The former residents of two square blocks at West 98th and 99th Streets in Manhattan have been holding annual neighborhood reunions since the mid-1950s, when the federal government bulldozed their homes in a "slum clearance project" spearheaded by Robert Moses.

This formerly all-black enclave was home to an A-list of black artists and intellectuals, including singer Billie Holiday, historian Arturo Schomburg, poet James Weldon Johnson, and actor Robert Earl Jones. Bordering Central Park, the community was settled in 1905 in an area with modern housing and easy access to the city's brand new subway.

The founder of the community was an African-American realtor named Philip Payton Jr., also known as "the father of Harlem." His role in the formation of what would later become the cultural capital of black America is well established. Less appreciated is the economic philosophy that guided his life's work.

Payton was an unabashed free-marketeer whose approach, as one headline writer put it, was "to make the color line costly." He believed that property owners participating in racial covenants could be forced to pay a penalty in a competitive marketplace, and that even bigoted landlords might choose "profit over prejudice" when faced with the choice.

"Race prejudice is a luxury, and like all other luxuries, can be made very expensive in New York City," Payton wrote in his company prospectus.

Payton anticipated by more than half a century some of the insights in Gary Becker's The Economics of Discrimination (1957), part of a body of work that earned Becker a Nobel Prize. He observed, as did Payton, that in a market economy, bigots who discriminate against blacks must "either pay or forfeit income for this privilege."

Just as a refusal to hire blacks means that an employer must forgo worthy employees and pay higher salaries, refusal to rent to blacks means that a landlord must forgo worthy tenants and accept less in rent. "The man who exercises discrimination pays a price for doing so," as Milton Friedman wrote in his landmark Capitalism and Freedom (1962).

Payton understood that he could exploit this market reality to buy buildings at a discount, and to sway even bigoted landlords to rent to blacks to maximize their incomes. In a racist society, with fewer options open to them in the housing market, blacks tended to pay higher rents for equivalent properties. Payton recognized he could use this regrettable fact to undermine racial covenants. "The very prejudice which has heretofore worked against us can be turned and used to our profit," he wrote.

Through competition, in theory, race-based price differentials would narrow over time. As Friedman wrote in Capitalism and Freedom, "there is an economic incentive in a free market to separate economic efficiency from other characteristics of the individual."

Born in Westfield, Massachusetts, in 1876, Payton moved to New York City at the age of 23, working briefly as a handyman and barber, before landing a job as a porter at a real estate company. That piqued his interest in the city's booming housing market, and in 1900 he went into business managing "colored tenements."

"All of my friends discouraged me," Payton later recalled. "They tried to convince me that there was no show for a colored man in such a business in New York."

At the time, black New Yorkers were relegated to a handful of overcrowded neighborhoods, with a dilapidated housing stock that typically lacked private bathrooms and hot running water. The tenements of the Tenderloin District, New York's largest black neighborhood at the time, were "human hives, honeycombed with little rooms thick with human beings," in the words of Mary Ovington, a co-founder of the NAACP.

After launching his business in 1900, Payton initially struggled for customers. But in 1902, he attended Booker T. Washington's National Negro Business League conference and began cultivating contacts among the city's black business elites. In 1904, he incorporated the "Afro-American Realty Company" with substantial backing.

"The fight that I am making has got to be made sooner or later and I see no better time than now," he wrote. His goal was to create a world where "a respectable, law-abiding negro will find conditions so changed that he will be able to rent wherever his means will permit him to live."

The origins of the West 99th and 98th Street community date to 1905, when, according to a contemporaneous article in The New York Times, a landlord on West 99th had a dispute with a neighboring property owner and retaliated by placing a sign across her two buildings welcoming "respectable colored families" to apply for tenancy. According to the Times, bigoted whites reacted by exiting the block en mass, leaving landlords desperate to fill their vacant apartments.

Enter Payton, who had written in a 1904 article: "[Why would landlords] keep their apartments empty thereby losing much money in rent, when there is an applicant for it, and no other objection can be raised to him other than that he has a black face?"

With whites fleeing, Payton started buying and leasing buildings on West 99th Street and renting them to blacks. By August of 1905, according to property records, he controlled seven out of 48 buildings on the block. He would continue acquiring more.

"Negroes Filling Up 99th Street Block," declared the headline of an August 14, 1905 article in the Times. The article described a "constant stream of furniture trucks loaded with the household effects of a new colony of colored people who are invading the choice locality is pouring into the street," while an "equally long procession moving in the other direction is carrying away the household goods of the whites from their homes of years."

In 1911, Mary Ovington wrote that the black community on West 99th and 98th Streets "ought not to be spoken of as belonging to the poor….Here are homes where it is possible, with sufficient money, to live in privacy, and with the comforts of steam heat and a private bath."

Payton's greatest symbolic triumph, however, took place uptown on West 135th Street in Harlem, when he went up against the Hudson Realty Company, a real estate outfit controlled by a group of elite white investors. As historian Kevin McGruder has documented, at one point, Hudson Realty's board of directors had included U.S. Ambassador Henry Morgenthau Sr., his older brother Maximilian Morgenthau, and Joseph Bloomingdale, the department store magnate.

The beginnings of black Harlem started forming around the turn of the century on West 135th between Fifth and Lenox Avenues. By early 1904, real estate on the block was expected to jump in value because a station on the city's very first subway line was slated to open on the corner. Hudson Realty saw opportunity; integral to its plan to enhance property values, however, was restoring racial purity on the block.

By April of 1904, the company had amassed a substantial portfolio on West 135th, and acquired four apartment buildings inhabited by blacks. It told all the tenants to move out by May 1.

Once again, Payton saw an opportunity to turn prejudice into profit. His Afro-American Realty Company immediately got title to two buildings a few doors down, and told all the white tenants to move out by the end of the month. Then he invited the dispossessed blacks from up the street to take their place. Hudson Realty offered to buy Payton's company out, but he refused.

So Hudson Reality gave up on its plans for West 135th Street real estate and started selling off its holdings. The original four buildings, where Hudson Realty had ordered the tenants to vacate, ended up in Payton's hands. Within a few years, blacks inhabited almost every building on West 135th.

As Harlem's black community spread west from 135th Street, white property owners, led by an ex-cop named John G. Taylor, organized neighborhood covenants to contain its expansion. But in the hyper-competitive world of Manhattan real estate, they rapidly crumbled under market pressures.

With a smaller supply of suitable apartments available for blacks to rent, landlords could get away with charging them higher rents than whites for similar properties. Payton recognized that this unfortunate effect of residential segregation created an incentive for landlords to break with the covenants in pursuit of higher profits. And he used this as a marketing tool, writing in a 1908 ad for his services, "If that colored tenement of yours is not paying you better than anything else you own, something is wrong."

The covenants unraveled. In 1912, for example, building owner Reginald Schenck told The New York Times that he rented his brownstone on 130th Street to blacks because "I can get more from negroes than from white tenants." The same year, Anna Lieb sold her building on 136th to a black family in violation of the racial covenant on the grounds that she had "a right to sell to any person she saw fit."

In 1913, a widowed landlord on 137th was sued by her next door neighbor for welcoming blacks to her building in violation of the covenant. Before the judge could issue a injunction, the neighbor dropped the case and joined her.

The Afro-American Realty Company was dissolved in 1908, following an ugly legal battle with some of its early backers, who claimed that the original prospectus misrepresented the company's activities. (The plaintiffs eventually recouped their initial investments.)

Payton rebounded, and he continued investing in Harlem real estate up until his death from liver cancer in 1917 at the age of 41. His work was carried on by two of his former employees, John E. Nail and Henry C. Parker, who went on to acquire over 50 apartment buildings, vastly expanding the footprint of black Harlem.

By the 1930s, as Richard Rothstein documents in his recent, groundbreaking history, The Color of Law, the federal government began its sweeping policies to foster housing segregation, including at West 98th and 99th Streets. After years of lobbying by an Upper West Side real estate group, which deemed the black community a source of blight, the two blocks were bulldozed as part of a massive urban renewal project. And rent regulation, which was first imposed in New York City during World War I, began the process of ossifying the city's housing patterns. It's a case study of how government interference in the housing market undermined the penalties that the market imposes on bigots.

More than 100 years since Payton's death, his story is a reminder that housing integration can be achieved by making racists pay a "price for their prejudice" and thereby "making the color line costly."

Video written, produced, and edited by Jim Epstein.

Music: "Jubilee Stomp" by Duke Ellington; "Washboard Wiggles," Tiny Parham And His Musicians; "Liza" and "The Dream" by James P. Johnson; "Babalu" by Jan August; "Serenade" by Herman Chittison Trio; "If I Had You" by Charlie Ventura. Source: archive.org, public domain music.

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