The Color of Money

by Mehrsa Baradaran

  In a follow-up ad called “Black Capitalism,” candidate Nixon promised to rescue the ghetto with a “hand up” and not a “handout.” Specifically, he promised “to get private enterprise into the ghetto and the ghetto into private enterprise.” He said that more black ownership of land, businesses, and homes would create a “multiplier of pride that will end our racial strife.”64 “Integration must come,” he said, “but in order for it to come on a sound and equal basis the black community has to build from within.” Presumably he meant that blacks would have to work toward integration themselves, as though segregation had been an act of nature and not a system imposed and enforced by racism and state power.65

  Nixon believed that government’s “overpromising and underproducing” had caused the rioting, and he vowed “not to overpromise now.” He was clear that the “federal government does not have the funds at this time to appropriate billions of dollars for our cities.”66 He believed that it was time to think not about what the government could do, but what “private enterprise and individuals” can do to “provide hope” and “reconciliation.”

  In a speech called “Human Dignity," he said that the country needed to “go beyond civil rights." Actually, in the initial draft in Nixon’s presidential files, the speech said “Forget civil rights," and Nixon highlighted the word “forget" and replaced it with “go beyond." The message was the same. “We cannot meet the needs of the late sixties with the solutions of the early sixties." He wanted to put an end to “more laws" and “more money," because they would only lead to “more of the same frustration," “more of the same rioting," and “more of the same despair." He said that “civil rights is no longer an issue," Jim Crow and segregation were over, and that it was time to focus on self-determination and “dignity." By using the word dignity, Nixon was communicating that blacks needed to stand on their own feet and that asking the government for help was depriving them of their dignity. “At long last, the Negro has his bill of rights—but he cannot pay the bill."67

  In a radio program in April 1968, Nixon took his case directly to blacks. He said that black Americans “do not want more government programs which perpetuate dependency. They don’t want to be a colony in a nation. They want the pride, and the self-respect, and the dignity that can only come if they have an equal chance to own their own homes, to own their own businesses, to be managers and executives as well as workers, to have a piece of the action in the exciting ventures of private enterprise."68 Nixon sold his program as a companion to the black power movement—his plan was in sync with the true spirit of black nationalism, he assured them. “Black extremists are guaranteed headlines when they shout ‘burn’ or ‘get a gun,’ but much of the black militant talk these days is actually in terms far closer to the doctrines of free enterprise than to those of the welfarist 30s."69 Nixon promised “more black ownership, black pride, black jobs, black opportunity, and yes, black power, in the best, the constructive sense of that often misapplied term."70 Nixon was practically repeating Malcolm X, who had said that the “black man should be focusing his every effort toward building his own business, and decent homes for himself," although Nixon left out the part where Malcolm had said, “show me a capitalist, I’ll show you a bloodsucker."71 He also ignored the point of the black power platform that included a demand for land, reparations, and political sovereignty. The part Nixon embraced enthusiastically was voluntary segregation, self-reliance, and private enterprise.

  Nixon and his advisors intended black capitalism to be a total replacement for Johnson’s antipoverty programs. According to a Nixon biographer, he “presented black capitalism as both a panacea and a fait accompli.”72 Nixon’s speechwriter Raymond K. Price explained that the path forward was to replace “the Negro habit of dependence" with “one of independence" and “personal responsibility."

  But had the black community not been trying to “help themselves" for generations while being repeatedly blocked by law and thwarted by policy? As Nixon seemed to portray it, the history of the black community was a perpetual state of dependency on government largesse. This explanation was inconceivably shortsighted. Never mind that the meager “handouts" had only begun a few years earlier, or that the ghetto was the only pocket in the entire American landscape that had not been the recipient of generous postwar government subsidies. In fact, the ghetto was created due to the complete and utter lack of any handouts. It had only ever had an economic system of unchecked, unmitigated, and absolute capitalism. Yet now that the deferred dream had erupted into violence, policymakers proposed that blacks learn how to be capitalists.

  Black capitalism was a commercial success, winning Nixon the Republican nomination and the White House. It all sounded great to the press. The Wall Street Journal and Time magazine embraced Nixon’s black capitalism rhetoric, calling it “thoughtful" and “promising."73 Even the Democratic-leaning New York Times, which usually showed the same disdain for the president that the president showed for it, endorsed black capitalism. The paper’s associate editor Tom Wicker wrote, “Richard Nixon’s radio speech on the need for the development of black capitalism and ownership in the ghetto could prove to be more constructive than anything yet said by other presidential candidates on the crisis of the cities." Max Ways, the editor of Fortune magazine, wrote that “business is the one important segment of society Negroes today do not regard with bitter suspicion."74 This likely had much less to do with the black community’s trust in business than their distrust of the government. The black Chicago Defender was more cautious. Though the paper endorsed black capitalism, it expressed some suspicion over the candidate’s motives, noting that without actual capital, “black power takes on the insignificant aspect of a paper tiger."75

  Republicans embraced black capitalism wholeheartedly. Nelson Rockefeller’s strategist called the concept “a stroke of political genius,” and Rockefeller himself supported the idea.76 National Review editor William Buckley praised the “spirit” of “militant black leaders who have been preaching black initiative, black capitalism, and yes, black power.” Buckley aligned black capitalism with a libertarian small-government philosophy, stating that the black power movement was allied with conservatives in their fight against “that huge monster on the banks of the Potomac.”77 Buckley proposed that the still-undefined program need not involve the entire black populace, because “scattered success can give universal hope.” This was the key objective. The government would not need to underwrite black businesses, just the community’s hope in black businesses.

  Black capitalism was a win-win, according to the administration. Nixon’s top aide, John Ehrlichman, explained that “with a relatively small budget impact this is one program which can put the Administration in good light with the Blacks without carrying a severe negative impact on the majority community, as is often the case with civil rights issues.”78 The budget was small, as was the impact. In fact, there was more emphasis on black capitalism in Nixon’s advertising and press response than there ever was in White House policymaking.79

  In 1969 President Nixon signed Executive Order 11458, establishing the Office of Minority Business Enterprise (OMBE) within the Department of Commerce. The OMBE was not allocated any direct funds, but was instructed to seek private business contributions and help from other federal agencies. What this meant in real political terms was that the “OMBE was given responsibility for ‘advising,’ ‘encouraging,’ ‘mobilizing,’ ‘evaluating,’ ‘collecting,’ information and ‘coordinating’ activities,” but beyond this vague mission it did not have a mandate or a budget with which to make unilateral decisions or to make any loans or grants. Any money it got its hands on came from the OEO’s antipoverty budget.80 Even so, the House Select Committee on Small Business immediately opposed it, calling the agency “discrimination in reverse.”81

  Nixon asked Secretary of Commerce Maurice Stans, a longtime Republican stalwart and an accountant by profession, to manage the black capitalism program in 1969. After this, N
ixon expressed no interest whatsoever in black capitalism. Stans selected Tom Roeser, a conservative business executive at Quaker Oats Company, to head the OMBE. He was charged with assembling an advisory committee on minority enterprise, and managed to create a committee of respectable conservative businessmen from a variety of Fortune 500 firms and banks.82 The sixty-three-member board was predominantly white and comprised of philanthropists and successful businessmen, eerily reminiscent of the Freedmen’s Bank Board. Like Nixon, the council was not particularly engaged in the management of the program. Rumsfeld and Moynihan also expressed indifference to the OMBE.83

  There were some within the administration who did not see black capitalism as a political ploy and were genuinely committed to it. Among them were Roeser and his deputy, Abe Venable, who became the highest-ranking black director at OMBE. Another true believer in black capitalism was Theodore Cross, a white entrepreneur and philanthropist who served as a key Nixon advisor on black capitalism. In fact, it was his 1969 book, Black Capitalism, that laid out the policy framework for building the ghetto economy. Instead of providing blacks with an exit from the ghetto through jobs, Cross believed that the government should focus on enriching the ghetto through significant government investment.84

  Cross understood that black businesses were stuck outside of the systems of power, prohibited from entry by its white gatekeepers, who were the ones “in possession of jobs, housing, and capital." Blacks needed to gain power simply because those with power had used it against those without it and had no incentive to share their wealth. Cross explained that the problem with black banking in particular was not lack of supply, but lack of demand. To make his point, Cross used black athletes as an example. He explained that there had always been a strong supply of black boxers because there had long been a demand for them. Yet until 1945, there had been rampant discrimination in other sports like baseball and football, and thus there was no market demand for black players in those sports, which produced no black athletes until the 1960s. Once there was a demand, black athletes came to dominate those sports in much greater numbers than their proportion of the population. “This did not come about because black people are stronger or more agile than whites. Certainly it did not occur because we suddenly instituted training programs for black athletes. That was not necessary When the demand opened up, the supply grew."85

  There had never been a market demand for black businessmen— just the opposite. During the century that the United States had allowed blacks to respond to market forces rather than forced labor, the demand for black labor had been for domestic labor, factory work, railroad work, farm work, or other menial jobs. Moreover, there had been a “solid aversion" to and “discouragement" of blacks in high-powered commercial roles.86 To put it bluntly, the dearth of black bankers and entrepreneurs was an “assured economic result of the sustained and collective preference of white people not to trade or exchange commercial promises with black people."87 Black businessmen did not need education or training. After all, most of the best entrepreneurs had no formal training at all. There just needed to be market demand. And that would not come from the business community’s sense of altruism. “Enterprise capitalists, big or small, are designed to share these turfs with no one—even if he is black, sports a new loan from the Freedom National Bank, and holds a fresh degree from a leading business college."88 Cross never held an administrative position and his ideas were ignored. And as it turned out, the program came to rely exclusively on white businesses to open their doors and their coffers to blacks based purely on altruism.

  At first, there was a sincere effort from within the OMBE to create a real boost to black businesses. Venable proposed an ambitious plan called the “National Strategy," which he distributed internally in 1969. He called for “nothing less than full equality of access to business opportunities and resources"; he recognized that even a robust national program was not enough because it would take many years of effort to achieve “the demise of the economic colonialism of our minority communities." The plan promised to invest $8.6 billion and to create 400,000 new minority businesses in ten years, using the FHA loan guarantee program as a model.89

  As soon as Stans heard of the plan, he shut it down. Stans was not interested in anything so broad and costly, even if the plan was to be built on private money and was designed to be profitable for investors. The OMBE had misjudged its mission and the political basis of black capitalism. Stans informed Roeser that the most important objective was to create success stories, which would “create pride among the minority which, in turn, creates aspirations of those down the line." In other words, the program was to be symbolic. “What the black people, the minority people, need more than anything else today is a modern Horatio Alger," said Stans. “This is the way we will build the pride of these people, and this is the way we will convince the young fellows coming up that they have a chance to do the same thing." There would be no financial support from the administration for black capitalism. It was clear that for Stans and Nixon, black capitalism was no more than a public relations strategy.90

  Roeser resigned from his post at OMBE in 1970, and Stans took over control of the OMBE after an initial public kerfuffle. With its reputation on the line, the OMBE launched the Minority Enterprise Small Business Investment Company (MESBIC), an idea conceived by Menlo Park executive Robert Dehlenford. The MESBIC initiative was based on the idea that what black businesses needed was credit, “technical assistance," and “mentorship."91 The credit would be provided on a fifteen-to-one leverage ratio—for every dollar invested by a black company, the program promised to attract fifteen more from investors. The Chicago Tribute introduced the program with the headline “MESBIC Multiplies Money for Minorities."92 The plan was for a hundred black MESBIC companies to put up a minimum of $150,000 of capital, which would be used as a down payment to be “multiplied" by private credit.93

  A year later, the program was a failure. Of the fifty minority businesses in the program, twenty-five had already failed by 1970 and sixteen more were in trouble. The fund was bankrupt.94 The flaw in the program, as pointed out by economists Richard Rosenbloom and John Shank in a Harvard Business Review article, was that it required these companies to operate with an extremely large debt burden—the companies were being 100 percent financed by debt. The only equity came from the companies themselves. “No matter what color the owner, successful businesses just do not get started with debt financing alone," said the economists, because the interest payments would be “an oppressive cash flow problem for a new business." Operating without capital in a high-crime, economically depressed, and resource-poor ghetto meant that shocks would be high and unavoidable, and there would be virtually no buffer or cushion of equity to absorb them. Even more disturbing was the Government Accounting Office (GAO) finding that the volunteer white firms that were providing technical assistance were charging unreasonably high rates, some taking almost 30 percent of the small black business profits as management fees.95

  By 1970, the country was in a recession. Jobless numbers were so bad by 1971 that the Nixon administration decided to stop reporting them. The new aspiring entrepreneurs in the ghetto suffered most acutely as inflation soared and banks closed the credit pipeline. A black accounting firm in New York summed up the situation facing new black enterprises, noting that “the people least likely to succeed in business were trying to make it at a time when seasoned businessmen were having trouble.”96

  Small businesses were the most vulnerable and least likely to succeed, yet all these programs were geared toward creating more small businesses. This focus was in part due to the lack of funds to support large businesses, as well as the fact that the program was more about business myth-making and platitudes of racial pride than it was an outcome-oriented effort to help the black community accumulate business power. Small businesses were supposedly the lifeblood of entrepreneurship, and this may have been true at some point in time; but small business was no way to grow wealth in
the 1970s. Large multinational firms were making more profits and using economies of scale to reduce costs, and they were already squeezing out small businesses, a trend that was only just beginning. As Walmart was building its profitable empire, blacks were being told that to prosper, they should focus small and local. Black businesses, which were already swimming upstream due to the deviant ghetto market, were facing an even stronger economic current, pushing businesses to grow larger and more efficient.

  Yet the focus remained relentlessly on small business. In 1969, Section 8(a) of the Small Business Act authorized the SBA to manage a program to coordinate government agencies in allocating a certain number of contracts to minority small businesses—referred to as procurements or contract “set-asides.” Moynihan helped shape the program.97 By 1971, the SBA had allocated $66 million in federal contracts to minority firms, making it the most robust federal aid to minority businesses. Still, the total contracts given to minority firms amounted to only one-tenth of 1 percent of the $76 billion in total federal government contracts that year.98 The program was not without controversy. The minority set-asides immediately faced backlash from blue-collar workers, white construction firms, and conservatives, who called it “preferential treatment” for minorities. Moreover, multiple studies revealed that 20 percent of these set-asides had gone to white-owned firms, which led to a 1973 amendment that stated specifically that the businesses had to be owned by minorities. Unsurprisingly, it was also revealed that Nixon had used these set-asides to bestow political favors. A frustrated SBA employee resigned, claiming that the agency’s “main purpose was political."99 The charge was accurate and could extend to cover the entire black capitalism framework.