Before the civil rights movement captured the nation’s attention, activists and community groups were protesting against exploitative credit and exclusionary lending practices rooted in centuries of racial discrimination. The ensuing protests and riots weren’t as picture-worthy or easy to understand, but the eradication of the Jim Crow credit market was necessary for the realization of America’s democratic ideals. 

Editor’s note: The current debate in economics seems to lack a historical perspective. To try to address this deficiency, we decided to launch a Sunday column on ProMarket focusing on the historical dimension of economic ideas. You can read all of the pieces in the series here.

During the capital-building and prosperous decades of the 1940s to the 1960s, fueled by the mixed economy of the New Deal era, black communities were lending and borrowing in a laissez faire credit market. Before the press and the nation focused on Martin Luther King’s Civil Rights coalition, activists and community groups were protesting against exploitative credit and exclusionary lending transactions. 

The first protest led by blacks against white businesses occurred in Harlem in 1935. The spark was lit when a teenage shoplifter was beaten by a store owner. The protest turned into violence, in a precursor of future events, rioters destroyed white business establishments while sparing black-owned businesses. Most race riots before the Great Depression were white-led riots against blacks, so this was a change, though violent protests were rare. In northern cities, collective action was beginning to coalesce around specific economic demands in segregated black ghettos. These protesters focused on discriminatory hiring practices and exploitation by white lenders who sold goods at high interest with heavy markups. These early efforts were focused on local and state action and enjoyed a few crucial victories. Harlem community groups persuaded the New York state legislature to enact consumer protecting legislation that curtailed some of the most onerous contract terms provided by lenders.

One side of the protests focused on encouraging more black businesses and called for “Bigger and Better Negro Business.” This movement was being waged by local black organizations that spanned the political spectrum from radical black nationalists to the conservative National Business League. Another strand of collective action with the slogan “Don’t Buy Where You Can’t Work” demanded that white businesses operating in the ghetto hire more black workers. These groups put pressure on local businesses using boycotts. Adam Clayton Powell emerged as the most vocal leader of the boycott movement and several years later, formed the “Greater New York Coordinating Committee for Employment” aimed at securing jobs through nonviolent protest.

In 1935, several white merchants challenged a black boycott of their Baltimore businesses in the Maryland Court of Appeals. The court ruled in favor of the boycotting community groups stating that the black community had “an unquestionable right” to present their cause “in a peaceable way.” The judge even seemed to be encouraging black protestors to “persuade white employers to engage colored employees” and to orchestrate boycotts of those who did not “by organization, public meetings, propaganda and by personal solicitation.”  In a troubling twist, however, the court seemed to put the onus on the black community to achieve their demands stating that “whether they succeed or fail will depend on the cooperation of their people.” The subtext seemed to be that it was the responsibility of the black population to work to end racism. The ruling set the stage for the civil rights movement’s early strategy of leveraging black market power and using organized boycotts against Jim Crow buses in Montgomery, Alabama. 

By the 1960s, black poverty was deeply entrenched, but more importantly, it was marked by its stark contrast to the white middle-class’s prosperity. Not only had the majority of black families not ridden the postwar economic boom; conditions in the ghetto had actually worsened. By the early 1980s, almost half of black children lived in poverty, in contrast with less than 15 percent of white children Black families had less than one-fifth the wealth of white families. The Federal Reserve studied the racial wealth gap in 1967 and concluded that “the evidence appears overwhelming that the net wealth position of black families is substantially poorer than that of white families of similar characteristics.” For whites and blacks earning more than $20,000 a year in 1967, whites had a net wealth of $100,009 and blacks had $30,195. At the bottom, for incomes less than $2,499 a year, whites had $10,681 and blacks had $2,148. 

The Federal Reserve study concluded that the source of the wealth gap was historic inequalities in income and opportunities, “a legacy of past economic deprivation,” which would not be fixed even if the income gap was eliminated. It could only be closed by a reversal of past privileges. A separate study on black wealth explained that the reason for the large wealth gap had nothing to do with black savings patterns. In fact, “the bulk of consumption studies show[ed] that blacks saved more at any given level of income.” The study concluded that “these rather stark findings on wealth accumulation suggest that economic equality for black families will not be achieved when the current annual income gap between black and white families is eliminated because a considerable wealth gap will remain as a legacy of past economic deprivation.” The wealth and opportunity gap would continue unabated without direct government action—in other words, something more than just stopping racial discrimination. 

“The protest against unequal interest and contract terms was the Birmingham struggle of the northern ghetto. However, this protest did not capture the national attention as did the fight between Bull Connor’s dogs and clubs and the peaceful children marching in the South.”

While the Civil Rights Act of 1964 and the Voting Rights Act of 1965 were in fact the beginning of historic changes that continue today, they were also the high-water mark of the civil rights movement. As soon as the acts were passed, it was apparent that the laws did nothing to remedy past wrongs—they were not designed to do so. The Civil Rights Act and the Voting Rights Act finally guaranteed the black population the same rights they had already been granted in the 14th and 15th Amendments passed 100 years earlier. Even these laws would have been disregarded had they not been supported by Supreme Court decrees and, more importantly, federal troops. The South was just as adamant about fighting the decrees of Congress in the 1960s as it had been in the 1860s. Only this time, the federal government forced compliance and eventually got it. The doors of the white only schoolhouse and voting stations were opened, but what could be done about the redlined ghettos and the effects of centuries of exclusion and poverty? The decree of equal protection before the law was ineffective as a remedy to this history. In fact, it stood as a barrier to it, for how could the federal government remedy its race-based laws without new race-based laws? Soon, claims of racial discrimination would be used to block and contest all government attempts at race-based remedies and affirmative action. 

Blacks were still unemployed at twice the rate of whites, they occupied low-wage jobs, had little wealth, and these momentous laws provided no conceivable path out of poverty. Abolishing racist laws was not the same thing as achieving equality. Ending segregation was not the same thing as integration. Ending job discrimination was not the same thing as having jobs. Ending credit discrimination was not the same thing as providing credit. A legal right to equality was meaningless to the destitute and marginalized unless it could chart a path to actual equality. 

The movement shifted toward “achieving the fact of equality” as Bayard Rustin wrote in 1965, rather than merely “removing the barriers to full opportunity.” If it was true, according to Rustin, that “freedom must be conceived in economic categories,” the civil rights movement turned its focus to achieving justice as an economic matter. The exploitative effects of housing segregation in the North were sown through legal contracts and bureaucratic zoning. Intractable poverty and inequality were just as oppressive as the South’s brute hostility, but a far less visible problem to address. However, it had to be addressed in order to achieve racial equality. Urban ghettos were zones with fewer public resources such as quality schools, roads, hospitals, universities, and infrastructure. The segregated ghetto contained too little capital to appreciate, and its main export, labor, struggled to find work as industries left America’s cities for the less costly suburbs before eventually moving offshore.

These trends were self-reinforcing. White flight included not just homeowners, but their consumer power, and ultimately led to the drain of investment and business funds. The decline of the inner city was not just a byproduct of racial segregation, but had to do with the decline of industrial manufacturing in the inner city. Large industrial plants either moved to the suburbs, closed up shop, or moved abroad. These trends led to higher joblessness in the inner city and counterintuitively to increased costs. The state of the ghetto was one of high prices and general deterioration—it was expensive to be poor and isolated. Suburban retailers could lower costs due to their access to an economically diverse set of customers and higher sales volume. Small businesses charged more for products because of their lower sales volumes and higher operating costs (due to the isolation of the ghetto). The black inner-city economy was a uniquely destructive mix of negative forces that impeded the economic mobility of the residents. In 1965, Kenneth Clark described the “dark ghettoes” as “social, political, educational, and—above all—economic colonies.” Though Clark was not a black nationalist, the black nationalist movement viewed the segregation of the ghetto through the prism of anti-colonization movements abroad. The ghetto did not resemble a colony in many ways, but one could be forgiven for drawing the analogy when observing the drastically different economies in the “dark ghetto” in contrast to the white suburbs. 

Moreover, just like the violence that accompanied the anti-colonialization fights abroad, a violent resistance also ignited in the US ghettos. This resistance was unlike anything the US populace had experienced heretofore. A CBS TV broadcast announced, “This was not a riot. It was an insurrection against all authority.” Johnson deployed the National Guard with military equipment to deal with the civil insurgency. Doug McAdams’s study of the civil rights movement after 1965 explained, “It would not seem an overstatement to argue that the level of open defiance of the established economic and political order was as great during this period as during any other in the country’s history, save the Civil War.” Sixteen days after Congress passed the Civil Rights Act of 1964, Harlem erupted in violence. Five days after President Johnson signed the Voting Rights Act of 1965, the Watts district in Los Angeles exploded in a deadly riot that killed and injured many and destroyed millions of dollars’ worth of property. Watts had been thoroughly segregated over the preceding decades, making poverty concentrated and extreme. One in three people in Watts were unemployed, all but a single industrial plant had abandoned the Los Angeles district, and rioters targeted white property as they channeled their anger toward their perceived exploiters—white absentee property owners, pawn shops, and grocery stores. In Chicago’s West Side, rioters claimed that they wanted to “drive white ‘exploiters’ out of the ghetto.” 

Though rioting and looting in some places seemed like a random and rage-fueled destruction of imprecise orientation, observers noted that there were typically specific targets. Generally, rioters directed their pent up anger specifically at ghetto lenders. The Washington Post reported that the stores that sold on credit were the “most popular victims of the riots.” Upon studying these accounts, the Federal Trade Commission (FTC) concluded that rioters were in fact engaged in “selective burning and looting” of stores they felt “had treated them unfairly” and that these rioters went to the lenders “not to loot, but to destroy the credit records of the stores they burned. This was their solution to oppressive debt.” Stores were seized by rioters who destroyed the records (“books”) on which their debts were recorded. Journalists reported crowds chanting “burn the damn records;” a mother told looters at a grocery store, “Don’t grab the groceries, grab the book.” 

The protest against unequal interest and contract terms was the Birmingham struggle of the northern ghetto. However, this protest did not capture the national attention as did the fight between Bull Connor’s dogs and clubs and the peaceful children marching in the South. One could be captured on the New York Times front page to expose the brutality of southern Jim Crow, the lawlessness of the southern justice system, and the obvious moral rectitude of the civil rights movement. The other—the riots, the destruction of property, the opaque legal mechanisms of the installment contract and debt financing—was not picture-worthy or easy to understand. Nevertheless, the Jim Crow credit market was also rooted in centuries of racial discrimination, and its eradication was just as necessary to the realization of the country’s democratic ideals. 

Editor’s note: the above piece is excerpted from Mehrsa Baradaran’s “Jim Crow Credit.” Read the full paper here