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The Broken Promises of the Freedman’s Savings Bank: 1865-1874

Summary:
The Freedman's Savings Bank lasted from 1865 to 1874. It was founded by the US government to provide financial services to former slaves: in particular, there was concern that if black veterans of the Union army did not have bank accounts, they would not be able to receive their pay. In terms of setting up branches and receiving deposits, the bank was a considerable success. However, the management of the bank ranged from uninvolved to corrupt, and together with the Panic of 1873, the combination proved lethal for the bank, and tens of thousands of depositors lost most of their money. Luke C.D. Stein and Constantine Yannelis offer some recent research on lessons the grim experience in "Financial Inclusion, Human Capital, and Wealth Accumulation: Evidence from the Freedman’s Savings Bank"

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The Freedman's Savings Bank lasted from 1865 to 1874. It was founded by the US government to provide financial services to former slaves: in particular, there was concern that if black veterans of the Union army did not have bank accounts, they would not be able to receive their pay. In terms of setting up branches and receiving deposits, the bank was a considerable success. However, the management of the bank ranged from uninvolved to corrupt, and together with the Panic of 1873, the combination proved lethal for the bank, and tens of thousands of depositors lost most of their money. 

Luke C.D. Stein and Constantine Yannelis offer some recent research on lessons the grim experience in "Financial Inclusion, Human Capital, and Wealth Accumulation: Evidence from the Freedman’s Savings Bank" (Review of Financial Studies, 33:11, November 2020, pp. 5333–5377, subscription requiredhttps://academic.oup.com/rfs/article-abstract/33/11/5333/5732662). Also, Áine Doris offers a readable overview in the Chicago Booth Review (August 10, 2020). 

Stein and Yanellis note: 

The Freedman’s Savings Bank was an early government-sponsored private enterprise that was created by Congress to provide financial services to formerly enslaved African Americans. ... The bank spread rapidly, and at one point had more interstate branches than any other U.S. financial institution, and approximately one in eight Blacks in the South lived in a family that held an account with the bank. ... We obtain novel data on Freedman’s Savings Bank account holders from 27 branches with surviving bank records. These 107,197 account records include names of main account holders and their family members, totaling 483,082 non-unique individuals, roughly 12% of the 1870 Black population in the American South. 
The main focus on the paper is that authors match the actual names of these depositors to data from the 1870 census, and then carry out a variety of calculations: for example, those who lived in the same county or within 50 miles of a branch of the bank, and those who did not. They can compare those who lived in areas where a branch was actually established, and those in similar areas where a branch was planned but never established. The result of these and other comparisons makes a persuasive case that access to a bank account had a clearly positive effect: "We find that individuals in families that hold Freedman’s Savings Bank accounts are more likely to attend school, are more likely to be literate, are more likely to work, and have higher income and real estate wealth." For example, the freed slaves with access to banks and savings were more able to buy land, start businesses, and build and attend schools (at the time, many adult freed slaves immediately sought to become literate and numerate). 

Stein and Yanellis also offer some suggestive evidence that the failure of the Freedman's Savings Bank had long-lasting intergenerational effects on black attitudes about banking. They write: 
Historians, notably Osthaus (1976), have long noted that the collapse  of Freedman’s Savings Bank—which many African Americans thought was fully backed by the federal government—and loss of savings led to a lack of trust in financial institutions by African Americans, and at least in part explains persistent gaps in utilization of financial services. The FDIC National Survey of Unbanked and Underbanked Households concludes that African-American households are considerably more likely to be unbanked: 2015 survey results indicate that 18.2% of African-American households were unbanked, compared with 3.1% of white households. Almost one-third of households indicate a lack of trust in banks as the primary reason that they did not have bank accounts, with this explanation more common among African Americans. ... [W]e show that African Americans in the present day who live in counties that once had a Freedman’s Savings Bank branch are more likely to list mistrust of financial institutions as a reason for being unbanked; this association is not present for Whites.

I dug back a little bit to get more information on what why the Freedman's Savings Bank collapsed. The US Office of the Comptroller of the Currency has a website with a smattering of details.  Although the OCC had been founded in 1863 to provide oversight to banks and limit risk-taking that would put deposits at risk, but the Freeman's Savings Bank was exempted from OCC oversight and instead was to be overseen by Congress. The result was a lesson in the potential for dysfunction of boards, with a takeover by the corrupt.  

For those who would like heart-breaking and angry-making details of how the Freedman's Savings Bank was mismanaged, I found especially useful the account of historian Walter Fleming, "The Freedmen's Savings Bank," published in the Yale Review, May 1906, pp. 40-76, and available via the magic of HathiTrust).

I should note that Fleming's essay has the curious trait of making occasional racist statements about black Americans, and then going on to provide evidence that the racist statements are not actually correct--without apparently noticing the contradiction. For example, Fleming states early in the paper: "Before the close of the war several experiments in the way of savings banks had been made among the negro soldiers for the purpose of preventing them from squandering their pay and bounty money, as it is the nature of the race to do." But  a few pages later, Fleming is writing about how black Americans flocked to deposit money in the bank. He writes: "The negroes, believing that their deposits would be secure in these banks, which they understood were supported by the government, eagerly availed themselves of the opportunity to lay up small sums for the future." 

But even with his prejudices hanging out in the open, Fleming provides a useful step-by-step overview of what happened with the bank. The law did not specify that the bank was allowed to open branches, but several of those involved in passing the law clearly saw it as part of the mission. They travelled around the South together with officials of the Freedman's Bureau (which was not legally connected to the bank) talking to those who had run military savings banks, many of which became the basis for branches, as well as those in prominent black communities.  Those who deposited money in the bank had often been led to believe that the federal government stood behind the bank. Bank officials wore US uniforms. Depositors were given a passbook, which had pictures of Lincoln, Grant, the US flag on the cover. The version of the passbook used in New York City had printed on the cover: “The Government of the United States has made this bank perfectly safe.” In Fleming's words: 
The negroes were given to understand that the bank was absolutely safe, being under the guarantee of Congress, and having the funds invested in United States securities, which were safe as long as the government should last, and that it was a benevolent scheme solely for the benefit of the blacks. The profits, they were told, would be returned to the depositors as interest, or would be expended for negro education.
Many of the early discussions of the banks at the time were quite positive. The bank branches offered a safe haven for funds, and education on savings and accumulation of interest. As Fleming writes: 
In the branch banks and at Washington, after 1868, an efficient body of negro business men was being trained. There was a sentiment that, since the bank was for the benefit of the negroes, the latter should be its officers as much as possible, and about one-half the employees were colored. At nearly all of the branches, especially after 1870, when some of the branch banks were allowed to do a regular banking business, there was an advisory board, or board of directors, of responsible colored property holders. These men were very proud of the Freedmen's Bank and of their position in connection with it. They took a deep interest in all that pertained to the institution, advised in regard to loans and investments, and promoted in every way the habit of saving on the part of their people.
But the inner workings of the bank went badly. Some of it was incompetence, a lot of it was corruption, but the underlying issue was that far too many people viewed the money in the bank as a large pot of honey, just waiting for them to scoop up what they could. Fleming describes a range of problems. Expenses were high, including $260,000 for building a pricey new headquarters building in Washington, DC. State governments often disliked the bank because the deposits were flowing to US securities, and out of their influence. Many of the employees were deeply inexperienced,  and the financial accounts were a mess. There was one inspector who was supposed to cover all the branches. 

Although the branches of the banks were not supposed to make loans before 1870, when a prominent community leader wanted to draw out more money than was in his account, the cashiers often found it hard to say "no"--and hard to get the money back later. Then the banks were allowed to make loans under supposedly strict conditions, but many of of them. After 1870, Fleming writes:   
As soon as the authority was given to the cashiers to make loans, they were besieged by a dangerous class of borrowers, who would have received scant consideration at the ordinary bank. Often the law of 1870, requiring that loans be made only on property worth double the loan, was violated and the cashiers proceeded to make investments on their own responsibility. Some of them loaned funds on the worthless script issued by the carpet-bag State and local governments; others loaned on cotton; some even made loans on perishable crops. The Jacksonville branch put money on everything that offered, from saw-mills out in the woods to shadowy claims on property. ... Most of the incompetent officials, it seems, were blacks; most of the corrupt ones were white. There was a belief, often expressed after the failure of the bank, that when a white cashier had stolen funds and involved the accounts of a branch, a negro official would be put in his place to serve as a scapegoat. The white clergymen who were cashiers proved to be quite unable to withstand the temptations offered by the presence of the cash in the vaults. One of the trustees (Purvis) afterwards said: “The cashiers at most of the branches were a set of scoundrels and thieves—and made no bones about it—but they were all pious men, and some of them were ministers."
Bt the real coup-de-grace for the bank was a result of what should have been criminal actions, even under the laws of the time, at the top levels of management.  As Fleming points out, the original bill named the 50 people who would be trustees of the institution. In his telling, the original 50 were (white) businessmen of good character. They were to meet at least once a month. However, it only needed nine members (one of whom had to be the president or vice president) to form a quorum, and a decision could be made with support of seven out of those nine. The trustees were to receive no compensation, and were not allowed to borrow funds from the bank. The original bill said that deposits would be invested in US securities only, except for an amount to be held as an "available fund" for withdrawals and current expenses. But then the headquarters of the bank moved from New York to Washington, DC, and the board turned over. Fleming tells the story in some detail of how the "hoarded deposits of the Freedmen's Bank drew the attention of the speculators in Washington," and how the new trustees stripped the banks of assets, but here's a quick sense of the kind of thing that went on: 
The places on the board [after the move to Washington DC] were somewhat difficult to fill, and it came about that most of those who were put in were incompetent persons elected simply to fill up the lists. They had little business capacity, no business connections, no property. The incapable ones were controlled by the few capables, who, after 1869-1870, were the District of Columbia members. These latter formed a kind of a “ring" for their mutual benefit. They were involved in other schemes that made their connection with the bank of great use to them. They were at once officials of the bank, and officers of the Bureau or of the army or of the government of the District of Columbia. Howard, Balloch, Alvord, and Smith were bureau officials and were connected with Howard University, and extensive borrowers from the bank; Cooke and Huntington were officials in another bank that put its bad loans off on the Freedmen's Bank; Cooke, Eaton, Huntington, Balloch, and Richards were officials of the notorious District government; Howard, Alvord, Eaton, Stickney, Kilbourn, Latta, Clephane, Huntington, Cooke, and Richards were connected with firms that borrowed large sums from the bank, notwithstanding the fact that officials were prohibited by law from using the funds of the bank, directly or indirectly. 

The trustees were under no penalties for the proper execution of their trust. They were not required to make any deposits in the bank. The law fixed as a quorum nine out of fifty trustees, and further required the affirmative vote of at least five on money matters. The trustees provided in the by-laws for a finance committee of five, of whom three should be a quorum. Thus three could and did habitually dispose of the financial business of the bank when the law required at least five. Often two trustees, or one, or even the actuary (cashier), negotiated important loans without reference to the trustees. 
When this situation was followed by the Panic of 1873 and crash in real estate values, there wasn't much left.  Pretty much no one was prosecuted or held responsible. Fleming tells hard-to-read stories of working people who faithfully put money in the branches for years, only to find that it had all been taken. As Stein and Yannellis write: "In June 1874, the Freedman’s Savings Bank was forced to suspend operations with only 50 cents to cover obligations per depositor. The failure of a bank catering to former slaves, and the loss of their savings, led to general public concern and sympathy for the fate of depositors. Following a congressional investigation, Congress created a program to reimburse up to 62% of savings, but many depositors were never compensated."

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