Racial Dimensions of Credit and Bankruptcy

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

Yet even these borrowers were unlikely to come to the Alexanders seeking bankruptcy advice. One reason for this is reputation. Before the advent of credit cards, reputation was important to all credit relations; it is no accident, after all, that "credit" is derived from the same Latin word as "trust" or "entrust."43 But reputation was especially important to the credit relationships described above. When Sadie vouched for the creditworthiness of a black friend at a Philadelphia department store, both she and the friend had a tremendous reputational stake in the friend's repayment of the amount borrowed. If the friend failed to repay, Sadie's reputation would be tarnished, and the friend would lose any hope of access to future credit in the Philadelphia community. Because reputation was the glue that held the credit relationship together, borrowers could be expected to go to great lengths to make sure they paid back the money they borrowed (and similarly, to borrow only amounts they were confident they would repay).

Although the heightened role of reputation is not as immediately obvious with the loans made by black financial institutions, reputation played a central role in these transactions as well. Black financial institutions-like their counterparts in minority and ethnic communities today-relied heavily on their understanding of whether the individuals or businesses applying for loans were creditworthy.44 From the borrower's perspective, maintaining a reputation for creditworthiness was therefore absolutely essential.

The role of reputation is closely related to a quality Glen Loury refers to as "social capital" in his writings on racial discrimination.45 Before moving on to the final explanation for the absence of a black bankruptcy practice, it is useful to consider how social capital issues fit into the picture.

Loury's analysis of social capital starts from the observation that "individuals are embedded in complex networks of affiliations: they are members of nuclear and extended families; they belong to religious and linguistic groupings; they have ethnic and racial identities; they are attached to particular localities .... Opportunity travels along the synapses of these social networks."46 An individual whose friends or relatives work in a given industry, for instance, may have better access to information about job opportunities in that industry than someone who lacks these contacts.47

Loury is primarily concerned with the exclusion of minorities from important social networks, and I will return to this theme when we bring the story to the present.48 But it is important to recognize that social networks also play a central role within the minority community itself. As suggested above, in the black Philadelphia of Sadie and Ray Alexander's era, the few sources of credit that were available to blacks were highly dependant on social relationships, and the principal currency of these relationships was one's reputation within the black community.49 Because access to credit was so dependent on reputation, borrowers had an extremely strong incentive to repay the amounts that they borrowed. Of course, this does not mean that no black borrower would ever end up in bankruptcy; even in close-knit communities reputation is not a perfect predictor of creditworthiness, and at least a few otherwise creditworthy borrowers may fail for reasons that could not have been predicted in advance. On balance, however, one would expect to see comparatively fewer bankruptcies in a community whose credit relationships are strongly dependent on reputation.