they admitted that this was “the only way poor people can buy.”79 What more could financial education have taught them?
In reality, all these solutions were incomplete and short-sighted. The only way to eliminate the drastic credit disparity was to eliminate the wide disparity in wealth. One path toward equality was to integrate the credit market. By concentrating the poor in income and the poor in assets in the ghetto, segregation had cordoned off the riskiest borrowers. Large national chains could avoid this area entirely, and thus avoid the higher costs of underwriting, servicing, and collection. That is what they were doing. But not all of these borrowers were poor credit risks. In fact, most of them were not—if they could have been given lower-cost credit. The more they paid for loans, the greater the debt burden, and the greater the likelihood that it would break them and they would default, which cost the lender more. If these borrowers could be integrated into the general market and large retailers allowed to do individual credit evaluations, the borrowers could have paid less for credit. This would have allowed lenders to diversify their risks, thus driving down prices for everyone. Increased diversity would even have been preferable for the large finance companies as most lenders prefer some borrowers who pay off their balance and many who roll over their balances and pay interest. But integrating the credit market would have been difficult to do without physical integration, which was simply not politically feasible.
The other alternative was to break the poverty cycle directly by giving black residents an infusion of capital to jump-start wealth creation. The racial wealth gap had been created by state law and policy, and so a reversal of the wealth gap through a program of reparations would have been justifiable. But while forced integration would have been unfeasible and unlikely, subsidizing black communities was inconceivable. If giving blacks land the year after their emancipation from slavery proved unenforceable, one hundred years later, financial grants didn’t stand a chance. Moreover, such a race-based redistribution of wealth had to contend with the bedrock principle of the civil rights movement: color-blind equality. Yet such a reckoning had recently happened in Europe. In 1952, West Germany agreed to pay the new nation of Israel three billion marks over the next fourteen years as reparations for the atrocities of the Holocaust. But the United States, at least under Johnson’s administration, never conceptualized the remedy for past wrongs in this way.
Johnson did understand that poverty was the root cause of racial inequality. In his 1964 State of the Union address, President Johnson declared an “unconditional war on poverty." Johnson’s Great Society and War on Poverty programs, contained in the Economic Opportunity Act of 1964 (EOA), were the largest federal government economic measures since the New Deal. The Office of Economic Opportunity (OEO) would launch job-training programs, food and income assistance, and the early childhood program Head Start. However, from the start, these programs were geared toward charity and education as opposed to control, power, or building capital.80 Congress was clear on this point: “These are not programs to bring about major structural change in the economy or to generate large numbers of additional jobs."81
Though Johnson framed his poverty program as an heir to the New Deal, and the two programs now stand as bookends to an age of American progressivism in action, Johnson’s Great Society fell far short of the ambitious economic restructuring of the New Deal. Although there were job-training programs, there were no job-creating programs—no public works projects or wealth-creating credit markets. Cyril deGrasse Tyson, who founded an antipoverty organization in Newark, New Jersey, lamented that the War on Poverty had no wealth-building functions, no “multiplier effect."82 Johnson’s program was also much less popular than the New Deal. During the New Deal era, poverty was seen as a systemic problem. Change the system and poverty goes away, and so do its symptoms. Not so in the 1960s, when poverty came to be seen as a moral failure. What changed? According to economic research, race has been the single most important predictor of support for American welfare programs. In other words, black poverty has been viewed as a moral failing, whereas white poverty had been viewed as a systemic problem. Therefore, once welfare came to be associated with black poverty, it was delegitimized.83
The War on Poverty eventually ran up against a torrent of protest and accusations of favorable treatment, and its “handouts" quickly became a target of conservative scorn. Not only did these programs not actually alleviate black poverty, but they have since been maligned by conservatives as the cause of black poverty. But they could hardly have caused anything, as they were largely abandoned shortly after they began. The money, energy, and pol itical capital that Johnson was to use in the proverbial War on Poverty were quickly diverted into the actual war in Vietnam. By 1968, all of the programs were mere shells of the robust 1964 promi
ses, as the administration’s budget, resources, energy, and all of their political capital were pulled toward Southeast Asia. In 1967, King lamented that the War on Poverty had been “broken and eviscerated as if it were some idle political plaything of a society gone mad on war," and that he watched as “Vietnam continued to draw men and skills and money like some demonic destructive suction tube."84
President Johnson himself was conflicted about the underlying rationale for the War on Poverty and came close to acknowledging that there needed to be a leveling of the playing field after centuries of white advantage. In a 1965 speech that still stands as the closest any U.S. president has come to reckoning with the history of racial injustice, Johnson told a black audience at Howard University that America had “failed the Negro” and that “freedom was not enough.” He even seemed to be rejecting the late-term egalitarianism that assumed that ending discrimination could erase a legacy of past injustice. “You do not take a person who, for years, has been hobbled by chains and liberate him, bring him up to the starting line of a race and then say, ‘you are free to compete with all the others,’ and still justly believe that you have been completely fair.”85 He further acknowledged that blacks were trapped in “inherited, gateless poverty,” which stemmed from a “devastating heritage of long years of slavery; and a century of oppression, hatred, and injustice.” Crucially, he understood that black poverty was not like white poverty, and that “there are differences—deep, corrosive, obstinate differences,” and that the differences were not attributable to race, but were a “consequence of ancient brutality, past injustice, and present prejudice.”86
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