The personal finance industry needs a sobering dose of history

The 2019 US Federal Reserve Survey of Consumer Finances, the most recent data available, found that the wealth gap between black and white Americans grew considerably over the previous two decades. The median white family had seven to ten times more wealth than the median black family. There are many factors behind this, from inequalities in wages to inequalities in home ownership and investment.

But really understanding the racial disparity in wealth requires going back further 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 building wealth, from banking to housing.

In 1865, after emancipation, the Freedman’s Savings and Trust Company was created to provide formerly enslaved people and veterans of the Black Civil War the ability to save and access capital within the traditional financial system. Despite being a bank specifically for black customers, it was run by an all-white board of directors and the funds were mismanaged, ultimately leading to a collapse that cost 60,000 depositors some $3 million, or more than $70 million in current dollars.

In 1921, Oklahoma was the home of the Tulsa Race Massacre, when a white mob looted, destroyed property, and murdered residents of the thriving black community in the Greenwood district. It is estimated that more than $200 million worth of damage occurred in today’s dollars.

Those are just two cases of wealth being stripped away from black families and leaving long-term consequences. Various discriminatory policies over the past century have also had a significant impact on today’s racial and socioeconomic disparities.

For example, in the 1930s, in the midst of the Great Depression, African Americans were largely excluded from reaping the benefits of New Deal-era policies, programs, and reforms, explains Dania Francis, an economist at the University of Massachusetts at Boston. Although the language itself did not explicitly exclude African Americans, the consequences persisted. “[The New Deal] originally it didn’t apply to domestic workers and farm workers,” Francis explains, “60 percent of blacks at the time were domestic workers and farm workers.”

It was during this era that redlining was created, the practice of denying financial services to residents of certain areas based on their race. The newly formed Home Owners Loan Corporation created “residential safety maps” and drew actual red lines around neighborhoods it deemed “dangerous.” 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 hurt black wealth building, but also further reinforced segregation. Black Americans were not only unable to obtain the equity to purchase their homes, but no one else was able to obtain a mortgage to purchase in the red-flagged neighborhoods.

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 Justice Department 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 promoting subprime or charge them fees or higher fees relative 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 educational stipends. The bill being administered at the state level rather than the federal government resulted in many black soldiers, particularly those in the South where Jim Crow still held sway, being unable to access or fully utilize education and housing benefits.

This is a critical context for the personal finance industry. It makes it clear that the startup narrative in personal finance is a lie, according to Kevin L. Matthews II, financial educator and author of From Burning to Blueprint: Rebuilding Black Wall Street After a Century of Silence.

“It ignores how the vast majority of wealth in this country has been generated,” says Matthews. “Specific groups received land and capital and entire groups were left out. That is not a start, they are laws and policies that helped some groups and not others.

For Kiersten Saunders, co-author of Cashing Out and co-creator of personal finance media company Rich & Regular, understanding the racial wealth gap and the bootstrapping fallacy requires seeing two different time horizons: Whites have had more time and opportunity to build wealth compared to blacks who have been financially banned. “It takes time to catch up,” says Saunders.

As are the correct policies. “Trying to make up for the poverty of previous generations isn’t just a matter of effort, particularly when a lack of effort isn’t what got you into that hole,” says Julien Saunders, co-author of Cashing Out.

Too often, our narratives around financial and socioeconomic achievement are tied to radical self-responsibility. That’s because, as Francis points out, it’s easier to tell people to change their behavior than it is 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 Inwkward Financial Conversations.”

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