The Color of Money | Mehrsa Baradaran

Summary of: The Color of Money: Black Banks and the Racial Wealth Gap
By: Mehrsa Baradaran


Embark on a thought-provoking journey as we explore ‘The Color of Money: Black Banks and the Racial Wealth Gap’ by Mehrsa Baradaran. This book summary will delve into the historical and economic forces that have contributed to the immense disparity in wealth between Black and white Americans. Examine the challenges Black-owned banks have faced in the fight for equality and the impact of segregation on the economy. Discover how political figures and activists, from Frederick Douglass to Richard Nixon, have endorsed Black banks as a means to uplift Black communities. Ultimately, we’ll scrutinize the reasons why these institutions have struggled to overcome their historical burdens.

Wealth Inequality Among Black Americans

Despite decades of reforms, Black Americans still face the wealth gap, which has caused present suffering due to historical injustice. The 2008 financial crisis compounded their problems as they possess little intergenerational wealth. Although Black-owned banks have long been touted as a solution to this problem, they have struggled to make headway in a deeply segregated economy. Many notable figures from Frederick Douglass to Malcolm X have emphasized the importance of these institutions, and even some political leaders have supported them. However, the few Black banks established over the years have been unable to break free from a history of oppression.

The Hidden Complexity of Black Banks

Black banks were established to cater to the needs of underserved Black residents and businesses, but the reality was more complicated than expected. The economic realities of the Black neighborhoods made lending to Black consumers and entrepreneurs riskier, which resulted in Black banks holding more loan loss reserves than other banks. Furthermore, Black customers typically made small deposits, which created higher costs for Black banks than for their competitors. As a result, Black financial institutions invested mostly in low-yielding government securities, redirecting their communities’ money to Washington, DC. Sadly, these banks were just another conduit for sucking money out of Black communities and into the mainstream economy rather than helping keep Black wealth in Black neighborhoods. The unintentional decision by Black bankers to use the incomes of their customers to undercut the ghetto economy by investing in the outside community made the situation even worse.

The Economic Exploitation of Enslaved People

Enslaved Africans were viewed as property and used as collateral for loans, with an estimated collective value of over $1 billion. Despite the economic gains created by slavery, enslaved people themselves never saw any profits. Black individuals in the North were prohibited from accessing the banking system and could not sue white customers or competitors, leading them to rely on other African Americans for credit. The Freedmen’s Bureau Act promised newly freed enslaved people 40 acres each, but it was ultimately not fulfilled due to backtracking from President Andrew Johnson and violent opposition from former Confederates. As a result, Black Americans were left marginalized and without assets or the ability to vote or acquire skills, ultimately forced to grow cotton through sharecropping.

The Freedmen’s Savings Bank Disaster

In 1865, the Freedmen’s Savings Bank was established to help Black people enter the financial mainstream. Marketing the bank as a government arm resulted in a tremendous influx of depositors, leading to $75 million in deposits in just ten years. However, the bank was run by white bankers who viewed it as a source of capital for speculative ventures rather than a means of supporting Black people. Despite adding branches and advertising campaigns to attract more investors, an economic crash in 1873 was devastating, causing the bank to close in 1874. More than 61,000 customers lost almost $3 million, leading to a widespread loss of faith in the federal government and distrust of banks among African Americans.

The Struggles of Black-Owned Banks

Despite a significant increase in the number of Black-owned businesses in the US, Black banks faced many challenges in the early 20th century. They were limited to serving a small clientele, which made it difficult for them to grow and compete with mainstream banks. Additionally, their deposits were riskier due to the smaller size and frequent withdrawal. This hindered their profitability and lending capacity, as they struggled to maintain high capital ratios. The True Reformers Bank in Virginia and the Wage Earners Savings Bank in Georgia were two examples of failed Black banks, due to issues such as personal relationships overshadowing stringent underwriting. Even into the 21st century, Black banks continued to have a high failure rate. Despite these obstacles, Black-owned banks have played an essential role in providing financial services to underserved communities, and some have remained successful for decades.

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