Towards an Economic Reckoning: Reparations And The Financial Markets
By Enith Martin Williams
Executive Director of the Reparations Finance Lab
With the proclamation establishing Juneteenth (June 19th) as a federal holiday by the Biden Administration, the topic of racial justice is more pertinent than ever, even as the COVID-19 crisis comes under control. There is no doubt that the country is beginning to return to normalcy even as we reflect on the Bloody Summer of 2020, in which we witnessed the tragic murders of George Floyd, Breonna Taylor, and others at the hands of police officers. This wave of deaths reawakened an urgency in America to seek racial justice. We saw this urgency on display when 26 million people marched in protest against police brutality. As America opens its eyes and begins to truly grapple with its past, we offer financial solutions.
There is a shift towards increasing diversity, equity, and inclusion in every sector, including education, businesses, and the government. By offering financial interventions, we embrace this shift and hope to accelerate it. Diving deeper into this shift, corporations and other institutions recently launched initiatives designed to invest in Black businesses and communities. These efforts are presented as addressing the racial wealth gap, but at their core, they are moving the country toward an acknowledgement of slavery and systemic racism in the lives of its descendants.
We sense that as a society, we are beginning the overdue process of confronting the legacy of enslavement and what that has meant for issues surrounding social and economic marginalization faced by the descendants. The decision by these organizations to focus on economic interventions is an acknowledgement that the Black population has long been excluded from the full benefits of America’s economic success, despite the fact that slaves’ unpaid labor paved the way for the United States to become a global economic power.
Modern-Day Black Racism
African-Americans face a multitude of socio-economic challenges today. From lacking access to loans and other financial instruments to living in underdeveloped areas, Black families lack many of the financial and economic means that White families have, which hinders their ability to climb the socio-economic ladder. According to the National Community Reinvestment Coalition, African-Americans make up 13% of the US population. The Black-White racial wealth gap in the U.S. is $10 trillion.
The legacy of enslavement has had many repercussions on Black people alive today, including ill health, low educational attainment, and high involvement with the criminal justice system. Economists Trevon Logan and Derrick Hamilton have stated that even among African-Americans obtaining advanced degrees and earning more in their jobs, the racial wealth gap remains.
States in which Black residents are concentrated score below national averages with regards to economic opportunity, access to healthcare, and access to broadband internet. Education, which typically enables poor families to climb the socio-economic ladder, presents obstacles to many Black families. Black borrowers are 2.3 times more likely to default on their student loans than are White borrowers. This is largely due to Black families’ inability to provide collateral.
What are Reparations?
Reparations are state measures designed to redress systematic violations of human rights through compensation or restitution to the victims. There are five categories of reparations: (1) restitution, (2) compensation, (3) rehabilitation, (4) satisfaction, and (5) guarantees of non-repetition.
In order to progress as a society, we must pay reparations to the descendants of the enslaved. The enslaved first proposed this during the 1800s and formed a significant part of the negotiations for emancipation in 1865. It can also be said that a moral commitment to the payment of reparations was acknowledged by the federal government in Special Field Order No.15 that was issued by General William T. Sherman which called for the redistribution of 400,000 acres of confiscated Southern land in Forty Acre plots to approximately 18,000 newly freed Black families and individuals. This allocation of valuable land was meant to serve as restitution for the unpaid labor and immeasurable contribution of the enslaved to the Union prevailing in the Civil War. Further, this land was meant to facilitate Black participation in the creation of the modern United States of America.
The Role of Financial Markets in Slavery: 16th Century to the Present
Missing from these discussions is how the financial markets enabled and profited from African enslavement. Specifically, financial institutions underwrote slavery and their involvement was central to its profitability. The question of how to right this historical harm has been part of global discussions since the mid-20th Century. Today, we add that the highly developed financial markets must fully participate in righting this historic injustice as partners in reparative justice, and not just as a means of fulfilling corporate social responsibility objectives.
There has been a normative shift in the financial markets in support of reparations. In order to achieve racial justice, we must embrace and accelerate this change. Indeed, as financial institutions increasingly present proposals to enact empowering programs for America’s Black population, it would be easy to conclude that the financial markets were neutral actors in the slavery business and generational economic injustice. However, financial markets were participants in the slavery business from its inception and after slavery ended, the entire financial industry incorporated racially discriminatory practices into their operations. For example, during the period of Jim Crow, the financial industry enabled redlining and federally-funded programs such as The GI Bill, the New Deal and Fair Deal, which excluded Black people as beneficiaries.
The capital markets were integral to the success of the Transatlantic Slave Trade as early as the 16th century. Research presented by Edward E. Baptist in, The Half Has Never Been Told: Slavery and the Making of American Capitalism and Sven Beckert & Seth Rothman’s ‘Slavery’s Capitalism: A New History of American Economic Development, demonstrate how the nascent financial markets of the 18th century were primary drivers behind the success and sustainability of slavery.
The business of slavery was global and depended on a web of financial arrangements that facilitated the movement of capital (in all its forms) from Europe (bearing trinkets, arms, shackles, chains, guns etc.), to Africa (where ships were loaded with human cargo), to the Caribbean, the Americas (where human cargo was unloaded and ships filled with sugar, coffee, rum, spices, cotton, etc.), and back to Europe. Every ‘leg’ of the triangle was profitable, and these profits were channeled back into financial markets.
Innovation Finance in Reparations
Slavery was a big business and was managed by a global network of bankers, brokers, insurance agents, accountants, bookkeepers, investment advisors, and other professionals who were responsible for managing the enormous wealth generated. In response, these professionals designed innovative financial products and systems that are commonplace financial tools today:
Project finance: each trip was undertaken by a promoter, who would raise funds from wealthy individuals or a syndicate,
Securitization: “human cargo” on each ship was used to securitize the loan/advance for the trip,
Insurance: this protected ship owners, merchants, investors, and slave owners against the risk of inherently dangerous undertakings, such as storms at sea, cargo deaths, piracy, and mutiny.
Sociologist Matthew Desmond of Princeton University found that America’s first bond market was backed by enslaved humans: Desmond’s reference to the London money market underscores the global reach of the slavery business. In fact, the rapidity with which these financial markets spread and their geographical reach underscores just how lucrative the business of selling and trading humans was. Even “abolitionist” northern cities such as Boston and New York played a big part in the business of slavery.
Mersha Baradaran in her 2017 bestseller, The Color of Money: Banks and the Racial Wealth Gap, noted that enslaved people were not just labor in the cotton production process.
How Financial Markets Can Right This Wrong
The financial sector has an obligation to participate directly and intentionally in reparation payments. The financial sector and the capital markets can and should use their unique capacity for directing capital to design financial instruments and market strategies that will repair and provide economic justice to the descendants of the enslaved. This proposal is complementary to efforts underway in the House of Representatives HR40, a bill to establish a commission to study reparations.
Legislative and market actions are both necessary and governments and financial institutions should work with think tanks, academic institutions, and public and private sector actors to design intentional, scalable, and multi-generational interventions. These interventions must make up for current and past discriminatory practices, such as: mortgage and credit redlining, subprime mortgages, funding of private prisons, and sustained underinvestment in Black-owned businesses and communities.
An article in the New York Times’ DealBook Newsletter on May 5, 2021 makes the case for banks to create social change with the intentional design of products and practices that seek to address societal harm. The article notes that "in their recent commitments to racial justice, financial institutions have mostly mimicked others instead of pulling the unique levers of power that they control."
Financial companies should collaborate to deliver restorative reparations using multi-stakeholders groups to design market-based solutions. Major financial firms came together to solve the climate crisis and signaled that Wall Street should focus on finding market-based solutions to the issue. The same thing must be done with reparations. We believe that the financial markets are in need of a Reparations Finance Lab that will provide leadership on closing the Black-White wealth gap and will create multi-generational pathways for Black economic success.
Dana Peterson, a former Citibank Global economist, found that racial injustice and bias has cost the US economy more than $16 trillion dollars since the year 2000. Closing the racial wealth gap could add $5 trillion to the national economy over the next five years. We are confident that cross-sectoral collaboration and sustained commitment will help the US achieve this goal. For the financial markets, the reward for participating in this effort will unearth sizable market opportunities in sectors such as: tech, oil and gas, and pharmaceuticals.
The financial markets have the ability to transform the lives of African Americans, repair some of the damage caused by “America's Original Sin,” and even observe investment returns doing so. The moment awaits.