Book Review

The Color of Money: Black Banks and the Racial Wealth Gap

By Mehrsa Baradaran

Harvard University Press. 2017.

In her book "The Color of Money: Black Banks and the Racial Wealth Gap," Mehrsa Baradaran delves deep into how financial systems have gone to create and continue racial inequities in the United States. Juvaria Jafri writes, "It provides invaluable historic links between wealth inequality and racial prejudice, along with detailed political economy of the working of financial institutions, how property ownership works, and the now familiar trope of self-help as substitute to systemic transformation.".

The Color of Money

In the book "The Color of Money", Mehrsa Baradaran theorizes financial systems based on racial wealth disparity in America. She points out that 60% of black Americans have either never had a bank account or had limited banking services, in contrast to 20% of white Americans. She says that reducing this inequality to merely racism ignores the monumental role of other subtle factors like 'commerce, credit, money, and segregation' that have silently worked at fracturing this gap of wealth in the modern American society.

Black banking

The "Black banking" idea dates back to the formation of small military banks during the Civil War of the 1860s. These banks were created primarily to deal with the salaries of black soldiers. The most pressing example among these is the Freedman's Bank that initially appeared plausible due to the fundamental government support by the administration of Abraham Lincoln. Still, in actuality it was a private investment bank having management personnel who were directly involved in active speculation. It encouraged the black community to use it as a personal savings bank while teaching the values that came with thrift and capitalism.

A financial Catastrophe

Baradaran insists that one of the distinct features of capitalism is that capital has the ability to reproduce itself by use of credit. However, the Freedman's Bank denied the black community this benefit because it was not a lending bank to depositors. The result was that the bank collapsed after incurring huge losses when their management invested customer deposits in the westward expansion of the railroad, later called 'the first postwar asset bubble'. It represented a financial catastrophe for many in the black community and a reason for general distrust of both the state institutions and banks in particular. The case for black banking continued to be advocated for, not just because many black leaders – among them individuals who worked in the bank as tellers, clerks, and bookkeepers – could envision success, but also because the legitimization of Jim Crow laws and segregation effectively closed off the black community from public life in America. Within this racially segregated setting 'not only was it impossible for black banking to be separate and equal, but they also could not even be separate and profitable'.".

White and Black Businesses

There were many structural reasons for this: for instance, although the number of black businesses increased exponentially between 1917 and 1930, because these were almost always individually owned and closed when the founder died they offered only a weak infrastructure for the production and accumulation of capital. Moreover, since the black community could not avail themselves of credit or insurance from a white bank or buy a home from a white realtor, the cost of accumulating capital was always higher. And prohibitions meant black businesses had to get black customers while white businesses could sell their products to all customers: the implication in this case is that, in addition to competing with white businesses, black businesses were also competing with other black businesses and therefore could not enjoy economies of scale.

 The Wealth Gap

The wealth gap is mainly due to the disadvantage blacks have had in owning homes. Given that white institutions rarely gave black individuals loans, if they did, the interest rates would be abnormally high. Black banks were thus filled with home loans, putting themselves at a risk of property value impairments when blacks bought houses due to segregation. A combination of the economic push, as well as racism, thus fueled the strong push by white individuals to prevent black people from entering their neighborhoods, since the fear of one's neighborhood deteriorating and becoming part of the ghetto was a major issue.

Civil Rights Movement

The successes of the Civil Rights movement, which fully got under way in the 1960's resulted in the black community receiving formal legal and political equality but not economic equality. When President Nixon took office in 1969 he confronted the vigorous white backlash against a new radical black movement with opposition to legal race discrimination and government integration efforts. As such, black banking was a part of black capitalism, which people viewed as a government affair in meeting the demands of the black populace.

Black Capitalism

Also, black capitalism could not solve the problem of capitalisation for the black banks faced with nonperforming loans, increasing costs and reduced profits, along with low investment capital. "Moreover, since most of the shareholders had to be black for a bank to qualify as a black bank, the limitation in number of possible investors for such bank impliedly limited its capabilities of attracting more funding. The volatility of deposits was also witnessed in the black banks that faced a higher rate of withdrawals of deposits than the white banks. These deposits were quite volatile and had to be underpinned by government securities to limit the risks involved, which did indeed lower returns and depress profitability.

The Flow of Capital

Baradaran demonstrates one of the segregationist banking system problems is one of the flow of capital: money deposited in a black bank ends up leaving the black banking system too as 'Black banks were still exporting funds from the ghetto.' Their excessive focus on government securities meant that they used deposits from customers to fund mortgages elsewhere. During the era of the second mortgage markets, the flow of deposit money to other people's mortgages rose as a result of the security that was mortgage-backed. Presently, globally, banks were investing in mortgages all over the world. For black banks, this became a new and less more transparent means for them to perform the financial filter role — shifting money from the inner city to the wider economy' 245.

Besides the fact that black borrowers have always had limited access to the loan markets, they were the hardest hit during the subprime era; it is estimated that over 53% of total black wealth was lost in the 2008 financial crisis. Since the crisis, black banking has generally been in decline, except in few rare moments of growth.

While Baradaran grounds her book in a historical analysis of wealth disparity within the framework of racial bias, she also includes such diverse themes as political economy concerning financial institutions, regimes of property ownership and its particulars for maintaining inequalities, and the idea of self-help in opposition to systemic transformation. All these are interconnected and very relevant, especially in an Anglo-American context, with austerity policies and with the increasing decline of the post-war welfare state. There is also a focus on 'workfare' and, particularly in Britain, on asset-based welfare like 'Help to Buy'. Moreover, it could extend into developing countries. Many of the comments about how this initiative—the black-owned banks—isn't going to work in creating wealth growth apply directly to the criticisms about microfinance and financial inclusion efforts in growing parts of the world.