The Color of Money

Mehrsa Baradaran, a law professor specializing in banking, traces the history of the racial wealth gap in the United States through the lens of Black-owned banks. Her central thesis is that for over a century, Black communities have been urged by leaders across the political spectrum to rely on segregated Black banks as a path to prosperity, but the very conditions that created the need for these banks, discrimination and segregation, have permanently limited their effectiveness. The result is a catch-22: The institutions meant to help communities escape poverty inevitably become victims of that same poverty.

Baradaran begins with slavery, arguing that it created the foundation of modern American capitalism, with 3.2 million enslaved people functioning as liquid assets, collateral, and currency. After emancipation, freed people expected land, and General William T. Sherman signed Field Order 15 in 1865, setting aside 400,000 acres for them. But President Andrew Johnson reversed these promises, pardoned Confederate rebels, and restored their land, while "black codes" forced freed people back into conditions resembling slavery. Instead of land, they received the Freedmen's Savings and Trust Company, a savings bank chartered by Congress and signed by Lincoln that appeared government-backed and attracted over $75 million in deposits. The bank was designed only to hold money, not lend it. White managers used depositors' funds for railroad speculation, and after the Panic of 1873, the bank collapsed. Frederick Douglass, appointed president in a last-ditch rescue effort, found the institution riddled with fraud. It closed in 1874, wiping out more than half of accumulated Black wealth and sowing lasting distrust of banks in the Black community.

In the Jim Crow era, Black communities built their own institutions. Mutual aid societies, churches, and fraternal organizations gave rise to the first Black banks, including the True Reformers Bank in Virginia (chartered 1888) and Maggie Walker's St. Luke Penny Savings Bank in Richmond (founded 1903). Walker was the first Black woman to own a bank in the United States. Booker T. Washington championed Black business as the path to equality, founding the National Negro Business League in 1900, while W. E. B. Du Bois, who demanded full integration and cofounded the National Association for the Advancement of Colored People (NAACP), also supported Black enterprise. Yet Black businesses operated on an "economic detour": Jim Crow barred them from serving white customers while white businesses served Black customers freely, forcing Black consumers to pay more for inferior goods. The vulnerability of even successful Black enterprise was illustrated in 1921, when a white mob destroyed Tulsa, Oklahoma's prosperous Greenwood district, known as "Negro Wall Street," killing approximately 300 people and burning over 1,200 buildings.

The Great Migration (roughly 1910 to 1970) brought 6 million Black people to northern cities, where housing segregation created a parallel economy and a boom in Black banking. From 1900 to 1934, some 130 Black banks emerged; Chicago's segregated Black neighborhood, known as the "black belt," supported the two largest. Baradaran identifies three structural problems that prevented these banks from building wealth. Their deposits were small and volatile because their customers were poor. Their loans, concentrated in Black real estate, lost value because segregation depressed property prices. Most critically, the money multiplier, the mechanism by which banks create new money through lending, was broken: When a Black bank made a loan to buy property, the proceeds landed in a white bank because sellers were almost always white, causing Black money to flow out of the community with each transaction.

Baradaran argues that the New Deal reshaped American banking along racial lines, amounting to what she calls "white affirmative action." The Federal Housing Administration (FHA) insured mortgage loans but explicitly prohibited lending in neighborhoods with Black residents, a practice known as "redlining." Between 1934 and 1968, 98 percent of FHA loans went to white Americans, creating the white suburbs while trapping Black people in declining ghettos. Into the void came exploitative contract sellers, who by the 1950s sold 85 percent of homes to Black people in Chicago at three to four times market price. Baradaran contrasts struggling Black banks with immigrant banks like the Bank of Italy, which grew into Bank of America after Italian Americans were accepted as "white" and received FHA and GI Bill benefits (federal veterans' education and home-loan subsidies), arguing that immigrant success depended on government support rather than self-help alone.

The Civil Rights Act of 1964 and the Voting Rights Act of 1965 banned racial discrimination but did not address the economic roots of inequality. Ghetto residents still paid vastly more for goods and credit. Beginning in 1965 with the Watts riot, over 150 full-scale riots erupted across the country. The Kerner Commission, a federal panel convened to investigate the unrest, warned that America was "moving toward two societies, one black, one white, separate and unequal" (156), but its recommendations were ignored. After Martin Luther King Jr.'s 1968 assassination, the civil rights coalition fractured, and the War on Poverty gave way to a War on Crime that accelerated mass incarceration.

President Richard Nixon co-opted the Black Power movement's rhetoric to create "black capitalism," a program that replaced meaningful reform with symbolic gestures. George Romney, Nixon's secretary of the Department of Housing and Urban Development (HUD), pursued aggressive integration, but Nixon shut down every initiative and forced Romney's resignation. Instead, Nixon created the Office of Minority Business Enterprise, which had no direct funds. Black capitalism cost virtually nothing but neutralized militant movements, cut off demands for reparations and integration, and gave Nixon cover to dismantle antipoverty programs.

Subsequent presidents continued the framework under different names. Reagan used free-market rhetoric while escalating the War on Drugs, which disproportionately imprisoned Black men. Clinton created tax incentives for Community Development Financial Institutions, promising that private enterprise could find profits in underserved neighborhoods. Senator William Proxmire's 1977 Community Reinvestment Act required banks to report on lending in low-income areas but lacked enforcement teeth. Meanwhile, deregulation allowed large conglomerates to dominate, driving community banks out of business. When Freedom National Bank of Harlem failed in 1990, the Federal Deposit Insurance Corporation (FDIC) chose the unusual step of paying off only insured depositors rather than selling the bank to another institution, causing churches and community groups to lose deposits, even as the FDIC simultaneously rescued a similarly situated white institution.

The most devastating blow came from the subprime mortgage market. Wall Street banks sent brokers into Black neighborhoods to sell high-interest loans; subprime loans were five times more likely in Black neighborhoods, and even high-income Black homeowners were steered toward subprime products. Wells Fargo loan officers referred to Black borrowers as "mud people" and to subprime loans as "ghetto loans" (259). The 2008 financial crisis wiped out 53 percent of total Black wealth. By 2016, white families had 13 times more wealth than Black families, a gap present at every income and education level. The Black banking industry shrank by more than half, from 51 banks in 2000 to 20 by 2016.

Baradaran concludes that placing the burden of closing the wealth gap on Black banks alone is both cynical and futile. Banks reflect economic conditions; they cannot transform them. She argues that any plan to bridge the gap must include integration or a means to acquire capital, and that an essential first step is acknowledging that the wealth gap was created through racist public policy. She proposes a reparations program focused on geography rather than identity, targeting neighborhoods that were originally redlined, building on historical precedent since land grants and mortgage subsidies were the instruments through which white Americans gained their wealth advantage.