Race, Riots & Markets — Investor Amnesia

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Visualizing History 

 


From the Archives

The GreenBook

‘The Negro Motorist Green Book was a guidebook for African American travelers that provided a list of hotels, boarding houses, taverns, restaurants, service stations and other establishments throughout the country that served African Americans patrons. Victor H. Green published it annually from 1936 to 1966 when discrimination against African Americans was widespread. During this period, African Americans faced racial prejudice, price gouging and physical violence while traveling around the United States. The information included in The Negro Motorist Green Book helped increase their safety and treatment.’ (Source)

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Sunday Reads

Suffice it to say that a lot has happened since my post last Sunday. Major cities across the United States and around the world have ignored social distancing in favor of social unity as hundreds of thousands (if not millions) of people protested George Floyd’s murder, police brutality and racism.

As a Washington, D.C. resident I’ve witnessed the protests, looting, and escalating tensions firsthand. I live on 14th Street, which is only 5-6 blocks away from the White House, and has historical ties to the 1968 Martin Luther King riots that followed his assassination. As military humvees patrol the streets and helicopters steadily hum overhead, it’s clear that I’m witnessing history unfold.

Before going any further I want to recognize that as a privileged white male there is no way I can adequately represent or do justice to the plight of black Americans facing racial prejudice and police brutality. With no personal experience of what this community faces on a daily basis, it feels wrong for someone like myself to even attempt writing about the historical aspects of race, inequality, and finance in just one post. However, I feel that I’d be committing a greater disservice to the movement by not writing about some of the broader themes behind what transpired this week.

Selective History

History is fascinating because it reminds us how little some aspects of life change. On Investor Amnesia, these ‘reminders’ are often served in the form of articles that reveal ‘modern’ financial instruments existing in the ancient world. These discoveries establish a common link that make us feel connected in some way with our historical predecessors. Yet, these historical anecdotes and stories do not probe us further into questioning the important issues we face as a society like inequality, poverty, injustice, racism, etc.

After everything that has unfolded this week, I want to underscore the fact that the popular sayings about history (“it doesn’t repeat, but it often rhymes”, etc.) are also applicable to the darkest periods of history we would rather forget.

Just over a century ago, in 1919, there was an outbreak of race riots across the nation during what became known as the Red Summer of 1919. Like today, these riots and protests took place around a global pandemic that swept the nation by storm: The Spanish Flu.

The cities of Chicago and Washington, D.C. were primary hubs of riots and violence in the summer of 1919. Similar to today, the President at the time, Woodrow Wilson, ordered in extra forces to the district in efforts to end the riots:

‘Only on Tuesday, July 22, did President Wilson give authorization to mobilize 2,000 soldiers. Crowds were dispersed from street corners, theaters and bars were closed, auto traffic was restricted, and tanks equipped with machine guns were brought in from Fort Meade, 25 miles away in Maryland. Limited violence arose that night, but what really brought calm to the capital was a relentless hot summer night rainstorm.’

The images below contrast scenes from the Red Summer of 1919, and what’s becoming the Red Summer of 2020:

I don’t know what it’s like to live life as a black man or woman in America, but it doesn’t take a historian to see the patterns of racism and prejudice so prominently sewn into our nation’s historical tapestry.

The Content in Today’s Post

It is impossible to write a piece of historical content on this issue without acknowledging the darkest period in our nation’s history: slavery. I also feel it’s important to acknowledged the systemic and institutionalized forms of prejudice and discrimination that have persisted since it was abolished. However, I want to place a stronger emphasis on the history of successful black financiers, businessmen / businesswomen, Black Wall Street, and other examples of the resilience and triumphs of black America. Lastly, please note that any outdated terms are only used in reference to the names of historical organizations (i.e. Booker T. Washington’s ‘National Negro Business League’).

And now, finally, let’s dive in.

Toxic Debt, Liar Loans, and Securitized Human Beings: The Panic of 1837 and The Fate of Slavery

The content of this article is difficult to read, which is why I’ve included it in this week’s post. In this exceptionally well written article, Edward E. Baptist from Cornell University explains the Panic of 1837 from the perspective of slavery in America, and demonstrates how profound the impact of speculative bubbles can be on society and individuals.

‘When collective euphoria, financial innovation, and astonishing disproportions of power mix together, what bubbles into being is anything but mere vapor… For in such financial exchanges we see not only the generation and transfer of real wealth—that is, real effects in the social and political world—but also that such transfers can incorporate great violence and disruption for some as the causes of great profit for others.’

His research also underscores the fact that slavery engendered an economic boom across not only the United States, but Britain and other nations, by driving growth and speculation in the burgeoning cotton industry.

‘By the 1830s, the cotton that enslaved people grew in the new states… was the most widely traded commodity in the world. Its sale underwrote investments in new forms of enterprise north of slavery. It was also the raw material of the industrial revolution. The creation of textile factories in the British Midlands launched a process of continuous technological innovation, urbanization, and creation of markets that broke the Malthusian traps of traditional agricultural society. First Britain, and then the U.S., and then the rest of Western Europe achieved sustained rates of economic growth never before seen in human history.’

Baptist argues that without the disgusting practice of enslaving humans to work the cotton fields, this boom would not have occurred. The statistics behind this are unimaginable, yet can’t even begin to describe the human toll of slavery.

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‘In the lifetime between the ratification of the Constitution and the secession of the Confederacy, enslavers moved more than a million enslaved African Americans to cotton-growing areas taken by the new nation from their original inhabitants. Forced migrations and stolen labor yielded an astonishing increase in cotton production: from 1.2 million pounds in 1790 to 2.1 billion in 1859, and an incredible dominance over the international market—by the 1830s, 80% of the cotton used by the British textile industry came from the southern U.S.’

The booming industry facilitated an explosion in credit and speculation among enslavers, cotton planters, and others.

‘Up and down the chain of (mostly white) people who sold, traded, shipped, and speculated on the cotton that enslaved people made, credit and risk were imminent to the task of moving the world’s most important commodity through a chain of buyers and sellers that stretched from Louisiana cotton field to Liverpool cotton exchange.’

Enter the Second Bank of the United States (B.U.S.):

‘As the single biggest lender in the economy, it lent directly to individual entrepreneurs—including enslavers like Jacob Bieller, who were always eager to buy more human capital whom they could put to work in the cotton fields of the southwest… In fact, by the early 1830s, the Natchez and New Orleans branches had lent out a full third of the capital of the B.U.S., much of it used to buy thousands of enslaved people from the Chesapeake, Kentucky, and North Carolina. Some of the lending was in the form of renewable “accommodation loans” to large-scale planters who were members of, or connected to, the clique of insiders who ran the B.U.S. branch and the series of state banks chartered by the Mississippi government. Even more of the lending was in the form of commercial credit to cotton buyers. This kept the price of cotton steady and, finding its way to the planters themselves, inspired Natchez-area enslavers to buy more of the people that Franklin and others were purchasing in the Chesapeake states and shipping to the Mississippi Valley.’

To summarize, the B.U.S. (which ‘fulfilled many of the functions of a modern central bank’) essentially financed the rapid expansion of slavery in the south by providing credit to slave traders and cotton planters that relied on slave-labor. Unfortunately, this is where things get even worse. Reading this article should make you livid, and it’s hard to fathom that you’re reading about a period of history in the United States.

Ultimately the entire structure was bottomed on, founded on, funded by the bodies of enslaved people: on the ability of slaveholders to extract cotton from them, and on the ability of slaveholders (or bankruptcy courts) to sell them to someone else who wanted to extract cotton. And the fact that cotton fields were the place where the margins of growth were created meant that they presented lenders with both needs and opportunities to hedge against the risk that individual counter-parties would default.

Participants in the cotton industry began to ‘hedge’ this risk by securitizing human beings, and mortgaged slaves. Everyone should read this article the whole way through, because it’s important to study our darkest moments in history, but I’ll leave you with this last excerpt describing this disgusting practice:

‘For everyone who drew profit in the system, enslaved human beings were the ultimate hedge. Cotton merchants, bankers, slave traders—everybody whose money the planter borrowed and could not pay until the time the cotton was sold at a high enough price to pay off his or her debts—all could expect that eventually enslaved people would either 1) make enough cotton to enable the planter to get clear or 2) be sold in order to generate the liquidity to pay off the debt. In 1824, Vincent Nolte, a freewheeling entrepreneur who almost cornered the New Orleans cotton market more than once in the 1810s, lent $48,000 to Louisiana-based enslaver Alonzo Walsh. The terms? Walsh had to pay the money back in four years at a rate of about eight percent. To secure payment he committed to consigning his entire crop each year to Nolte to be sold in Liverpool. And, just in case, he provided collateral: “from 90 to a 100 head of first rate slaves will be mortgaged.

Yet enslavers had already—by the end of the 1820s—created a highly innovative alternative to the existing financial structure. The Consolidated Association of the Planters of Louisiana (despite its name, the “C.A.P.L.” was still a bank) created more leverage for enslavers at less cost, and on longer terms. It did so by securitizing slaves, hedging even more effectively against the individual investors’ losses—so long as the financial system itself did not fail. Here is how it worked: potential borrowers mortgaged slaves and cultivated land to the C.A.P.L., which entitled them to borrow up to half of the assessed value of their property from the C.A.P.L. in bank notes. To convince others to accept the notes thus disbursed at face value, the C.A.P.L. convinced the Louisiana legislature to back $2.5 million in bank bonds (due in ten to fifteen years, bearing five percent interest) with the “faith and credit” of the people of the state. The great British merchant bank Baring Brothers agreed to advance the C.A.P.L. the equivalent of $2.5 million in sterling bills, and market the bonds on European securities markets.

The bonds effectively converted enslavers’ biggest investment—human beings, or “hands,” from Maryland and Virginia and North Carolina and Kentucky—into multiple streams of income, all under their own control, since all borrowers were officially stockholders in the bank. The sale of the bonds created a pool of high-quality credit to be lent back to the planters at a rate significantly lower than the rate of return that they could expect that money to produce. That pool could be used for all sorts of income-generating purposes: buying more slaves (to produce more cotton and sugar and hence more income) or lending to other enslavers. Clever borrowers could pyramid their leverage even higher—by borrowing on the same collateral from multiple lenders, by also getting unsecured short-term commercial loans from the C.A.P.L., by purchasing new slaves with the money they borrowed and borrowing on them too. They had mortgaged their slaves—sometimes multiple times, and sometimes they even mortgaged fictitious slaves—but in contrast to what Walsh had to promise Nolte in 1824, this type of mortgage gave the enslaver tremendous margins, control, and flexibility. It was hard to imagine that such borrowers would be foreclosed, even if they fell behind on their payments. After all, the borrowers owned the bank.

Using the C.A.P.L. model, slaveowners were now able to monetize their slaves by securitizing them and then leveraging them multiple times on the international financial market. This also allowed a much wider group of people to profit from the opportunities of slavery’s expansion. Perhaps it was no accident that the typical bond issued by the C.A.P.L. and the series of copycat institutions that followed was denominated at $1,000, which was roughly the price of a field hand. For the investor who bought it from the House of Baring Brothers or some other seller, a bond was really the purchase of a completely commodified slave: not a particular individual, but a tiny percentage of each of thousands of slaves. The investor, of course, escaped the risk inherent in owning an individual slave, who might die, run away, or become rebellious.’

Financing Black Business in the 1920s

This article from the Museum of American Finance is an inspiring story of unity and perseverance in the face of adversity. The piece tells the story of competing organizations focused on the financing, investment, and development of black-owned businesses in America. A particular focus is paid to the Allied Industrial Finance Corporation (AIFC) and National Negro Finance Corporation (NNFC), both of which formed as offshoots of the National Negro Business League (NNBL) founded in 1900 by Booker T. Washington.

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Maggie Lena Walker probably was no longer surprised that she was the lone woman among the 50 or so African American business, banking and insurance leaders attending a banquet in late 1924 in New York City. The banquet had been called ‘to stabilize, strengthen, and protect Negro business.’ As president of the St. Luke Bank and secretary-treasurer of the Independent Order of St. Luke (IOSL) in Richmond, Virginia, Walker stood as the most powerful Black woman in the financial industry. She had worked most of her life to prove that women could excel in the financial world, and her presence lent legitimacy to, if not full acknowledgment of, women’s critical roles in the financial industry. She surely wondered whether her lifelong efforts counted for much, because here she was again: the only woman in a room full of Black men who were charting, as they imagined, the economic future of  the race.

The select group of business leaders outlined plans for the National Negro Finance Corporation (NNFC), a million dollar corporation that would launch Black business into a new financial age. Walker took advantage of the novelty of her presence. She offered the St. Luke Bank as a model to emulate for the young finance company. She told the austere group, ‘We shall not stop, but put our moneys and brains together and achieve a commercial emancipation.’ Walker echoed her call to IOSL members two decades earlier, when she had first shared her vision for a bank that was largely owned and run by women for women.”

National Negro Finance Corporation (NNFC)

The NNFC was founded in 1924 as a response to the establishment of the AIFC in 1920 by the new leader of the National Negro Business League, Emmet J. Scott.

“Fearful that Scott’s AIFC might actually succeed and best the NNBL, in early 1924 Charles C. Spaulding arranged a secret meeting in Durham with a select group of businessmen and then an open organizational meeting in early June. Spaulding, co-founder of the North Carolina Mutual Insurance Company and president of the Mechanics and Farmers Bank in Durham, was arguably the most well-known and respected Black businessman in the country. At the banquet in New York City in November, where Maggie Lena Walker had declared “a commercial emancipation,” Spaulding officially announced the launch of the NNFC.

While not all of the NNFC’s objectives were fulfilled, they were ambitious in their goal of improving the socio-economic status of black Americans in the face of institutionalized racism that obstructed the development of black-owned businesses. The excerpt below is from the NNFC’s own announcement of its plans, including the establishment of a black stock exchange since black-owned businesses were barred from American exchanges:

The importance of such an organization was outlined in a 1925 issue of the Opportunity journal, a National Urban League publication known for spurring the Harlem literary movement:

Black Wall Street & The Tulsa Race Riot of 1921

This week marked the 99-year anniversary of a racist massacre in Tulsa, Oklahoma that is almost uniformly ignored in history textbooks across America. If you have not heard of Black Wall Street, or the Tulsa Massacre, this is a must-read section of today’s Sunday Reads.

This is how Ebony magazine described what is known as Black Wall Street:

‘The Greenwood community, where black wall street existed, seems almost imagined when we examine it through a historical lens.  The oil booms of the early 1900’s had many moving to Tulsa for a shot at quick economic gains and high life, and African Americans hoped to prosper from the new industry as well.  Tulsa, like many cities and towns throughout the US, was hostilely segregated, with African Americans settling into the northern region of the city.  As we often saw before integration, Blacks in the area created entrepreneurial opportunities for themselves, which housed an impressive business center that included banks, hotels, cafes, clothiers, movie theaters, and contemporary homes.  Greenwood residents enjoyed many luxuries that their White neighbors did not, including indoor plumbing and a remarkable school system that superiorly educated Black children.’

In the atrocity that became known as the Tulsa Race Riot, this community symbolizing black wealth and entrepreneurial success was destroyed in 48 hours after news spread of a black man allegedly raping a white woman (which was false).

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‘As many as 5,000 armed whites, hundreds of them deputized by the police, descended on Greenwood that night and into the next morning. They used a mixture of plundering, coercion, and violence to reassert the supposed racial hierarchy of Tulsa. Houses were looted for their valuables, like jewelry, as well as their invaluables, like family Bibles. If the invaders found a building still occupied, they’d sometimes lead residents to a detention center in downtown Tulsa. Other times, they’d murder the occupants. A.C. Jackson, a prominent Greenwood surgeon, was shot by two assailants when he emerged from his home with his hands in the air.

Buildings were set on fire systematically, with teams of white rioters gathering flammable materials in the center of a room, dousing them with kerosene, and igniting them. The fire department failed to respond to most emergency calls during the night. Planes circled overhead — according to police, they were for reconnaissance, but survivors said they dropped bombs filled with turpentine or coal oil. Either way, along with the roving machine gun that white attackers mounted on a truck, heavy-duty weaponry confirmed that Greenwood had transformed from a neighborhood to a war zone in a matter of hours…

The attack on Greenwood destroyed 1,256 houses and saw the looting of another 215, according to the American Red Cross, leaving 9,000 black Tulsans homeless. Virtually all the district’s businesses were gone. An accurate death toll will likely never be calculated, though eyewitnesses said they saw unidentified black bodies stacked onto trucks and dumped into unmarked graves. While the Tulsa Race Riot Commission issued a report in 2001 confirming only 39 deaths (26 black and 13 white), it also acknowledged that previous fatality estimates ranging from 100 to 300 people were credible.

However, the community refused to give up.

The revival of Black Wall Street began almost immediately after its burning. Initially, the city of Tulsa promised to help rebuild what its citizens had destroyed; instead, officials passed an ordinance requiring that new structures in Greenwood be at least two stories tall and made of expensive fireproof materials. It was a naked attempt to price black residents out of their own community. But a trio of local lawyers, including John W. Franklin’s grandfather, B.C. Franklin, filed a lawsuit against the city. They worked out of a tent in the burned-out business district and eventually brought the case to the state Supreme Court, which deemed the ordinance unconstitutional.

By the end of 1921, Greenwood residents had rebuilt more than 800 structures in the neighborhood. By June 1922, virtually all of the area’s homes had been replaced. And by 1925, the National Negro Business League was holding its annual conference in Tulsa, indicating that Black Wall Street’s stature as an economic force had been restored.’

A huge amount of credit needs to be given to this year’s Watchmen series on HBO, which for many viewers marked the first time that they had heard of Black Wall Street and the Tulsa Massacre of 1921. The chilling portrayal of this ghastly massacre is linked below:

Here is the official report on the tragedy: A Report by the Oklahoma Commission to Study the Tulsa Race Riot of 1921

Arthur G. Gaston: Entrepreneur Against All Odds

A truly inspiring story.

‘The grandson of slaves, Arthur George Gaston was born in 1892 in Demopolis, Alabama, to Rosie Gaston. There is no record of his father’s name, who died shortly afterward. A. G. Gaston started with nothing but the encouragement of his mother and grandparents. Over the next seventy years, he became the wealthiest black man in Birmingham, with a fortune of $30-40 million. Gaston’s path was never easy—his home was fire-bombed and at the age of eighty-three, he was kidnapped. He was at or near the center of the racial strife of the 1960s, alongside Dr. Martin Luther King, Jr. He stirred great controversy during his life, but also provided employment and services to thousands of blacks in Alabama. This is the remarkable story of his 103-year-long life.’

The Ultimate Self-Made Woman

‘Madam Walker’s accomplishments were staggering. She was almost 40 when she began to develop her business and only lived another 14 years. Yet in that period she trained over 40,000 agents, created great jobs for many more, helped millions with her hair care products and methods, visited every corner of America, donated to a multitude of causes, and played a strong leadership role in the African American community. The fact she was worth $600,000 when she died (almost $10 million in 2017 dollars), one of the wealthiest black women in the world — if not the wealthiest — was perhaps the least important of her achievements.’

The Economic Aftermath of the 1960s Riots in American Cities

‘In the 1960s numerous cities in the United States experienced violent, race-related civil disturbances. Although social scientists have long studied the causes of the riots, the consequences have received much less attention. This paper examines census data from 1950 to 1980 to measure the riots’ impact on the value of central-city residential property, and especially on black-owned property. Both ordinary least squares and two-stage least squares estimates indicate that the riots depressed the median value of black-owned property between 1960 and 1970, with little or no rebound in the 1970s. Analysis of household-level data suggests that the racial gap in the value of property widened in riot-afflicted cities during the 1970s.’

 

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Jamie Catherwood
My name is Jamie Catherwood, and I’m a Client Portfolio Associate at O’Shaughnessy Asset Management. Get your financial history fix through reading my articles, or those that I link to in my weekly “Financial History: Sunday Reads”.
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