The personal finance industry needs a dose of sobering history
(Bloomberg review) — There is a belief in the United States that has seeped into the personal finance industry – that if you work hard enough, then you will find financial success. The problem is that this “get up by your boots” narrative is a long-standing mistake.
Of course, this rhetoric is powerful because, in some ways, it’s empowering to believe that you can get rich on your own. But this obscures the important role of external factors in shaping our finances. Crucially, it ignores the country’s legacy of systematically marginalizing certain groups, making it difficult, if not illegal, for many to access opportunity and create wealth.
February is Black History Month and an important time to remember this legacy and learn about the centuries of financial oppression in the United States, even after the official abolition of slavery. It’s a story many of us never learned about in school, though it still impacts Americans in many ways today.
The US Federal Reserve’s 2019 Survey of Consumer Finances, the most recent data available, found that the wealth gap between white and black Americans has grown significantly over the previous two decades. The median white family had seven to ten times more wealth than the median black family. Many factors explain this, from inequalities in remuneration to those in home ownership and investment.
But to truly understand racial wealth disparity, you have to go further back into the long history of black Americans suffering significant financial losses at the hands of white Americans and being directly excluded from many avenues of wealth creation, from banking to housing. .
In 1865, after emancipation, Freedman’s Savings and Trust Company was established to give former slaves and Black Civil War veterans the opportunity to save and access capital in the mainstream financial system. Although it was a bank specifically for black customers, it was run by an all-white board and funds were mismanaged, eventually causing a collapse that cost 60,000 depositors an estimated $3 million. dollars, or more than $70 million in today’s dollars.
In 1921, Oklahoma hosted the Tulsa Race Massacre, when a white mob looted, destroyed property, and murdered residents of the affluent black community in the Greenwood District. It is estimated that over $200 million in damage was caused in today’s dollars.
These are just two examples of wealth stripped from black families, leaving long-lasting consequences. A number of discriminatory policies over the past century have also had a significant impact on today’s racial and socioeconomic disparities.
For example, in the 1930s, amid the Great Depression, black Americans were largely excluded from the benefits of New Deal-era policies, programs and reforms, says Dania Francis, an economist at the University of Massachusetts at Boston. Even if the language itself did not explicitly exclude black Americans, the consequences remained. “[The New Deal] originally did not apply to domestic workers and farm workers,” says Francis, “some 60% of black people at the time were domestic workers and farm workers.
It was during this time that redlining – the practice of denying financial services to residents of certain areas based on their race – was created. The new Home Owners Loan Corporation created “residential safety maps” and drew real red lines around neighborhoods it deemed “unsafe.” Anyone who lived in these neighborhoods, which were often home to black residents, would be denied a loan. Francis points out that this not only harmed the building of black wealth, but also reinforced segregation. Not only were black Americans unable to get the capital to buy their homes, but no one else could get a mortgage to buy in the gated neighborhoods either.
Redlining was banned in 1968 by the Fair Housing Act, but that doesn’t mean it’s gone. In 2012, Wells Fargo settled with the Department of Justice for more than $175 million for allegedly engaging in discriminatory lending practices against African American and Hispanic borrowers between 2004 and 2009. The bank was accused of pushing subprime mortgages or charging for them. higher fees or rates compared to white customers.
There was a similar exclusion after World War II with the GI Bill, which gave veterans access to low-interest mortgages and scholarships. With the bill being administered at the state level rather than the federal government, many black GIs — especially those in the South where Jim Crow still ruled — were unable to access or fully utilize child-raising allowances and of accommodation.
“It ignores how the vast majority of wealth was generated in this country,” says Matthews. “Specific groups were given land and capital and whole groups were left out. It’s not bootstraps, it’s law and policy that helped some groups and not others.
For Kiersten Saunders, co-author of Cashing Out and co-creator of personal financial media company Rich & Regular, understanding the racial wealth gap and the bootstrap fallacy requires seeing two different time horizons: white people have had more time and opportunity to build wealth compared to black people who have been economically barred. “It takes time to catch up,” says Saunders.
Just like good policies. “Trying to compensate for previous generations of poverty isn’t just a matter of effort, especially when it wasn’t lack of effort that got you into that hole,” says Julien Saunders, co-author of Cashout.
Too often, our narratives of financial and socio-economic achievement are tied to radical accountability. Indeed, as Francis points out, it is easier to tell individuals to change their behavior than to challenge the structures of our economy and society that allow some to succeed while limiting others. It’s time for the personal finance industry to stop taking the easy way out.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Erin Lowry is the author of “Broke Millennial”, “Broke Millennial Takes On Investing” and “Broke Millennial Talks Money: Stories, Scripts and Advice to Navigate Awkward Financial Conversations”.