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Financial Exclusion: How Competition Can Fix a Broken System

Author(s):Wright, Robert E.
Reviewer(s):Snowden, Kenneth A.

Published by EH.Net (November 2019)

Robert E. Wright, Financial Exclusion: How Competition Can Fix a Broken System. Great Barrington, MA: American Institute for Economic Research, 2019. xii + 454 pp. $18 (paperback), ISBN: 978-1-63-069170-7.
Reviewed for EH.Net by Kenneth A. Snowden, Department of Economics, University of North Carolina Greensboro and Thomas B. Storrs, Department of History, University of Virginia.

Robert E. Wright promises a book about “financial exclusion, discrimination, and predation” with the goal of persuading readers “via an historical narrative informed by economic theory” that competition — especially competitive forces generated by “self-help” financial organizations that arise from within poorly-served groups — rather than centralized regulation is the time tested strategy to ameliorate the ills he documents (p. 1). He delivers a breathtakingly comprehensive (928 footnotes!) compendium of secondary literature and novel primary research of his own on various groups’ exclusion from the financial system. Wright’s solution, to encourage the entry of more and “better” suppliers of credit to serve the excluded, will persuade some and at least give pause to those more inclined to search for more traditional regulatory solutions to financial exclusion. This is a new perspective on a well-worn debate but Wright’s unique contribution is to base his recommendations on a synthetic history of financial exclusion that displays Wright’s unusual facility to explain and integrate econometric studies, economic theory, archival research, and a plethora of additional corners of academia. Financial Exclusion: How Competition Can Fix a Broken System will ably serve readers seeking an introduction to the history of unequal provision of financial services in the United States and scholars in need of a well-organized repository of secondary literature.

After an introduction, Wright provides an overview of the U.S. financial system over the history of the nation, which he invites readers conversant in the area to skip. They should not. The author calls this survey a “whitewashed” account since it does not cover discriminatory financial exclusion, but it effectively lays the groundwork for that examination which comprises the remainder of the volume by providing a concise, yet effective history of the evolution of small business credit, consumer finance, mortgage lending, and investment and insurance services within the U.S. economy. The account will be accessible to all readers, but even specialists in financial history will appreciate its breadth, detail and literacy. The chapter is not designed, however, as an organizing template for the next four chapters that lay out discrimination against African Americans, Native Americans, “White Trash,” and women, respectively. This structure effectively compartmentalizes a sprawling subject matter into discussions of specific groups. But it is left to the reader to integrate and compare the exclusion they have faced, and continue to face, in the distinct components of the financial markets so effectively described in the second chapter.

Chapter three, “Yet Enslaved: African-Americans Fight Jim Crow Finance,” tracks the depressing history of blacks’ interactions with the financial system as they were “excluded as slaves, largely excluded as quasi-slaves, and blatantly discriminated against as second-class citizens” until “loans became easy to procure, far too easy” (p. 85). Wright trudges through the well-trodden ground of literature on redlining with some skepticism as to specific findings while building an incontrovertible synthesis of African American’s financial exclusion throughout most of the twentieth century. Wright then pivots from “subtle discrimination” to “voracious predation” via subprime loans to African Americans that banks began offering as a result of the Community Reinvestment Act in the 1990s. Wright, as with all the discriminated against groups, recounts evidence as well of resilience and agency within the African American community to overcome barriers to economic progress.

In chapter four, Wright turns from the well known to the almost forgotten story of American Indians’ relationship, or more often lack thereof, with the financial system. This novel focus on the First Peoples of America respects Natives’ agency and posits their pre-Columbian propensity to “truck, barter and exchange,” while at the same time documenting the vast array of impediments foisted upon them by Euro-American government and society. This chapter drives home the point that research focusing on the black-white racial dyad neglects important pieces of American history. In chapter five, Wright transitions to “White Trash.” Wright’s at times provocative diction is on full display in this chapter and is certainly effective in grabbing the reader’s attention. Nonetheless, he makes an effective case that lower-class whites have suffered both financial predation and exclusion throughout American history. His section on the downsides of mobile home ownership — immobility, chattel financing, shoddy construction, lack of deductibility for interest payments — lacks appreciation of the possibility that the “white trash” occupants improved their circumstances by moving into a trailer park. The perfect becomes the enemy of the better.

Chapter six brings the largest group against whom discrimination courses through American financial history: women. In this section, Wright’s historical breadth shines with his distinctions between the barriers faced by married women versus single and widowed women in the colonial era and early republic in addition to their roles as business owners throughout the nineteenth century. After the Second World War, women’s access to mortgage lending resembled that of African Americans: seeming discrimination gradually but incompletely easing after about 1970 followed by overrepresentation in subprime lending. Women were also more likely to engage in costly forms of consumer credit such as pawnshops and credit cards. Overall, Wright makes clear, mediated by differences in class, marital status, and race and changing in different eras, that women have not enjoyed access to the financial system equal to men over the past quarter of a millennium in American history.

The final two chapters, entitled “Avoiding Past Mistakes” and “The Self-Help Solution,” contain prescriptions for the future, which the author gleans from the past. Chapters seven and eight lay out Wright’s basic interpretations of what worked and what didn’t with regard to creating an inclusive financial system throughout American history as suggestions for a better future. Command and control systems that place limits and barriers on consumer choice along with government-run banks fall in the category of “past mistakes” to be avoided. He uses the specific example of the Reconstruction Era Freedman’s Savings and Trust Company to illustrate his point of the hazards of government-run financial institutions because it eventually became “a tool for surreptitiously extracting rents from poor blacks, who, like other savings bank depositors, were not considered acceptable risks as borrowers” (p. 297).

The solution, Wright argues in the final chapter, is innovative self-help, which “is time-tested and will aid any group in any field of finance” (p. 309). Mutual savings banks, building and loans, credit unions, and Morris Plan banks are some of the historical examples given. The innovations cited in the early twentieth century insurance industries also exemplify his thesis. A summation of his argument: “the best way to reduce financial discrimination and predation is to reduce barriers to entry and encourage members of groups that feel discriminated against to form their own financial services companies” (p. 338). Wright’s sweeping anecdotal account provides persuasive historical evidence that self-help financial innovation has often provided substantial benefits to excluded groups. Despite these achievements, the persistent and widespread exclusion documented in the remainder of the book underscores the limited impact self-help has had in U.S. financial markets. Wright is less persuasive when he argues that the limited impact of self-help is primarily due to regulatory barriers to entry and a bias in favor of large-scale intermediation. The argument would have been more compelling had Wright balanced these forces against the difficulties associated with establishing and managing cooperative financial organizations.

Robert Wright sets an ambitious goal of chronicling a problem throughout American history –financial exclusion — and then using historical examples of solutions to suggest a different approach to overcoming the problem’s persistence in the present day. To do so he marshals and integrates an impressive compendium of disparate sources, opportunities for further research in understudied groups (American Indians and lower-class whites), and a paradigmatic intervention on the proper scope of government action. The downside of the breadth of his approach is the lack of depth or gaps at times. Nonetheless, Financial Exclusion provides a volume that will be utilized by scholars for years to come.

Kenneth A. Snowden is Professor of Economics at the University of North Carolina Greensboro and a Research Associate with the National Bureau of Economic Research. He has written extensively on the development of the U.S. mortgage market before 1940 and is co-author of Well Worth Saving: How the New Deal Safeguarded Homeownership (University of Chicago, 2013) and co-editor of Housing and Mortgage Markets in Historical Perspective (University of Chicago, 2014).

Thomas B. Storrs is a graduate student at the University of Virginia’s Corcoran Department of History. He studies urban and financial history with a current focus on New Deal home mortgage policy and wrote “‘This Will Drive Them Wild … Wild': Comptroller James Saxon’s Transformation of American Banking, 1961-1966,” forthcoming in Management and Organizational History.

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII