Black Banks and the Racial Wealth Gap

The founders of the Mechanics & Farmers Bank in Durham, 1900 (Image: Durham County Public Library).

When I first heard about the “#BankBlack movement” I knew I smelled a rat. So I wrote about it. After reading Mehrsa Baradaran’s new book The Color of Money: Black Banks and the Racial Wealth Gap I think I might have underestimated that rat. This one is far bigger and far more insidious than I had initially imagined.

My spontaneous response to #BankBlack was a variant on Cornel West/E. Franklin Frazier’s critique of the capitalist impulses embedded in bourgeois Black nationalism. The problem with Black-owned banks, as I saw it, were twofold.  While I love the notion that they are Black, I hate the notion that they are owned–by anyone. Corporate charters enforced by state violence that protect private capital and maintain a rigid set of hierarchies between owners, workers, and customers are not my ‘cup of tea.’ But besides being owned, Black banks are also, well, banks. Birthed on the back of the transatlantic slave trade, Western banking epitomizes the extractive, predatory logic of capitalism replete with its requisite abstractions. The International Monetary Fund and the World Bank continue to conspire daily in the service of (neo)colonialism—imposing remote control of capital over labor around the world.

My meager suggestion was for a more participatory and less hierarchical model of Black economic cooperation.  Initially, that might look something like a credit union. With no owners, no bosses, and no profit motive demanding the endless reproduction of capital, Black communities could experiment with new models of collective action, communal ownership, and a democratic allocation of resources. As the already-burdened, ethical guardians of America, Black people have always arisen thanklessly to show a new way forward during nearly every other moral crossroad in American history. Why should today be any different?  If Black institutions can somehow push beyond the limits of capitalism and show America a better way (once again), then perhaps a workable alternative to this crumbling order we call America might be possible. I still believe that. But after reading Baradaran’s work, I might believe it a little less.

Ostensibly Baradaran’s book is about Black banks. What it’s really about, however, are Black self-help strategies more broadly. For Baradaran, any effort that remains confined to a segregated economy is destined to fail. Segregation itself is set up to reproduce multiple upward cycles of white prosperity—depending upon an equally destructive “negative feedback loop” of black poverty (91). In this way, Baradaran is an Afro-pessimist (even as her vision of the future is decidedly hopeful).

Leaning heavily on the structure button and dashing through broad swaths of American history, Baradaran argues throughout her very readable book that Black banks simply never stood a chance. For her, the problem was not that they are too wrapped up in American capitalism but they were not integrated enough into “full participation in American capitalism” (7). While this formulation may sound to many like integrating into a burning house, Baradaran’s point is to show how white and Black Americans effectively live in two separate economies. Whites get subsidized state-sponsored corporate welfare that occasionally benefits the white working class. African Americans get systematically shut out of state programs while being told moralistically to fend for themselves against an invisible hand that is far from invisible and a free market that is anything but free. Access, inclusion, and integration managed by a strong, but unwilling federal state are Baradaran’s primary policy proposals. While she flirts with reparations sporadically, she never seriously develops this idea.

As a work of history, the book contains a disturbingly coherent narrative of racist plunder spanning from the Freedman’s Bureau bank to today’s payday lenders. In each historical era, Black banks and racial uplift programs reliably re-emerge as naïve political panaceas for an extractive economy. Indeed, Baradaran is at her best when conveying how Black self-help ideology functioned as “a decoy response” (4) for racist conservatives and Black accommodationists bent on continuing the exploitation while purporting to challenge it.

Predictable stories emerge of opportunistic Black loan-sharks like A.G. Gaston. Feeding on the segregated economy, Gaston became a banker by buying government wage warrants from struggling Black teachers at fifty cents on the dollar only to sell them to white investors at full price (55). Contemporary payday lenders, check cashing outfits, and other government-sanctioned predators furthered this tradition of sucking wealth away from Black workers (261). Counter examples like the Bank of Italy show how immigrant Italians were eventually granted access into the cult of whiteness (and its financial marketplace) as the Bank of Italy literally transformed into the Bank of America (125). Meanwhile, Black banks emerged as a response to this exploitation but ironically became “the very mechanisms through which black money flowed out of the black community” (96, emphasis in original).

Here Baradaran takes us deep into the world of high finance and the wonky mechanics of the fractional banking system to show us exactly why Black banks were always destined to fail. Banks make money on the spread between the interest paid on their deposits and the interest earned on their loan portfolio. The less money the bank has to keep in cash, the more profit it earns by lending it out. This model works best with a large, stable, illiquid deposit base (like time-locked certificates of deposit or long-term retirement accounts) and a solid, highly-liquid loan portfolio whose borrowers consistently make their mortgage payments while their underlying collateral (houses or businesses) soar steadily up in value. Through “money-multiplying magic” (13) these banks just don’t lend money—they create money.

In the case of Black banks, every single one of these optimal business conditions disappears in the face of systemic racism. Black poverty and the ‘last hired, first fired’ pattern of employment means that Black depositors are constantly having to tap their savings accounts. This leaves Black banks (already forced to maintain a prohibitively high capitalization rate in advance of this threat) with a brutal run on deposits and nothing stable to lend out. When the disasters of capitalism inevitably happen, Black banks try to get creative and sell off their loans to meet their customers’ needs but because of either redlining or outright racism white investors simply won’t buy Black mortgages. Knowing that assets in Black neighborhoods tend to depreciate in value, Black loans are often underwater before the ink is dry. Consequently, loans have to be heavily discounted to be made liquid (assuming they can be liquidated at all). This forces Black banks into a steady fire sale of already risky loans. The cash crunch and subprime mortgage crisis of 2008 was not an anomaly for Black banks—it is their ongoing business model.

For all its explanatory merits, Baradaran’s book does suffer from a handful of critical shortcomings. While Black rhetoric may at times seem to draw a sharp line between integration and nationalism, everyday Black thought and lived experience proves far more nuanced and flexible. Baradaran, however, too often reifies this false binary by characterizing Black banks and Black self-help as largely incompatible with integration. Additionally, we get far too little of the many non-economic projects taking place through Black self-help frameworks. We are pushed, instead, to see success and failure through a frankly neoliberal lens of banking profits and losses.

Yet this neoliberal lens largely shuns the hard quantifiable data that is normally its hallmark. While the measurable racial wealth gap has changed little since emancipation, Baradaran asserts (without much data) that Black banks (at least partially) must have been a cause of that stagnation. It is certainly plausible, however, that Black banks, while failures in themselves, may have actually shrunk the net racial wealth gap and made it less severe than it might have been had Black homeowners instead been forced exclusively into contract buying or renting. Overall, would net Black wealth have actually been higher if Black people had remained entirely unbanked from 1863 to 1968, as Baradaran argues? More data is needed here. But knowing that income inequality today is worse today than it was in 1774 in a full-blown slave society it is at least conceivable that the Black share of the national wealth might have actually gone backwards since emancipation if it weren’t for the ameliorating efforts of Black self-help projects fighting to hold the line. While Black banks may have ultimately rested upon a failed business model in a thoroughly unethical system, this doesn’t mean that Black self-help is always unproductive when viewed on a more macro scale.

Overall, Baradaran’s book is a must read for anyone interested in closing America’s racial wealth gap. While the 1,300% increase in Black wealth required to achieve racial wealth parity is almost certainly unattainable in the absence of reparations, Baradaran’s call for increased economic integration may eventually prove a useful addendum to preventing future harm. At the same time, well-funded, voluntary, autonomous, Black self-governance in the spirit of decolonization is something that this country has never really tried. If Black-led interracial “Freedom Cities” with strong, sustainable, local collectives based on mutual aid and direct democracy are funded through reparations they may not only solve the problem of the racial wealth gap, they may also offer an antidote to the cancer of American capitalism that created this wealth gap in the first place.


Guy Emerson Mount

Guy Emerson Mount is currently a PhD Candidate at the University of Chicago and a Mellon Foundation Fellow. His dissertation, “The Last Reconstruction: Race, Nation, and Empire in the Black Pacific,” analyzes intersection of American slavery and the birth of American overseas empire. Follow him on Twitter @GuyEmersonMount.

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