By Brentin Mock—Sept. 3 2019

It will end up costing the U.S. economy as much as $1 trillion between now and 2028 for the nation to maintain its longstanding black-white racial wealth gap, according to a report released this month from the global consultancy firm McKinsey & Company. That will be roughly 4 percent of the United States GDP in 2028—just the conservative view, assuming that the wealth growth rates of African Americans will outpace white wealth growth at its current clip of 3 percent to .8 percent annually, said McKinsey. If the gap widens, however, with white wealth growing at a faster rate than black wealth instead, it could end up costing the U.S. $1.5 trillion or 6 percent of GDP according to the firm.

“Despite the progress black families have made in civic and economic life since the passage of the Civil Rights Act of 1964, they face systemic and cumulative barriers on the road to wealth building due to discrimination, poverty, and a shortage of social connections,” reads the report, “as both mechanisms and results of racial economic inequity.”

Crucial to understanding how to close that gap—such that it can actually be closed—is grappling with how it was created in the first place. The McKinsey report identifies four components that perpetuate this gap—family wealth, family income, family savings, and community context (a community’s collective public and private assets). Black families have not been able to build wealth due to “unmet needs and obstacles” across these four dimensions.

That’s the deficit-lens on the problem as it pertains to black families. But it’s worth looking at how each of those components also played a huge role in boosting white families’ financial standing to begin with. The wealth, income, and savings that white families accumulated during slavery supplied the economic thew that catapulted them into elite affluent status during the country’s first two centuries of existence. But it was community context and creative credit machinations that helped white families maintain that status over the ensuing two centuries, putting into doubt whether a closure of the black-white racial wealth gap is even possible given these deeply entrenched advantages.

Community context and connections

A study on the transfer of wealth from Southern slaveholding families to their children helps explain how these advantages came about. Strikingly, the inheritance of actual material profits from the slavery-based economy isn’t the culprit some suppose. The economists Leah Platt Boustan of Princeton University; Katherine Eriksson of the University of California, Davis; and Philipp Ager of the University of Southern Denmark found in their study, “The Intergenerational Effects of a Large Wealth Shock: White Southerners After the Civil War,” that white resilience to economic catastrophe has been almost impenetrable.

According to the study, the largest slaveholding families in the South took a huge hit after the Civil War—a 38 percent drop at the median and a 75 percent loss among the top wealthiest families between 1860, a peak year for slavery profits, and 1870. But by 1880, many of the sons of those families had already recovered that wealth. By 1900, the sons of the richest slaveholders had not only financially recovered but were wealthier than the sons of families who were just as wealthy before the Civil War, but from mostly non-slaveholding assets and activities.

It took just one generation for white slaveholding families to regain their riches, and this rebound was not due to an inheritance of slavery profits. Much of that was devoured by the war, emancipation, and regressive crop productivity in the South after the war. Nor was the recovery owed to an inheritance of entrepreneurial skills, which the study ruled out because of the drastic transition of the economy from agricultural-based to industrial-based.

The Southern dollar rally might have had something to do with those slaveholders’ sons marrying into wealthier families. But most of the wealth recovered by slaveholders’ children came from occupation-based earnings. The most likely explanation for the restoration of their wealth, according to the study, is the “role of social networks in facilitating employment opportunities and access to credit”—or, in other words, community context. The wealthy slaveholding families were cozy enough with the wealthy families who weren’t totally in the slavery business to leverage their relationships into preservation of their elite status.

“We think the most likely explanation for the rapid recovery of slaveholders’ sons is that slaveholding families were embedded in social networks that facilitated adjustments to wartime losses,” reads the study. One critical adjustment facilitated in this respect was credit, which was “surprising in light of the fact that slave collateral formed the basis for nearly all southern credit relations and was completely wiped out after emancipation.”

Also wiped out were, in some cases, the land and plantations themselves, which were the final major appreciable assets that some former slaveholding families possessed after the war. The study examines General William T. Sherman’s “March to the Sea” and his “Special Field Order No. 15,” which directed Union troops to destroy and confiscate Confederate family homes, businesses, and properties along the Carolina and Georgia coasts. The households targeted and toppled by Sherman’s troops lost considerable wealth, on top of losing their slaveholding assets. But by 1880, those same ransacked families had financially recuperated. By that year, their wealth had even surpassed that of the wealthy families of neighboring counties that Sherman did not invade.

“Results suggest that even destroying the capital stock or temporarily expropriating the land of wealthy households would not have been enough to prevent their sons from experiencing full recovery in a generation,” reads the study.

Those coastal families achieved recovery through the same means that other white former-slaveholding families achieved it throughout the South: via their connections to those commandeering capital and finance in the post-Civil War milieu. Slaveholding families’ pre-war material resources and wealth did “not ultimately affect” their children’s future comeuppance, and neither did these advantages stop with their sons. By 1940, even the grandsons of former slaveholders were doing better than similarly situated non-slaveholding families, by graduating from high school and college— fairly uncommon in the South at the time—and settling securely into white-collar jobs.

“Jim Crow Credit”

The 1940s were also the period when white families were able to further enhance their wealth prospects through new credit and finance instruments created as part of the New Deal. At this point, white families and farm owners were taking advantage of loans created by what was then called the Federal Housing Administration and the Farm Security Administration to leverage their way into wealth. Whereas before the Civil War, mortgages and credit were collateralized on the backs of enslaved Africans as properties, by 1940 white families could obtain mortgages and credit collateralized by land, houses, and farms. And they didn’t have to come from wealthy families or be wealthy themselves to obtain this financing.

Read more at CityLab.