Financial History Issue 130 (Summer 2019) | Page 14

Financial Discrimination and Innovation By Robert E. Wright One need not invoke Freud’s injunc- tion homo homini lupus (man is wolf to man) to understand the root of the American financial system’s long history of exclusion and discrimination. Adverse selection and moral hazard stalk financial contracts more ferociously than any pack of depraved human wolves of Wall Street ever could. Most financial markets clear on quantity, not price, because those willing to bleed big to secure a loan or insurance policy often default or file claims. Unlike most businesses, therefore, financial insti- tutions cannot serve all comers, or even the highest bidders. Instead, they must screen, monitor and ration. They have to say “no” to their most eager applicants if they wish to stay in business for long. Disappointing applicants is therefore the nature of the financial beast. Little won- der, then, that Americans since the colo- nial period have continuously complained A group of African Americans outside the Holmes County Bank & Trust Co. in Lexington, Mississippi, October 1939. about being locked out of banks, insurers and other parts of the financial system. Most rejections were rational, the neces- sary consequence of asymmetric informa- tion: adverse selection and moral hazard. Many instances of exclusion and discrimi- nation, however, were rooted not in pru- dent banking and insurance practices but in bigotry and irrational stereotypes with which admirers of the financial system cannot abide. After all, financial markets and institutions are necessary causes of economic growth, of sustained increases in inflation-adjusted output per person. Just as America and all the world’s high-income nations prospered only after the creation of modern financial systems (and the govern- ments to protect the human and property rights on which such systems thrive), so too individuals can thrive economically only when they have access to banks, brokers and insurers. To deliberately exclude cred- itworthy individuals from the myriad ben- efits of the financial system is tantamount to imprisoning them in poverty, and it renders everyone a little poorer. Unsurprisingly, in the early national and antebellum periods, chattel slaves 12    FINANCIAL HISTORY  |  Summer 2019  | could not lawfully own bank notes or deposits, let alone shares in corporations. Married women were similarly excluded, unless they asserted feme sole status or contracted to hold an estate separate from that of their husbands. Free Blacks and single women were not legally excluded from the financial system, and some did obtain mortgages and make appearances in bank and insurance ledgers and corpo- rate stockholder lists. Many, however, suf- fered financial exclusion. Contemporaries considered a gentleman creditworthy until he proved himself a knave, but a free Black woman was considered an unacceptable risk until she proved otherwise, which was no mean feat. Even pawn shops were leery of doing business with free Blacks, on the suspicion that the property they offered for pawn was stolen. Passage of the 13th Amendment and married women property laws reduced legal exclusion from the financial system, but Jim Crow segregation laws and cus- tom often kept women, Blacks, Ameri- can Indians, immigrants and poor Whites on the fringes of finance. They did not remain passive victims, however, but