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 | www.MoAF.org
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