During the American Civil War, nearly 180,000 black Americans fought for the Union, many of whom escaped from former slaves. They were paid for their service, although less than what white soldiers received. But there were few banks at the time that allowed a black person to open an account and protect their money.
In 1865, after the war ended, a white New York abolitionist preacher named John Alvord successfully lobbied Congress to establish a bank to serve these deserving soldiers and the millions of recently emancipated former slaves.
It was called the Freedman’s Savings and Trust Company – or simply the Freedman’s Savings Bank – and by the early 1870s it had received $3.7 million in deposits (worth over $85 million today). hui) of black account holders who thought the government bank had their backs.
Tragically, this is not the case.
In 1874, less than a decade after its founding, Freedman’s Bank collapsed, a victim of mismanagement, corruption and a global financial crisis. But the real victims were its black account holders, few of whom recovered a dime from the bankrupt company.
Good intentions, bad execution
Tim Todd is a historian at the Federal Reserve Bank of Kansas City and has written two books on the history of black banking in America, the most recent, “A Great Moral and Social Force: A History of Black Banks.” Todd says the “spirit” behind Freedman’s Bank was good, to “create a bank that would primarily serve former slaves in the South”.
Frederick Douglass, the prominent abolitionist and statesman, was a fan. Douglass wrote in his autobiography that he believed Freedman’s Bank could “instill in the minds of uneducated Africans lessons of sobriety, wisdom and economy, and show them how to rise in the world”.
Over 100,000 people opened accounts, which could start with as little as 5 cents. Many clients were saving to buy houses, land or farm animals. About half of the staff employed in bank branches (there were eventually 37) were African American, a great source of pride in the black community.
Unfortunately, the people in charge of Freedman’s Bank didn’t know much about the bank. Alvord, the bank’s first president, was a preacher, and the bank’s 50-member board included the likes of William Cullen Bryant, a famous poet and publisher, but not a banker either.
In the rush to create Freedman’s Bank, Congress made other fatal mistakes. Worst of all was tasking lawmakers with auditing the bank’s books, instead of the usual auditors from the Office of the Comptroller of the Currency. So if the bank’s executives made mistakes or deliberately fudged numbers (which they did), Congress was unlikely to catch them.
Crazy bets and growing debts
Freedman’s Bank was meant to be a simple, safe, and secure institution. The bank would not lend money, it would simply maintain savings accounts. Its operations would be funded by investing a percentage of those accounts in US Treasury bonds, the safest security available.
But the Freedman’s Bank board was less careful with its finances. For example, they decided to move the headquarters of the bank from New York to Washington, D.C., where they built an ornate and expensive brownstone building just down the street from the White House for a price of $4 million. dollars to today’s dollars.
It soon became clear that Freedman’s Bank would not be able to balance its books by investing only in low-risk, low-return securities like Treasury bills. So the board asked Congress to relax its charter and allow the bank to make riskier bets on things like real estate.
Then came the Panic of 1873, a worldwide economic collapse that briefly shut down the New York Stock Exchange and bankrupt countless businesses. All of these risky investments collapsed and Freedman’s Bank was in debt. To make matters worse, some of the bank’s own executives, such as businessman Henry Cooke, had quietly funneled some of his company’s debt onto the bank’s books.
The Failed Freedman’s Bank
In a last-ditch effort to right the ship, the board fired Alvord and hired none other than Frederick Douglass to be president of Freedman’s Bank. Douglass, who had invested $10,000 of his own money in the bank, marveled at the grandeur of the bank’s DC headquarters before discovering the rotten truth behind the gleaming facade.
“They brought in Douglass way past the 11th hour,” Todd explains. “He took over without knowing the true state of the bank until he got to work and realized, in his own words, that he ‘was married to a corpse’.”
In June 1874, Congress voted to close Freedman’s Bank. Douglass led an effort to recover wasted deposits from black account holders, but most never saw a dime. Congress eventually authorized a program that would pay 62 cents for every dollar deposited, but the application process was so murky that most depositors walked away with little or nothing.
“In many cases it was very small deposits, literally just a few dollars,” Todd explains. “It’s even more tragic when you think all you have is a few dollars, and now it’s lost.”
In 1899, the headquarters of Freedman’s Bank was demolished. The location is now the site of the Treasury Annex Building which was renamed Freedman’s Bank Building in 2016, to honor the bank and the black communities that supported it.
