In a country where policies blocking Black people from obtaining mortgages, land, and capital have created an immense wealth gap between Black and white Americans that persists to this day, inequality is a threat to our democracy, says Mehrsa Baradaran, professor of law and associate dean for equity, diversity and inclusion at University of California, Irvine, and the author of How the Other Half Banks and The Color of Money: Black Banks and the Racial Wealth Gap.
In this conversation, Baradaran discusses the historic roots of economic inequity, how white supremacy doomed attempts by Black banks to keep wealth within their communities, and why it’s critical for business leaders to “get educated and learn the history.”
Prof. Brian Lowerey and Prof. Mehrsa Baradaran discuss the history of racism in banking and how systemic issues and historical events have led to the modern racial wealth gap.
Brian Lowery: Can you tell us a little bit about how you got interested in Black banking and how your book came about?
Mehrsa Baradaran: There is a theory that banking in minority communities should take the form of microcredit or community banking, independently from the big banks supported by the federal government. However, the big banks get subsidies and guarantees from the federal treasury, which allow them a money multiplier effect, and that is not true of community banks. I wanted to use Black banks to discuss the general myth, but as I started researching Black banks the book turned into much more of a political story, and much more dark and cynical than I originally intended it to be.
Brian Lowery: Your book starts with the roots of American capitalism in slavery. Can you tell us more about that?
Mehrsa Baradaran: There was an enormous wealth creation from slavery. The free labor that plantation owners received from Black men and women meant that they were able to produce much more cotton without having to pay wages. In addition, the ownership of humans was capital that could also be used as collateral to increase one’s wealth. Both the North and South economies used not just the labor that slavery produced, but also the capital that it afforded to spin the wheels of the capitalist system, as well as create a currency out of the slaves themselves. During the reconstruction, right after the civil war and the slaves had been freed, cotton importers started getting very concerned that if the Black people were going to own land, they would no longer be growing cotton because their land would be mostly used for subsistence crops. If less of the cash crop was being made, they knew that with the drastic decrease in supply would come an increase in price, which would devastate the worldwide cotton market. In order to prevent that from happening, they decided that Black people should not be given land. Instead, they were given a bank, known as the Freedman’s Bank. I use that story to talk about the subversion of the land grant being about the demands of capital.
Brian Lowery: It’s interesting that you talk about the revolution in Haiti in terms of the concern about the kind of crops that would be raised as opposed to the actual violence that was happening. Are you saying that was the main worry of what would happen in the South?
Mehrsa Baradaran: They were definitely worried about the violence as well, so I don’t want to minimize that. The threat of rebellion was present both during slavery and after slavery, so with that came the fear of incredible violence. However, during the reconstruction itself, the Liverpool owners and capitalists were most worried about the shift in crops. They really needed to meet the burning demand for low-priced cotton.
Brian Lowery: Can you elaborate on what you mean by the term “reconstruction?”
Mehrsa Baradaran: The reconstruction was the period of 8 years following the Civil War and the passing of the 13th, 14th, and 15th amendments that guaranteed equal protection, due process, and the right to vote for Black people under the law. During those eight years, Black men were actually allowed to be elected to Congress and represent interests of their race, and this new reality of equality was beginning to be recognized by many southerners. However, the country quickly entered a recession due to the lack of cotton being grown, and the reconstruction was radically overthrown by Southern democrats. They were able to do this through the use of violence, disenfranchisement, and overturning many of the newly made laws. Black people couldn’t be vagrants, meaning they had to go back to the cotton industry. In addition, there were the Black codes, which said their property wasn’t protected, they couldn’t engage in trade, and they couldn’t get patents for their inventions–all rights that had been given to them at the start of the reconstruction and were stripped away by the end.
Brian Lowery: In that period of time, most white people did not own property. There were a few wealthy white men who owned most of the land, but the vast majority of the population was not well off, and many were dying in poverty. Moving forward in your story, you talk about how there is an explosion of the white middle class and the birth of much more economic opportunity. Can you elaborate on how that happened, and what role race played throughout this?
Mehrsa Baradaran: In our country there’s a progressive tradition of complete revision to the structures that we have. I think that the tragedy of American progressivism is that all people’s movements aimed at challenging the monopolies and the big money powers are deeply infused with white supremacy. For example the New Deal, enacted by FDR, essentially ends up cementing racial segregation in housing in the law. Between 1934 and 1935, the entire banking, credit, and mortgage sectors were radically changed. FDR essentially took out the risk of all mortgage lending and banking, and made sure all deposits were insured. The FHA guaranteed every mortgage loan, as long as that area was deemed not “high risk.” This determination of whether an area was “high risk” or not was made purely based on race. There are real estate maps from that time that color code different areas and neighborhoods based on the percentage of different races living there. If an area was more than 50% Black, that area would have a red light, meaning they would not be eligible for loans or mortgages. This creates a segregation between the white suburbs and the Black tenant locations, and links up other important factors such as schools, taxes, parks, etc with home ownership.
Brian Lowery: How tightly correlated are property values now with the original shifts of property values as a function of FHAA support?
Mehrsa Baradaran: Studies show that Black properties in Black neighborhoods are still not increasing in value (a Black neighborhood being defined as one in which 5–10% of inhabitants are Black). The red line areas themselves have shifted a bit — as cities have gentrified Black communities have been pushed outward. Every current zip code lines up with maps all the way back in the 1930’s. You can track almost anything that relates to zip code and it can be a stand in for race, to the extent that credit score companies can’t use zip code as it is considered discriminatory.
Brian Lowery: Where do Black banks come into all this?
Mehrsa Baradaran: There’s a reason why Black banks are created by Black communities themselves. Many white institutions refused to lend or give deposits to Black customers, most prominently in the Jim Crow South but also to an extent in the North. These institutions were created out of need — not just banks, but also burial societies, social clubs, schools, and much more. With Black banks functioning independently from federal banks, promises of closing the racial wealth gap or equality began to come into sight. People like Booker T. Washington said that if the Black community gained economic strength and power, that political power will come. What I do in my book is I look at the money-creating mechanism and really explore whether it is possible to create wealth for a community through a Black bank. Can you, as the industry promises, control the Black dollar and keep it within a community? What I show in the book is not only did deposits suck money out of the banks, but also mortgages on Black homes were under water almost as soon as they were issued. Black banks could lend to people within their community, but that money would quickly escape because of the original status quo of white property ownership and Black tenants. After the New Deal, only five Black banks were able to survive, but the Civil Rights movement brought about a resurgence of them. Later, Nixon comes in and co-opts the language of Black banking to reinforce segregation. Everything that we do now as banking attorneys and law professors to promote equity is embedded in the Nixonian structure. The premise has always been that the way for poor communities to gain wealth is to create their own banking institutions. That was the original myth I tried to debunk, because it’s not true.
Brian Lowery: Are you saying that Black banks were always a dead end?
Mehrsa Baradaran: Yes. There were two Black economists who studied this — the only two economists in the whole country who actually studied this issue — and said that it would not work. One was Abram Harris, who in 1936 looked at all the balance sheets of all the Black banks and wrote this book called The Negro As Capitalist, which said that all the money was leaking out of the banks. The other was Andrew Brimmer, the first Black federal reserve board member, who actually went to Congress and said that this Black capitalism was snake oil, and that it was a trap. The trap was that you can’t have capitalism without capital; you can’t create money out of nothing.
Brian Lowery: So you’re saying that the white middle class was created by the government through loan guarantees that produced an economy that Black people were shut out of. But I’m gonna assert that there has been some progress. How do you account for the progress that’s been made by the Black community?
Mehrsa Baradaran: Of course there’s been progress. There’s progress in that there is less overt racism. But there hasn’t been progress on the racial wealth gap, by numbers. Home ownership rates between Black and white people are as dramatically different now as they were in the 1880’s. It’s easy to find successful Black people — Oprah, Lebron James, etc., — but numbers work through the mean. White poverty is certainly also a problem, but because race and class have been so intertwined for so long, it still is very much the case that certain communities are going to be disinvested.
Brian Lowery: I assume you’re aware of Derrick Bell’s Interest Convergence Hypothesis. It more or less says that when a dominant group of people have control, political or monetary, they only help the groups that are economically poor when it serves their own personal interest. In your book, you talk about the politics (segregation, Jim Crow laws, etc.) being the driving force of these economic outcomes. We have been seeing a lot of improvement on the political side, but as you said, barely if not any improvement on the economic side. What do you make of that?
Mehrsa Baradaran: One of the things that I think most speaks to Derrick Bell’s idea is that even though people had been demanding civil rights all the way back since slavery, the Civil Rights movement itself only took place in the 1950’s, under the backdrop of the Cold War. The question is, when does civil rights become part of the convergence of white interest? We have a majoritarian democracy, and insofar as we continue to say that what’s good for one race isn’t good for all of us, we are not going to get anything that benefits minorities. During the Cold War, civil rights violations in the United States were used for propaganda purposes by the Soviet Union. Now, any racism that happens here gets translated into Chinese and Farsi and is used by propaganda by Chinese and Iranian governments. There is an anti-colonial movement that came to America from Algeria and other countries in Africa, and it became the civil rights movement in America, which was a movement against exploitation. The African American community in the United States was exploited and patronized, in the same way colonies were all over the world. As the American empire was fighting communism abroad, it found it advantageous to franchise its Black Americans, especially as they were coming back from fighting abroad. On the other hand, this was when the neo-liberal idea that the Government should not do anything (whose proponents were Milton Friedman, and later, Alan Greenspan) began to gain traction. These two thinkers were critical in crafting the Nixon administration’s Black capitalism program. Black communities wanted sovereignty, capital, and justice, but Greenspan labeled them as “anti-capitalist” and “communist.” At that moment, and going into the 70’s, the neo-liberals stopped the subsidies going to Black communities. People in power remained in power, without having to integrate or pay reparations.
Brian Lowery: Since you are saying that Black capitalism was used to drain power from the Black Power Movement, should people have continued to protest in the streets?
Mehrsa Baradaran: Martin Luther King’s response to the violent protests was that fighting using violence was never going to work because they were outgunned and outnumbered; if you try to fight the American military you are going to get squashed. For this reason, I don’t think it should have continued. It wasn’t just Black capitalism, it was also the FBI, which either exiled, killed or infiltrated every resistance group in the country. I think the Black Panthers was a genuine resistance movement, but it was later marginalized because they had not been the ones telling the story. But I think things could have gone differently, and there could have been a coalition, just like how during the Reconstruction there was a coalition of white sharecroppers and Black sharecroppers. The Black Panthers were forming a coalition with white Appalachians, but many of these potential coalitions got subverted by Black Capitalism, as well as the crashing of the labor movement and the weaponization of welfare.
Brian Lowery: The BLM movement is the biggest movement in American history, and is incredibly diverse. Does that make you more hopeful?
Mehrsa Baradaran: If you are a monopoly and have power, you want to maintain power. It doesn’t have to be race-based power; you would rather deal with racism than give up your power. Before the New Deal, Italians and Irish people were also segregated, but the New Deal brought them into the American system. I think “whiteness” is expanding, but there is still power in whiteness. It has been set as “anti-Blackness,” so it will take in other groups before it encompasses the Black community. A lot of companies and institutions will diversify and give voice to the BLM movement before the structures of power will shift. However, I am hopeful because this is a moment of adaptation–this is another pivot point, just like the Reconstruction. My original ending to the book asked the question: “Now that America is colorblind, how does racism present itself in America now that it can’t be out loud?” I had to revise this, though, because it has been out loud again recently; there was a real backlash against Obama and Black progress. However, I think that has actually pushed the conversation forward. Yes, I think we’re at a moment of change, and I think that there are now incentives for a revolution of the hierarchy as opposed to complete eradication.
Brian Lowery: Given what you study, what should we change on the ground, or what policies should we change, to change the course of this country’s history?
Mehrsa Baradaran: You integrate, so that every kid has the same resources as every other kid. I think that within one generation, you can completely change people’s mindsets, but what it truly takes is proximity, and not breaking up race and class the way we do. People with privileges shield their kids from a “drop to the bottom” by separating themselves from “bad” neighborhoods and “bad” schools. The problem is, this drop is too large. Some schools have great resources, and others are in over-policed neighborhoods with ever present police and peer violence. These are things that can be easily disrupted through policy. Going back to the FHA and the New Deal, over the course of 10 years, it created a middle class by giving loans to Italians and Irish people who used to live in the tenements, allowing them to move to the suburbs. They were now living the “Great American Dream,” and their homes were building equity. They were building social capital, but in reverse, all of that was taken out of the Black spaces.
Brian Lowery: It’s hard to imagine integration functioning if people have a perception of African Americans being “scary,” or “crime-prone.” Are you saying that to get to successful integration, we need reparations?
Mehrsa Baradaran: When I say integrations, I don’t mean without capital; either way, it’s got to take capital. We can put the capital into housing grants — like the Homestead Act and FHA — but it doesn’t have to be called “reparations.” We need to do the same subsidies and capital creation for Black communities, to bring us up to equal. Just to bring us up to the same wealth level would eliminate the racial wealth gap.
Brian Lowery: Is it possible to have a fully integrated capitalist system in this country; can capitalism exist without the “other?”
Mehrsa Baradaran: We currently do not have a capitalist economy; we have a state managed credit/debt/housing system. Everything is either government guaranteed or produced. All of the money comes from the Fed, it gets routed to the banks, debts and deposits are guaranteed by the treasury. To your question — we have not had a capitalist system that exists without the “other” yet. That doesn’t mean that we can’t have it; as W. E. B. Du Bois said, “the only problem with American democracy is that it hasn’t been tried.” Inequality is now a threat to democracy — and it is not just race-based. The stock market keeps ticking up, but only 20% of Americans are in the market. 10% of Americans own 80-90% of all the assets. We have a majority of voters who, in a democracy, could achieve massive change, which is what happened during the New Deal. FDR was facing the threat of socialism, and saved the economy from an existential crisis. We may be there; we could do another New Deal, and this time really include people. The New Deal worked for the people it was designed to work for; it cut inequality dramatically.
Brian Lowery: What would you tell our listeners — many of whom will be future leaders in organizations — to do if they care about these issues?
Mehrsa Baradaran: Look in your own backyard. The industry that you are in is hiding so much history. In banking, for example, there is a legacy of using credit scores to discriminate. Thinking about how to eliminate this history starts with understanding the facts of how the racial wealth gap occurred, how racial inequality happened. If you don’t understand the history behind this, you will usually come up with a racist, inaccurate story, like “these people don’t work as hard,” “it’s a biological thing.” Business leaders should get educated and learn the history.
Brian Lowery: What would you tell the average white person who feels that helping the Black community would mean taking something away from them?
Mehrsa Baradaran: Having the racial wealth gap is a drag on the economy. Public works programs and the investment in getting people out of poverty will actually boost the economy. The myth of race that we used to justify the horrific system of slavery is still present in America. A process of reparations and truth and reconciliation would be very healing for all of us. Look at post-Nazi Germany, where Germany has been so open and willing to talk about all of the horrors that went on. In America, it has been different, where we have tried to shove it aside and not talk about it. It’s okay to say that yes, this was a horrible thing, and let’s deal with it and pay what’s owed.
Brian Lowery: Do you have any closing thoughts?
Mehrsa Baradaran: It’s really helpful for everyone to go to the original sources — W. Du Bois and James Baldwin are great ones. Reading Black Construction or James Baldwin’s non-fiction is a really necessary experience that all of us should have. It’s very relevant, especially right now.
— summary compiled by Julia Rose Segal
This is Leadership for Society: The Podcast, a series of conversations hosted by Brian Lowery, senior associate dean for academic affairs at Stanford GSB, that focuses on the most pressing issues of today. In this season of the podcast, Lowery explores the role of race in society, how race interacts with structures of power, and how systemic racism manifests itself in day-to-day business and policy decisions.