Black Capitalism and Black Banks

...It was announced recently that General Motors hired over 20,000 "hard-core" unemployed, mostly Negroes, in the last six months...

...There is a kernel of truth in all this, but little more than a kernel...

...To assist in this direction, public funds might be deposited in black banks...

...A pseudo-economic argument for black banks runs as follows: Negro-owned banks will do those things (primarily grant loans) that large, white banks could do but won't...

...To compensate, black banks must impose high service charges: The Cambridge Trust Company in Cambridge, Massachusetts, charges nothing for a checking account with a $100 minimum balance...

...Economically, it is largely irrelevant to improving life in the ghetto...

...Finally, the inadequate business experience of most ghetto loan applicants, and the poor economic conditions in the areas black banks serve, make loans risky and necessitate greater than normal attention by bank officers...

...For Unity Bank appears to have received much more from local deposits and investments in its capital stock than it has yet lent to Roxbury residents...

...Their small size limits the funds available for loans and makes them reluctant to take chances...

...If private enterprise really can help improve ghetto conditions, shouldn't our concern be the integration of Negroes into white banks, rather than the fate of tiny black banks that are doomed to impotence...

...The contribution of black banks to ghetto financing, therefore, is minimal...

...Naturally, this contribution would be more substantial if black banks were somehow strengthened...

...Downtown banks that have ghetto branches must maintain uniform service charges throughout an entire city, or they will be accused of discrimination and racism...

...In Philadelphia, various intermediate groups have been formed...

...Morally, it evades the real issues facing America—integration and equality...

...The ghetto also provides few opportunities to make low-cost commercial loans, which editor Cross calls "the backbone of American banking...

...the rest are on such unsure footing that without cooperation from white banks they would be crippled or dead...

...Liberalized policies at white banks tend to obviate the social and political need for black banks employers, pathfinders, etc., while their small size and low profit margin make their economic contribution minimal...

...Given these circumstances, serving the needs of the ghetto may not be profitable for them...

...And so they become a drain rather than source of additional resources for the community...

...Sometimes more mortgage loans are made instead, but these are at simple interest and not discounted, restricting profits, nba figures show that black banks have lower loan-to-asset ratios than most banks in the U.S...

...Yet realistically, perhaps half the nation's Negro-owned and run banks are truly independent...

...Without special protection," he observed, "the single institutions in poverty areas may find that they cannot afford even to invest the funds they themselves have collected from the area...

...Theodore Cross noted in the Senate hearings that there is only one bank in Brooklyn's Bedford-Stuyvesant section, and that the bank/population ratio, 1/5,000 for the city as a whole, is 1/30,000 in Harlem...

...The most striking characteristic of the nation's black banks, however, is neither their location nor their age...

...Freedom National Bank in New York, for example, is currently the largest Negro-owned or run bank in the country...

...To the extent that they raise their capital in the Negro community, black banks tie up millions of dollars in an enterprise that will probably show no profits for several years, and low profits thereafter...

...And many big banks are trying...

...And these figures do not reveal the extent to which many of the newer black banks represent white charity as much as black power...

...The main problem of Negro-owned banks is the problem of the black capitalism program in general: The heart of capitalism is capital, and Negroes simply do not have very much of it...

...The 12,-000-odd commercial banks in this country have $330 billion in assets, with the black banks' share of the total coming to under $200 million...

...many banks are recruiting at Negro colleges for the first time...

...But the only purely economic argument that has been put forward concerns their ability to involve themselves exclusively, and so deal effectively, with conditions in the ghetto...

...This same dilemma is said to apply with regard to loans...

...or tax credits allowed for deposits in them...

...White economic institutions must provide the "take-off" capital without which there can be no alleviation of ghetto conditions...

...They provide jobs for Negroes who want promotions to be totally independent of race...

...Their ability to demand higher interest rates might become important if their assets were big enough to allow for relaxed loan criteria...

...The nba says service charges constitute only 4.5 per cent of total income for all banks, and 14 percent for black banks...

...To my mind, black capitalism is a slogan, not a solution to the problems of the ghetto...

...The bdc is an all-Negro group made up of black businessmen...

...Moreover, since participation in most bank ghetto programs is voluntary, Negro borrowers are likely to be dealing with officers who are sensitive to their problems...

...Other organizations performing the same role include the Urban Coalition, the Urban League, and the naacp...

...Shawmut uses its Roxbury office to make ghetto loans, and executives seem to feel that the success of Negro applicants in securing them is spreading by word of mouth...

...These factors combine to raise operating costs and reduce profits...

...But the Hughes article was written in September 1956...

...Thus the black community's weak banks are often weaker than they appear to be, for in many cases they must rely upon the white community for support...

...Since they are predominantly at low-to-middle income levels, they have little money to save or invest...

...The holding company might set up other financial institutions, such as a development corporation to invest in (rather than loan to) ghetto companies, or a loan company to make risky loans at the high rates that are impossible for banks...

...In an interview, an officer of Unity admitted that his bank has difficulty in finding worthwhile loans, forcing it to rely on commercial paper and on loan participations offered by large white banks in Boston...

...Since banking is central to capitalism, the experiences of the growing number of black banks around the country may provide some estimate of black capitalism's real potential...

...No matter how "hard-core" these men really were, one need only consider the investments, loans, training, and personnel necessary to employ 20,000 people, to realize that black entrepreneurship will not be a major factor in aiding Negroes...

...Unity Bank was called by one of its officers "an act of vanity...

...Emmet Hughes has said in Fortune: "Negroes, who today can get loans from any Atlanta bank, owe thanks to the Auburn Avenue (Negro-owned) financial institutions, which, by their fine records, shattered the myth that the Negro is financially irresponsible...

...The latter three are especially important in New York, where the ghetto areas are seriously "under-banked...

...They also provide a source of power for new black leaders...

...Federal Reserve Board Governor Sherman Maisel noted another important consequence of the inability to take on high-risk loans...

...The claim that a black bank is the best intermediate group is vitiated by the fact that these new institutions tie up millions which might otherwise be loaned or invested...

...with a mere $27 million in assets, it ranks 1.734th in the nation...

...The larger staffs that black banks require to investigate and follow up loans, meanwhile, result in wages consuming 33 per cent of their income, as opposed to 21 per cent for the industry generally...

...Testifying at last fall's Senate Banking and Currency Committee hearings on "Financial Institutions and the Urban Crisis," Banker's Magazine editor Theodore M. Cross reported that the average individual savings account at Freedom is $600, with many at $100, while at the "white" and typical Dollar Savings Bank in New York City balances average $2,000-$3,000...

...For one thing, Negroes may simply be less hesitant about dealing with other Negroes, no matter how friendly the white bankers...

...Somewhat contradictorily, it is further contended that the role of black banks is largely to act as a conduit for channeling money from the white into the black community, because getting a foothold in the ghetto is a problem for white banks...

...nba statistics show that members spend 95 per cent of their income for expenses, compared to 76 per cent at all commercial banks...

...So it is hardly going too far to state that black banks are not a significant economic force...

...Similarly, while many white bankers still fail to understand why they must have different loan policies for ghetto clients, past business failures and the criminal records of life-long ghetto residents are coming under increasingly sympathetic review...

...In 1962 the nba, then known as the National Negro Bankers Association, had 10 members...

...THERE is, of course, a case to be made for Negro banks...

...Several large banks, like Boston's National Shawmut, do have branches in black neighborhoods...

...This could be done by granting loans to corporations involved in the construction or renovation of housing...

...Then there is the important matter of the role black banks play in spurring white institutions...

...Ghetto banks, in other words, are not prejudiced and have a deeper understanding of the communities they serve than their downtown counterparts...

...shouldn't it be the hiring and promotion of Negroes by America's large corporations, rather than the establishment of Negro-owned furniture and grocery stores...

...These suggestions require cooperation between whites and blacks, and this raises another objection to black capitalism: Is separatism not undesirable, in banks, in capitalism generally, in principle...

...Unity's largest depositor is the State of Massachusetts...

...Subsequently, a dozen new black banks were established, and some of these in the North have quickly outgrown their Southern predecessors...

...The Business Development Corporation (bdc), working mostly with the city's largest bank, First Pennsylvania Banking and Trust Company, brings blacks together with white bankers after screening proposals...

...it is their size...

...PERSPECTIVES Black Capitalism and Black Banks By Elliott Abrams The evidence that "white" capitalism is failing to solve America's social problems has not deterred the Nixon Administration from extolling the possibilities of "black" capitalism...

...It might be wiser to invest this capital in manufacturing or commercial corporations, which are frequently more profitable and require less money to operate...

...All of those founded before World War II are located in the South, where Negro banking started after the Civil War among the newly freed slaves...

...Boston College, and Andover Theological School, in addition to Roxbury...

...In the end, though, the arguments in favor of black banks prove to be fairly weak...

...In his testimony to the Senate hearings mentioned above...

...For where the income level of depositors is low, accounts are likely to be numerous and balances small...

...They have the money and expertise needed to take greater risks...

...The small size of black banks is inherent in the ghetto market they serve...

...Hiring policies have undergone considerable revision even on the executive level...

...As for the assumption that white banks are both prejudiced and ignorant of ghetto conditions, American banks have certainly been bastions of prejudice but they now seem to be less and less so...

...Nevertheless, black banks provide the proverbial "example to look up to" incentive for many young Negroes...

...or the insurance of their accounts raised to permit larger deposits in absolute safety...

...A few defaulted loans mean little to a big bank...

...Even Freedom National is extremely small...

...According to the Harvard Crimson, deposits in Boston's Unity Bank and Trust Company, located in the Negro area of Roxbury, come from the New England Telephone and Prudential Life Insurance Companies, Brandeis, Harvard, and Northeastern Universities...

...The trend toward one-bank holding companies now apparent among the nation's major banks suggests many additional approaches...

...Only five black banks have more than $10 million in assets...

...Elliott Abrams, a previous contributor, is now a senior at Harvard...

...The activities of black banks, and the other efforts to enact the black capitalism program, will be no doubt constructive, yet will also be marginal to the real needs of the ghetto: jobs, housing, education, health care...

...In addition, there is an unhealthy predominance of savings accounts, on which interest must be paid, over checking accounts...

...Unity Bank imposes a 70 cents per month "base charge," plus four cents per deposit and 10 cents per check...

...But when all is said and done, the increase in the number of loans would not be very great, for black banks simply cannot take on many high-risk loans, regardless of the interest rate...

...The key institution in the world of black commercial banking, the National Bankers Association (nba), now has 20 member banks...

...But officers of Shawmut admit that the relatively small size of Boston's Negro community may be responsible for their success, and that word of mouth may not be enough in New York or Philadelphia...

...Although precise figures are hard to come by, the situation in Roxbury seems to illustrate Maisel's point...

...to a bank with total assets under $10 million, every default is a real blow...

...For this reason, I believe the established groups like the naacp and Philadelphia's bdc are better suited to the task...

...For instance, black banks can insist on very high service charges, permitting them to make a profit even on the small and very active interest-bearing ghetto account...

...By the time of the Great Depression there were scores of Negro commercial and savings banks, but most failed in the early '30s...

...The sociological and political arguments for black banks are more difficult to evaluate...

...Almost all of America's major financial institutions have inaugurated special programs in connection with the racial crisis, as the activities of the American Bankers Association Committee on Urban Affairs testify...

...The one still significant role of the black bank in the Negro community is as a source of wealth, power, and self-esteem independent of white control...

...downtown banks cannot because they fear charges of racism ("7 per cent for whites, 10 per cent for blacks"), and because their normal practice is to grant loans at a uniform rate to those who meet the requirements or not grant them at all...

...Black banks can charge the high rates that are warranted...

...In any event, there is simply no reason to believe that a small, Negro-owned bank offers more to the customer than a big, white-owned bank...

...In purely economic terms, large white banks are in a much better position to aid the ghetto than black banks...

...time has eroded white prejudices, and the dozen black banks established in the '60s appear to have arrived when the crucial need for them is in many ways past...

...Since the ghetto is a bad place to do business, interest rates must be higher there than in the rest of a metropolitan area...

...As one white Boston banker put it, no small bank can compete in services rendered with a big bank that is really trying...