“Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!”
-The New Colossus by Emma Lazarus, inscribed at the base of the Statue of Liberty
The American dream has always been prosperity and achievement. Our nation’s ideals have always included the concept that anyone can achieve success here, that drive, determination, and grit can lead to a bright future.
We hold inventors, entrepreneurs, and small business owners as exemplars of this American dream: anyone can become anything in America. The land of opportunity is core to our national narrative. But some people are more equal than others.
American law enshrines equality from the moment of our independence. We hold these truths to be self-evident, that all men are created equal. But even in the land of opportunity, access to resources plays a big part in what one can accomplish with an opportunity. Finance is opportunity, and access to finance is crucial to achieving the American dream.
The American ideal is equality for all, but American history has often been a struggle for marginalized groups to realize that ideal. And despite laws passed to help create that equality, finance hasn’t always been equal, although great strides have been made over time.
In honor of Pride month, Prosper’s here to shed some light on the history of finance and equality.
Financial Discrimination and Race
America has made significant strides, especially in the last half century, but the struggle for racial equality and justice has been a long, difficult path. Financial discrimination has played a significant role in slowing efforts to build a more equitable society. Even once policies are changed or laws passed, the damage done by financially discriminatory policy affects the well-being of many marginalized populations for generations.
Wealth disparities have persisted between families of different ethnicities, and the gap is closing very slowly – if at all. In 2019, the typical white family had eight times the wealth of the Black family. While wealth did increase more rapidly for Black and Hispanic families between 2016 and 2019 than for white families, the median wealth gap narrowed very little, from $163,700 to $164,100.
This data is from 2019 and doesn’t take the effects of the COVID-19 pandemic or the recent spikes in food and housing costs due to inflation, but there’s evidence that the Great Recession of 2007-2010 may have exacerbated racial wealth gaps. Median wealth fell about 30 percent for families of all ethnicities during the recession, but the recovery varied between groups. Black and Hispanic families saw their median wealth drop another 20 percent between 2010 and 2013. White families saw their median wealth levels stabilize over the same period.
This is primarily due to a higher foreclosure rate for Black families during the Great Recession. First-time Black homebuyers were often saddled with subprime mortgages that were harder to repay.
Why does this wealth gap exist? There are many factors. Much of the gap is due to our history of financial discrimination and its lingering effects on intergenerational wealth building.
Much of family wealth is built through intergenerational transmission of wealth.
Families transmit their wealth to the next generation through bequests and gifts (such as wedding gifts or making down payments on a home for younger family members just starting out). According to research published in the Review of Black Political Economy, these types of bequests and gifts account for more of the racial wealth gap than any other factor.
In addition to direct transfers of wealth, parents make indirect transfers through investments in their children. Wealthy children often have greater opportunities (such as private schooling or prestigious colleges and universities), increasing their ability to accumulate more wealth.
The echoes of past discriminatory housing policies also contribute to today’s racial wealth gap. As we’ve discussed in the Prosper blog many times, home ownership is one of the key drivers of intergenerational wealth building in America. Real estate is historically a safe investment and one that gains value over the long term. In addition, owning real estate provides access to advantageous financing vehicles. It is often less expensive than renting one’s home, assuming one has the capital and credit history to buy.
Sundown towns and places like them used both written and unwritten laws to limit where Black families could buy land or homes or even live. Banks and lending institutions largely worked off individual relationships with their customers. This provided ample opportunity for prejudice and bigotry to express themselves through negative credit and lending decisions. For example, during the New Deal era, the Federal Housing Agency engaged in a process known as redlining, refusing to insure mortgages in predominantly-Black neighborhoods. This both limited homeownership and encouraged segregation.
While the advent of more objective credit scoring systems and federal and state-level anti-discrimination laws helped level the playing field, it takes time for a profound gap to level itself.
Slavery and Wealth
Slavery is a difficult concept for many people to think about or discuss as anything other than ancient history. Many of us don’t want to admit our ancestors were capable of such monstrous actions. Others bear the family stories of horrors committed upon their ancestors. However, it’s impossible to address the intergenerational wealth gap without considering the effect of the institution of slavery.
Slavery was only legal in the southern and parts of the western U.S., and slave ownership was concentrated in the most wealthy classes. However, the ripple effect of slavery still carries through to this day. Many slaves were freed with very little to show for the labor they contributed to the wealth of enslavers and the economy of the southern U.S.
The Lincoln administration intended to provide support and resources for newly freed people to build their future. However, Lincoln’s assassination led to the Johnson administration, which reversed many of the more progressive policies Lincoln championed. And various forms of discrimination, such as financial and employment discrimination, endured for decades after the Civil War, and in some cases, well into the modern era.
There’s been enormous pushback recently in many states against teaching the historical fact of race relations in the U.S. Consider recent news stories about banning critical race theory-based education or The 1619 Project. There are several proposed ways to close the racial wealth gap, such as baby bonds or various forms of reparations, but many Americans simply think ‘slavery was over 150 years ago’ without considering the implications our past still has for financial equality.
Financial Discrimination and Gender
Experts believe that economic discrimination remains an issue for women in the workplace and is improving slowly, if at all. In 2020, women earned 84% of what men earned, according to an analysis by the Pew Research Center using median hourly earnings of full-time and part-time American workers. This number has remained relatively stable for the last fifteen years, although the gap narrows for younger women.
Historically, women have been formally and informally excluded from many employment classes and have had fewer educational opportunities, even for the few well-paying fields that they were able to pursue employment in. Although financial equality for women has improved, it’s only been made recently throughout the past few decades.
- The Equal Pay Act of 1963 mandated equal pay for equal work, although that hasn’t always translated to real-world results.
- In 1972, Title IX mandated that women have equal access to education. Title IX is considered a landmark piece of legislation in achieving its intended goals
- It wasn’t until 1978 that the Pregnancy Discrimination Act made it illegal to fire someone for becoming pregnant.
- The Women’s Business Ownership Act of 1988 gave women access to business loans without needing a male relative to co-sign.
- The Family and Medical Leave Act was enacted in 1993. It provided most workers 12 weeks of paid leave for childbirth or caring for sick family members.
A Long Way To Go
Despite recent progress, according to the 2020 census, families with a woman as head of household are twice as likely to be below the poverty line compared to families with male heads of household. In addition, women left the workforce in more significant numbers than men during the COVID-19 pandemic, often to care for children during school closures. This is expected to impact their careers and exacerbate the wage gap negatively.
Women still make less than men overall, often due to inequity in family labor. While federal law can help level the playing field, societal attitudes and expectations continue to affect the quest for financial equality.
Financial Discrimination and Sexual Orientation
Happy Pride Month! The LGBTQIA+ community has made enormous strides in equality in many areas, such as the 2015 Obergefell vs. Hodges Supreme Court decision that cemented marriage equality. However, financial inequality is still a more formidable challenge.
Marriage isn’t just about romantic bonds- it’s also about economic bonds. Our society is built around families as its basic unit. As a result, many laws and financial structures are created to support the nuclear family. From tax benefits gained through joint-filing to applying for and receiving credit as a couple, marriage carries many benefits for wealth-building.
Many LGBTQIA+ people were barred from forming family units until recently. They were also often barred from arranging their finances to support their unofficial families. For example, many gay men in the 1980s AIDS crisis had their wills challenged by family members when attempting to leave wealth to their partners. Lengthy court battles often ensued; in many cases, LGBTQIA+ people were even barred from their partner’s funeral.
The ECOA and Sexual Orientation
The Equal Credit Opportunity Act of 1974 has helped secure credit opportunities for LGBTQIA+ individuals. Moreover, court decisions in the intervening decades have solidified the ECOA’s protections. For example, in a federal court case in 2000, the court ruled in favor of a transgender person who was denied a bank loan.
In 2021, The Consumer Finance Protection Bureau issued a ruling that their interpretation of the ECOA makes discrimination by lenders based on sexual orientation or gender identity illegal, further clarifying the issue.
Employment Discrimination and LGBTQIA+ Individuals
Discrimination against LGBTQIA+ individuals has been less consistent but just as widespread as other types of discrimination. Some banks are more accepting than others, and some areas of the country are more accepting than others. However, only with strengthened federal protections has it become possible for individuals to challenge wanton discrimination. And just as with other types of discrimination, past discriminatory policies often have lingering effects. For example, couples that spent their lives together prior to the legalization of same-sex marriage often weren’t eligible for the same survivor’s benefits available through Social Security that straight couples were entitled to.
Employment discrimination has been rampant throughout history, a problem that continues to occur even with federal protections. It’s hard to build wealth when your career gets repeatedly derailed. Even with federal protections in place, many states known for being hostile environments for LGBTQIA+ people are also right-to-work states. While employers are prohibited from releasing workers just for their sexual orientation or gender identity, they can terminate them without giving a reason and face no consequences even though sexual orientation or gender identity was their motivation.
Legislation and Precedent
Financial discrimination has played a major role in slowing efforts to build a more equitable society. Even once policies are changed or laws passed, the damage done by financially discriminatory policy affects the well-being of many marginalized populations for generations.
To help understand how far we’ve come and so our readers know and exercise their rights, here’s a compendium of the most important Supreme Court cases and federal laws that impact financial discrimination and the quest for financial equity:
The Civil Rights Act of 1964
Title VII of the Civil Rights Act of 1964 made it unlawful to discriminate against someone on the basis of race, color, national origin, sex (including pregnancy, sexual orientation, and gender identity), or religion. The Act also made it unlawful to retaliate against a person because the person complained about discrimination, filed a charge of discrimination, or participated in an employment discrimination investigation or lawsuit.
It includes not only intentional discrimination but practices that discriminate as a side effect of their purpose, such as many forms of financial discrimination.
Fair Housing Act of 1968
The Fair Housing Act prohibited discrimination against buying, selling, renting, or financing homes based on race, religion, national origin, or sex. This bill was the subject of intense debate in the Senate until the assassination of the Reverend Dr. Martin Luther King Jr. in 1968, after which it was passed quickly. It’s widely known as one of the final great legislative achievements of the 1960’s Civil Rights movement.
Equal Credit Opportunity Act of 1974
The Equal Credit Opportunity Act prohibited lenders and financial institutions from discriminating against credit applicants for any factors unrelated to their creditworthiness and ability to repay a loan. The ECOA protects applicants from discrimination based on race, religion, national origin, marital status, age, and participation in social assistance programs. A series of court cases and law clarifications has expanded the ECOA’s auspices to include sexual orientation and gender identity discrimination.
Civil Rights Act of 1991
The Civil Rights Act of 1991 was a response to a 1989 Supreme Court decision that diminished workers’ ability to sue employers for discrimination. This law amended the original act passed in 1964 to add new methods to sue employers, strengthen workers’ rights to sue, and provide for workers’ ability to receive damages for emotional distress.
Windsor V. United States, 2013
In a landmark case for LGBTQIA+ equality, Edie Windsor sued the federal government after her wife passed away. The federal government refused to recognize her marriage (which was conducted in Canada due to American marriage law at the time) and taxed Ms. Windsor’s inheritance accordingly. In the case, the Supreme Court ruled that Section Three of the Defense of Marriage Act was unconstitutional and that the federal government was forbidden to discriminate against married LGBTQIA+ couples.
Obergefell v. Hodges, 2015
In Obergefell v. Hodges, the Supreme Court ruled that states must issue marriage licenses to two people of the same sex and recognize all lawfully-licensed marriages. Before this case, same-sex marriage was different from state to state.
Bostock v. Clayton County, Georgia; Altitude Express Inc. v. Zarda; Harris Funeral Homes v. EEOC, 2020
The Supreme Court ruled in 2020 that Title VII of the Civil Rights Act of 1964 definitively applies to LGBTQIA+ individuals. While lower court decisions had applied Title VII to LGBTQIA+ discrimination cases, this decision by the highest court in the land extends that throughout the United States.
Moreover, the decision potentially has an even broader impact than just employment discrimination. Many federal anti-discrimination statutes in other fields, such as housing, health care, and education, use Title VII as a benchmark.
The Struggle Against Financial Discrimination Continues
We’ve made progress in recent years to level the playing field for all members of our society, but we’ve got a long way to go.
Credit decisions are now based on credit reports and objective credit scoring, which limits opportunities for discrimination, but credit invisibility is now a problem for many seeking credit. It’s a paradox. To get credit, you need a credit history. To build up a credit history, you need credit. And credit-invisible consumers are often residents of lower-income areas, BIPOC individuals, recent immigrants, and other disadvantaged people. So addressing the issue of credit invisibility is crucial to building a more equitable world.
Financial education is a huge opportunity to move toward a financially equitable future. Wealthy people tend to know how to manage their finances or have advisors to do it for them. They pass that on to their children, increasing the chances of maintaining their family’s wealth. Unfortunately, many individuals without those privileges never learn how to manage or grow their own wealth.
Relying on parents to hand down financial literacy to their children provides the already wealthy with another advantage. Free, high-quality financial literacy education helps maximize the opportunities granted by government anti-discrimination programs. Greater financial literacy leads to better outcomes for everyone. That’s what the Prosper blog is all about, after all.
Financial empowerment should be within reach for every single one of us. Prosper’s committed to making that happen.