Race & Place (pt 2 of 3): Convicts, Capital, Collusion, & Cashflow
One of the most fascinating aspects of America, to me at least, is its segregation. America, on paper, is one of the most diverse nations on the face of the planet. The statement is a tad misleading though. It’s very well documented that there’s still a considerable degree of residential segregation across communities in the United States. That, in and of itself, isn’t so bad; however, when you couple it with the staggering socioeconomic disparities across communities of different demographic profiles, you may start to take a bit more interest in the segregation. I find myself particularly intrigued by the topic, albeit it’s a bit more sociological in orientation than psychological (although I only recently became a psychologist). That, and there’s a complex social web at work in America, affecting both social structures and the financial markets, and we don’t fully understand the intricacies of what that means and all the parties affected. There are a few things we have a better understanding of, so perhaps we can start with some of that.
Maybe some history first.
Elephant in the room: slavery was practiced in America for 245 years. From an economic perspective, slavery was critical to American economic development (European development as well, but let’s focus on the former). The American South produced over half of the world’s cotton by 1840. In fact, cotton represented over half of export earnings for the US during that era. But we needed infrastructure to support all of that plantation activity. To that end, the North focused more on delivering that infrastructure through business services, ie. insurance, textile factories, cotton brokerages, legal support, banking, etc. The South, of course, would focus its resources on cotton growth. It worked very effectively, and America benefited tremendously during this time.
There were many problems with this economic model, but it’s easy to note that the slaves were both exploited and excluded.
You have an entire population of people that went 245 years (that’s almost 10 generations) without being compensated for their work. Most of us would be upset if we do a little bit of overtime without getting paid or we have to come in on Saturday to work or something a bit more trivial. Imagine if you were told today that nobody in your family would be paid for the next 245 years.
Instead, for your trouble, you’d receive room and board. But no income.
You can’t build capital that way.
I think most people agree that (245 years of) slavery plays a big role in economic disparities between blacks and whites. What’s important to note though is that the disparity didn’t end when slavery was abolished in 1865. After the South lost the Civil War, they had to begin Southern Reconstruction. If you didn’t know, war is an exorbitantly expensive undertaking. LOSING a war is detrimentally expensive (why do you think America tries to win every single war we fight? You want to try and rebuild New York City? Good luck!). Rebuilding the South was complex, expensive, and in many ways, just down right depressing (this probably serves to fuel hate groups like the KKK, but that’s just an aside). White people and black people were suffering. Unemployment was through the roof. The government was almost nonexistent. The south needed a way to accelerate the rebound… keeping the negros in their place would also be a nice plus.
This set the stage for Black Codes, as well as convict leasing, which would prove to be two key features of Southern Reconstruction.
Convict leasing is exactly what it sounds like. Keep in mind, when you lose a war, a lot of things have been destroyed in the process. Sherman’s March to Sea is a great example. General Sherman captured the city of Atlanta and destroyed and burned much of what he came across in his march to the eastern coast of Georgia. Well, prisons got destroyed, too. So, you have crippling poverty, little government intervention, and an increased period of lawlessness. This was bad on all fronts. But upon closer examination of the 13th amendment, which Lincoln approved after the Emancipation Proclamation, there was actually some hope.
The 13th amendment prohibits slavery and involuntary servitude, with one notable exception: convicts. Yes, you’re allowed to make prisoners work for free. That’s still true today, actually.
The implication was simple.
If I could show you’re a “criminal” (note the air quotes), I could have you arrested and thrown in prison. After that, the state could use the convict leasing system to rent you out to a business at a very modest price. That business benefited, because they probably had mills, factories, etc. that needed to be rebuilt anyway, and now they can do it on a paper-thin budget. The state government benefited, because prisons were destroyed during the war, so they didn’t really have a place for the ‘criminals’ anyway, and the corporations leasing the convicts would provide room and board (food and lodging). Additionally, the extra money the state brought in from convict leasing probably helped with the government budget, too.
After all, if we’re going to rebuild The South, we’ll need some cashflow.
So, there was a plan in place… the only thing they needed now were criminals.
Enter Black Codes: laws passed by Southern States to (1) limit the rights of newly, freed slaves, as well as (2) severely punish them for previously minor criminal offenses.
Loitering (idleness).
Breaking curfew.
Vagrancy (homelessness).
Not carrying proof of employment.
With laws like these, the southern states would have their convicts in no time. And, you guessed. They were almost exclusively black people.
90% of the leased convicts were black, presumably people who were just freed as slaves a few years back. It goes without saying that the system that provided these convicts was incredibly crooked: the white officers that arrested them, the white jury that passed their verdicts, and the white judges that gave the sentences. There are probably some parallels to today as well (the 13th amendment still reads exactly the same, after all), but let’s do one topic at a time. In essence though, convict leasing was preserved for decades, because the collusion of law enforcement, judges, the prosecution, and, of course, the corporations that benefited from it all.
To make this point another way, convict leasing served to become the new institution of slavery, replacing the plantation-based system prior to the Civil War. In fact, in some ways, experts believe it was worse. During slavery, slave masters could beat the trash out of their slaves, but at the end of the day, they paid for the slave, and the slave is their property… you at least need to try and make sure your slave stays alive. It represents a capital investment, much like a factory, or tractor, etc.
Well, when you rent something, you don’t treat it the same way you do when you own it (think of renting a condo vs. buying that same condo). In some ways, businesses treated the convicts they rented even worse than slave masters treated their slaves, because the incentives were different (ie. renting vs. owning). So, much like in the case with slavery, America moved forward, and black people were left behind. Convict leasing really took off after the civil war ended, but it was practiced as early as 1844 and lasted until 1928. In essence, you could probably just tack on an extra 50 years to our count of how long slavery lasted (albeit, I suspect America didn’t have as many leased convicts as we did former slaves, which numbered well over 3 million). So, we have 245 years of slavery (0 income), plus 50 years of convict leasing, where there was a clear agenda to criminalize and oppress blacks, including but not limited to no pay for their work (0 income).
Coincidentally, or not so coincidentally, around the same time prisoner leasing ended, in 1933, America established the Federal Housing Administration with the National Housing Act of 1934. This produced more federal involvement by the government in the matter of US housing. It also resulted in blacks being excluded or discriminated against in the financial markets, particularly mortgages and business loans.
By the way, that’s not an opinion. That’s a fact.
Yes, so you have a community of people that you forced to work for 300 years (245 years of slavery, plus an additional 50 years of convict leasing) with little to no pay, you trapped them in the lower class (restricting opportunities to accrue education or receive professional training), and locked them out of the American dream, and to add the struggle, you made sure that they had little to no access to financial services. So, while other people, white people, are borrowing money to purchase homes, start risky business undertakings, or just make key financial investments as America was being built, the opportunity was not extended to black people.
You don’t have to be an economist, sociologist, or policy expert to see that this is an absolute train wreck.
This is ~300 years of little to no income (not to mention the disrupting effect of separating married men from their families when you wrongfully imprison them), and then we exacerbate it with discriminatory lending practices, including no lending at all.
We have to tie this into segregation though.
There are 2 critical things the Federal Housing Administration did. 1. They viewed approving loans in black communities as “riskier” than providing loans in white neighborhoods. As a result, if you have too many black people in your neighborhood, good luck trying to get a loan. Also, if you’re a middle-income black, you’re probably less likely to be approved for a loan than a low-income white. In essence, race was a huge part of the criteria that underwriters used to evaluate “risk”. 2. They regularly engaged in predatory lending. Why don’t you borrow money from loan sharks? Would you ever borrow $10K from the Russian mob? Of course not! In general, you see these as illegitimate loans. They’ll probably come with unreasonable stipulations and much, much higher interest rates. Well, the FHA more or less endorsed and recommended that banks engage in these activities for black borrowers.
“Sure, charge them ridiculously high interest rates. Draft absurd contracts! It’s all good in the hood, fam!”
The predatory lending I described above, redlining, was practiced from 1934 through 1968, until the Fair Housing Act was passed (redlining is still a very ambiguous topic, and there’s still a lot of research done in this area for exactly that reason… this stuff still happens today, it just takes new forms). For 34 years, America attempted to lock black people out of the American dream by refusing to provide them fair and traditional financial services. Couple that with 245 years of slavery, plus another 50 years of prisoner leasing, amounting to 300 years of oppression and little to no pay for work. This is a financial disaster. And I didn’t even get into Jim Crow (a more elaborate extension of Black Codes, practiced throughout the 1900’s). I won’t, but you should read about that, too. Again, it all ties together.
We’re talking about social structures and how they affect finance.
Okay, so I know I’ve been a bit longwinded, and it’s the end of the post, and I’ve still talked about segregation very little… but didn’t I, though?
The fact is everything I highlighted up until this point situates perfectly into our discussion on segregation.
In America, a huge part of where you live is what you can afford to pay… and for 300 years, black people in America weren’t paid anything (or very, very little), while our white counterparts during that time were pursuing the American dream, at the expense of those at the very, very bottom. After that, even when blacks achieve middle class status and are trying to buy a new home in a different community, with more white people, you basically make it prohibitively difficult for them to do so. You don’t want them… instead, you’d prefer they stay on the other side of town, with all the other black people. As for you, once you get out of your rut and get back on your feet, you’ll buy a home as soon as you can and join other whites pursuing the American dream, on the opposite side of town. Middle income and upper income black neighborhoods are almost nonexistent. Heck, we didn’t even have access to traditional and fair financial services until almost 1970. That’s less than 50 years ago. As for most white Americans, they’ve had access to that since the foundation of this country was laid. They’ve been pursuing the American dream since the birth of America.
Black people have been pursuing the American dream for less than 50 years. My point? Cut us some slack. Yes, many, many black households are low income. That’s not a huge surprise though.
For 350 years (From 1964, when the Civil Rights Act was passed, all the way back to the early 1600’s), blacks in America were viewed as inferior to whites. It’s one of the reasons we were pushed to undesirable neighborhoods and isolated to certain parts of town, presumably so you interact with us less. 350 years is a long, long time. I think America today is in a place where they’re more interested in integrating and being inclusive, but in order for that to happen, you’ll have to deal with the effects of 350 years of exclusion, discrimination, and mistreatment, and unfortunately, there’s no easy way to approach that.
This post was a lot more historic. Part 3 will be a bit more anecdotal, and I’ll be talking about perceptions of segregation today. Until then, talk to me about residential segregation.
Nnamdi