Racial Dimensions of Credit and Bankruptcy

Washington and Lee Law Review, Fall 2004 by Skeel, David A Jr

I. Introduction

"Again," W.E.B. DuBois wrote over a century ago at the end of his classic sociological study The Philadelphia Negro, "the white people of the city must remember that much of the sorrow and bitterness that surrounds the life of the American Negro comes from the unconscious prejudice and half-conscious actions of men and women who do not intend to wound or annoy."1 A "generous granting of opportunity to them," a "seconding of their efforts, and a desire to reward honest success-together with proper striving on their part-will go far," he concluded, "even in our day toward making all men, both white and black, realize what the great founder of the city meant when he named it the City of Brotherly Love."2

In the century since its publication, DuBois's magisterial analysis, with its hints of both optimism and wistful resignation, has served as a yardstick for measuring racial progress and for understanding the black community in Philadelphia and in the nation as a whole. In his introduction to a recent reprinting of The Philadelphia Negro, Elijah Anderson emphasizes both the seminal insights of DuBois's work and several of its limitations.3 After noting that DuBois's "comments on the twoness of American society, on the separateness and inequality of its white and black worlds, . . . anticipated the work of Gunnar Myrdal, Daniel Patrick Moynihan, and the Kerner Commission Report,"4 Anderson argues that DuBois put too much confidence in the beneficence of Philadelphia's white business leaders.5 Anderson also notes that DuBois gave short shrift to the vibrant role of church life in the black community.6

This Article focuses on another set of issues that occupies comparatively little of DuBois' s attention-namely, credit markets and bankruptcy. Although DuBois briefly explores the role of black lending institutions such as building and loan associations,7 bankruptcy does not figure in his study at all. There are both simple and more subtle explanations for the omission. The simple explanation is that in 1896, when DuBois conducted his study, there was no federal bankruptcy law on the books in the United States. Not until two years later did Congress finally enact a permanent federal bankruptcy law.8 More subtly, the very conditions DuBois documented, including the exclusion of blacks from manufacturing jobs in favor of the waves of new immigrants coming to Philadelphia,9 were accompanied by sharp limitations on access to credit and business opportunity. Bankruptcy is for debtors-for those who have borrowed money and cannot repay it. Unless there is credit, there will not be bankruptcy.

The goal of this Article is to explore the connections among race, credit markets, and bankruptcy. Because my analysis lacks the extensive empirical grounding of DuBois's study, this Article will have a more speculative and impressionistic tone. But my aim, in the spirit of The Philadelphia Negro and the tradition it inaugurated, is to provide as rich a context as possible for understanding the racial dimensions of credit and bankruptcy. This Article draws many of its illustrations from Philadelphia-from the same blocks and neighborhoods that DuBois himself studied-but the Article will also look well beyond the two rivers that bracket the nation's fifth largest city.

Throughout this Article, I use Ray and Sadie Alexander, two of Philadelphia's leading black lawyers in the mid-twentieth century, as a window into black business and financial life. Part II begins with a puzzle: Although prominent black lawyers like the Alexanders developed wide-ranging practices, they do not seem to have handled many bankruptcy cases. Why is this? The most plausible explanations stem from perversities in the credit markets in the 1940s and 1950s. Part II concludes by considering these perversities, as well as the nature of blacks' access to credit in this era. Part III describes the explosion of consumer credit in the 1970s, along with several important legislative reforms that were designed to eliminate discrimination in the credit markets. Part IV turns to the present and offers a progress report on where things currently stand. In the past decade, blacks' access to credit has increased dramatically. However, the shift to mainstream credit from alternative forms of credit has brought its own malignancies, as reflected in recent evidence of discrimination in the automobile and mortgage markets. Indeed-in an irony that is a central theme of this Article-the transition itself has made many of the current problems possible. The most striking legacy of the discrimination of the past is the magnified vulnerability of blacks to more subtle forms of discrimination in the present. After exploring how and why this is so in Part IV, I briefly consider, in Part V, the possibility of credit and bankruptcy reform.

II. The Mysteryof the Missing Bankruptcy Practice: Credit and Race in the Middle Decades

In mid-twentieth century America, black students who aspired to become lawyers faced daunting obstacles. "To most blacks," Geraldine Segal notes in her study of blacks in the law, "it was a goal that seemed to defy social and economic realities."10 Law schools overtly discriminated in admissions, and even apart from the obstacles to entrance, the cost of a law school education was beyond the reach of all but a few families.11 In 1910, census records suggest that there were only 798 black lawyers in the entire country, a number that had increased only to 1925 by 1940.12