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September 30, 2022
—W. E. B. Du Bois, The Souls of Black Folk
The dawn of emancipation in the United States saw 4 million former slaves, 90 percent of the Black American population, gain their freedom. But they did so in poverty, as Du Bois describes: A few years prior, they had been counted as wealth, earning and owning nothing in their own name.
After emancipation, proposals to provide former slaves with land so they could survive economically were largely defeated. Thus in 1870, the wealth gap between Black and White Americans was a staggering 23 to 1: For every $100 of wealth held by White households, Black households had about $4.
Fast forward 150 years and that gap has narrowed to about 6 to 1—and yet, a significant gap remains: On average, for every $100 of wealth of a White American, a Black American now has around $17. In actual amounts, that translates to an average wealth of $338,093 for White Americans and $60,126 for Black Americans, as of 2019.
In the new Institute working paper “Wealth of Two Nations: The U.S. Racial Wealth Gap, 1860–2020,” former Institute visiting scholar Ellora Derenoncourt and colleagues Chi Hyun Kim, Moritz Kuhn, and Moritz Schularick study the evolution of the Black-White racial wealth gap to understand how it has changed and what forces drove those changes.
“We wanted to see if there was something to be learned for policy: Do we see that certain periods were particularly good, particularly bad in terms of convergence? What conclusions can we draw from that?” Kuhn said about one motivation the author team had for undertaking the research.
Drawing on numerous historical resources, the economists construct a new dataset that fills in around 100 years of missing wealth data, from the 1880s to the 1980s, when modern surveys of wealth began. They then use a model of wealth accumulation to investigate the sources of the wealth gap.
So where does wealth come from? Yesterday’s wealth, mostly. Unlike income, which can change quickly—lose a job, take a new job—wealth builds slowly from interest on previous wealth and new savings from income. For that reason, “it takes a lot of time to build wealth and to close an existing wealth gap, especially if the world around you is not stopping to accumulate wealth,” Kuhn said.
The economists’ analysis suggests that, more than 150 years after the end of slavery, today’s racial wealth gap is the legacy of very different wealth conditions after emancipation. While the White-Black income gap has narrowed over time, differences in Black and White Americans’ capital gains rates and savings rates throughout history have slowed the convergence (closing the gap) between Black and White wealth.
The result: An enduring wealth gap that shows no sign of resolving. “It was interesting for us to see how extremely persistent the racial wealth gap is. We saw a lot of things changing in the U.S. economy in the last 70 years, but the racial wealth gap seems to be pretty ignorant of all that,” Kuhn observed.
Tracing 150 years of the racial wealth gap1 reveals rapid early progress followed by frustrating stagnation (Figure 1).
The thirty years following emancipation saw rapid narrowing of the racial wealth gap, falling from a ratio of 56 to 1 in 1860 on the eve of the Civil War to 23 to 1 in 1870 following emancipation and 11 to 1 in 1900. (In 2019 dollars, that comes to average wealth of $34,000 for a White American and $3,100 for a Black American.) White slaveholders’ loss of slaves as “wealth” explains about a quarter of this convergence. The rest was due to a higher wealth accumulation rate for Black Americans than White Americans.
This convergence, however, is more a matter of statistics than reflection of meaningful economic or political change. Because Black Americans’ wealth was so low in 1870, even small gains translated to big percent increases in wealth and thus large reductions in the wealth gap, even though the difference in the amount of average wealth held by Black Americans and White Americans remained large.
Unfortunately, this period of rapid convergence was relatively short-lived. Proposals to redistribute property to former slaves, such as General William Sherman’s field order allowing freed slaves to establish 40-acre farms on federal land, ultimately failed to garner sufficient political support, and early enforcement of Black Americans’ rights were similarly reversed. By 1900, a racist economic and social order was largely restored.
Between 1900 and 1930, the racial wealth gap narrowed tepidly, at a rate around 0.3 percent a year. During this period, Black Americans’ share of national wealth stayed fairly constant, at 1 percent (Figure 2).
“Barriers to Black economic progress were pervasive in the post-Reconstruction era,” the economists observe. For instance, Black Americans had limited access to financial institutions or credit; they had little opportunity to purchase land; they experienced the violent destruction of their property; they faced widespread discrimination in education and the labor market. In the South, the vast majority of Black farmers were renters or sharecroppers in an economic system that hindered Black workers’ economic progress because White landlords were able to capture their tenants’ improvements to the land simply by not renewing the lease.
Wealth convergence picked back up modestly during this period, and by 1960 the gap was 8 to 1. (In 2019 dollars, that translates to average wealth of $76,00 for White Americans and $9,000 for Black Americans.) A closer look at the timing reveals this does not appear to be the result of New Deal economic relief or new social insurance policies, which tended to exclude sectors with large representations of Black workers. Rather, labor market dynamics around the time of World War II led to Black workers moving into higher-paying occupations, notably related to war production and defense, which reduced the racial income gap and led to greater gains in Black Americans’ wealth. This movement was facilitated by President Franklin D. Roosevelt’s Executive Order 8802, which banned “discrimination in the employment of workers in defense industries or government because of race, creed, color, or national origin.”
The civil rights movement was responsible for the fastest period of racial wealth convergence since 1900. Tireless efforts by Black activists to demand equal rights and protections led to the passage of numerous laws that reduced social, political, and economic discrimination, including the Civil Rights Act of 1964, the Voting Rights Act of 1965, the Fair Housing Act of 1968, and expansions to the Fair Labor Standards Act, which sets federal minimum wage policies.
These legislations helped narrow the racial income gap, which in turn narrowed the wealth gap; it fell from 8 to 1 in 1960 to 5 to 1 in 1980. Figure 2 shows that Black Americans’ share of national wealth started increasing sharply in 1960 even as the total U.S. population of Black Americans was also increasing.
And then—convergence stopped. In the 40 years between 1980 and 2020, the racial wealth gap actually increased by the equivalent of 0.1 percent a year. The reasons for this stagnation are discussed in the section “A widening gap: The role of capital gains” below.
The next step is to analyze the causes of the racial wealth gap. To do this, the economists engage in a thought experiment: What if Black and White Americans started with the radically different levels of wealth in 1870 that they did in real life, but their wealth accumulation rates were identical after that? The resulting wealth gap in 2020 would be about 3 to 1 ($33 dollars of Black wealth for every $100 dollars of White wealth). That’s about half of what the actual wealth gap is today, suggesting that unequal levels of wealth in 1870 are a major source of today’s racial wealth gap.
The fact that today’s racial wealth gap is larger than it would be under this optimistic scenario is due to unequal wealth accumulation rates, which of course haven’t been identical for White and Black Americans, as the brief history above of political and economic exclusion makes plain.
Wealth accumulation can be described as a fairly straightforward equation. It starts with yesterday’s wealth and the interest earned on that wealth (capital gains rate). Add to that new savings from income, which is the product of yesterday’s income level, how much income has changed (income growth rate), and how much of that income is saved (savings rate).
While historical data on these rates is difficult to come by, since at least 1950, White Americans have enjoyed a higher average savings rate and capital gains rate than Black Americans (see Figure 3).
What drove wealth convergence, then? The income growth rate. The economists estimate that the average annual income growth rate for Black Americans was larger than that of White Americans from 1870 to about 1980. At that point, income convergence stalled; over the last 40 years, the annual income growth rates for Black and White Americans have been essentially the same.
Now that income convergence has stalled, the difference in the capital gains rate experienced by Black and White households is the main factor pushing their wealth apart.
The role of capital gains is particularly important here. The high rate of return to capital holdings over the last 40 years—economic parlance for “stocks have really gone up a lot”—is a leading cause of the wealth dispersion in the United States today. According to analysis by economist Emmanuel Saez and others, wealth has become significantly more concentrated during this period: In 1980, the richest 0.1 percent of Americans—about 160,000 households—owned 7.7 percent of national wealth. In 2020, they owned 18.5 percent.
“Given that there are so few Black households at the top of the wealth distribution,” Derenoncourt and co-authors write, “faster growth in wealth at the top will lead to further increases in racial wealth inequality.”
And that’s what’s happening now. On average between 1950 and 2010, Black households held about 7 percent of their wealth in stock equity; among White households, it was 18 percent (Figure 4). The portfolios of White households are also more diversified than Black households, which are concentrated in housing wealth. Housing has appreciated since the 1950s, but stock equity has appreciated five times as much.
“At a more general level,” Kuhn stated, “this research emphasizes how important portfolio choice and investment behavior is. It’s not only about putting money aside, but where you put it.”
The distribution of wealth in the United States comes under frequent scrutiny because of how skewed it is—and because wealth is a determinant of social and economic outcomes far beyond what someone can buy.
“Wealthier families are far better positioned to finance elite independent school and college education, access capital to start a business, finance expensive medical procedures, reside in higher amenity neighborhoods, lower health hazards, etc.; exert political influence through campaign financing; purchase better counsel if confronted with the legal system, leave a bequest, and/or withstand financial hardship resulting from any number of emergencies,” Institute advisor William Darity Jr. and Darrick Hamilton wrote in a 2010 article analyzing policies to address the wealth gap.
It matters a great deal, then, that White Americans hold 84 percent of total U.S. wealth but make up only 60 percent of the population—while Black Americans hold 4 percent of the wealth and make up 13 percent of the population. Put another way: The wealth of the richest 400 Americans is approximately equal to that of 43 million Black Americans.
The historical analysis and counterfactual simulations by Derenoncourt, Kim, Kuhn, and Schularick provide useful context for thinking about policies to address the racial wealth gap. Without redistribution, the wealth gap will likely persist for centuries. But redistribution alone, without attending to disparities in wealth accumulation, will see the gap reemerge. These approaches, the economists argue, are complimentary.
They are also necessary if the wealth gap is to meaningfully narrow before another 150 years slip by.
1 The economists actually compare Black wealth to non-Black wealth—that is, the average wealth among all groups except Black Americans—because the data does not allow them to separate out the wealth of other racial/ethnic groups. As a check, they compare their estimate of non-Black wealth to an estimate of White wealth in the periods 1860–1880 and 1960–2020; the estimates are very similar. Racial/ethnic groups other than White and Black were quite small in the United States prior to 1950. And because White Americans are the wealthiest racial/ethnic group in the United States, using “non-Black wealth” likely underestimates White wealth and therefore underestimates the Black-White wealth gap.
Lisa Camner McKay is a writer/analyst with the Opportunity & Inclusive Growth Institute at the Minneapolis Fed. In this role, she creates content for diverse audiences in support of the Institute’s policy and research work.
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