The Rise and Fall of the Freedman’s Bank

And the seeds of economic distrust, with Professor Justene Hill Edwards

Here and there over the last few years, I’ve come across references to the Freedman’s Savings Bank, an institution formed after the Civil War—which then collapsed nine years later. When I saw that Professor Justene Hill Edwards had written Savings and Trust: The Rise and Betrayal of the Freedman's Bank, I jumped at the opportunity to bring her on Skipped History.

Professor Hill Edwards (University of Virginia) and I discussed the good intentions that led to the bank’s founding, and how those good intentions were soon corrupted by, in my estimation, the equivalent of 1870s tech bros. We also explored the continued ramifications of the bank’s demise and how, if you want to get to the heart of “the fraught relationship between African Americans and the financial services industry today,” you have to discuss the Freedman’s Bank.

A condensed, edited transcript of our conversation is below. You can also listen to the interview on the Skipped History podcast:

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Ben: What problem was at the root of the bank's opening, and who took the lead in opening it?

JHE: A man named John Alvord starts the story. He was a white abolitionist minister from Connecticut, living in New Jersey with his family. In 1864, he was an attaché with the Union Army, traveling in the South.

He took the opportunity to speak to and meet with as many freed people as possible. He learned their first goal was to rejoin their families, and their second goal was to build wealth and to buy land; to save money.

Ben: You highlight how few ways there were for emancipated people to save money. One person decided just to bury their money but forgot where it was. I find that very relatable—and I suppose it speaks to the depth of the need for financial institutions that Black people could trust.

JHE: Well, I think that also gives us a sense of the landscape of banking. We often think of banks as being ubiquitous, but in the mid-19th century, savings banking was still in its infancy.

After his time with the Union Army, Alvord traveled up to New York at the beginning of 1865, and he gathered a who's who of white bankers, philanthropists, and politicians, and introduced the idea of a savings bank for African Americans. Congress established the Freedman’s Bank in March of 1865.

Afterward, the bank's white administrators traveled around the South to open branches and convince African Americans that they would be responsible stewards of their money. African Americans wanted to know what the bank's administrators were going to do with their money. Alvord and his colleagues successfully allayed their concerns.

In its first year, freed people deposited about $305,000 ($5.8 million today), a stunning amount. Over the next few years, the bank opened branches throughout the Carolinas, Virginia, and Georgia. At its height, the bank held over $31 million in deposits (over $800 million today), and there were about 37 branches across 17 states. It was the largest bank by branches in the nation.

Ben: You talk about some of the bad solutions the bank turned to in response to growing so fast. Can you elaborate on that?

JHE: So for John Alvord, working for the bank was not his only professional responsibility. He also worked as a supervisor of schools for the Freedmen’s Bureau after the Civil War. I think he really did have benevolent intentions, but his plate was full.

In 1867, he was behind a change that would fundamentally alter the bank’s benevolent mission. He moved the bank’s main office from New York to Washington D.C.—from one of the hubs of finance to the hub of political power. Alvord thought D.C. would have cheaper operating costs and be closer to larger populations of freed people.

But the move coincided with the addition of three new board members, most notably Henry D. Cooke—an investment banker, lobbyist, and publisher. In the spring of 1867, Henry Cooke became chair of the bank’s most important committee, the finance committee, which controlled the bank's investments.

Ben: Can you talk about some of the nefariousness that ensued?

JHE: Around the same time, D.L. Eaton, a friend and business partner of Cooke’s, also joined the board and became the bank’s actuary—the person who evaluated the risk profile of the bank’s investments. Two days before he officially signed on to be the bank's actuary, Eaton received the bank’s first loan.

This is fascinating because Congress established the bank as a simple savings bank. It was supposed to accept deposits, pay a small amount of interest on the deposits to depositors, and make very low-risk investments in government securities. It was not supposed to make loans. So when Eaton took this loan, it was illegal, and it marked a sea change in how the bank operated.

Ben: Putting Eaton in charge of evaluating risk sounds a little like tasking Cookie Monster with working the counter at a bakery. Theft seems like the natural next step.

JHE: He did repay the loan, but once the first illegal loan was made, the bank's board of trustees started to make small frequent loans to themselves and to their business partners. In 1869, the board decided to lobby members of Congress to amend the bank's charter so it could operate like a commercial bank.

That happened in May of 1870. In the first year, about half a million dollars of loans went out of the bank's coffers. By the end of 1873, the bank had loaned out about $3 million (close to $80 million today). 95 percent of that loan volume went to white people in and around D.C.—most of whom had close personal relationships with the bank's board of trustees.

Ben: I was floored when you mentioned that the YMCA, then a segregated organization, was one loan recipient. In your words, money “raised from the deposits of African American people” went toward an organization “actively sustaining a racially segregated institution.”

JHE: Exactly. We should point out that Reconstruction, which the bank was part of, was a period of great hope and promise. But practically, it was chaotic. We are talking about the attempted reunion of the nation. At the same time, economically, the U.S. was bankrupt from having to fund a civil war. So regulating the Freedman’s Bank was not a high priority for Congress, and legislators just didn’t pay as much attention to this illegal activity as they should have.

Ben: An ominous statement, even by your own standards.

JHE: Ha, yes. As more money recklessly flowed out of the bank, Cooke, Eaton, and other bank administrators constantly amended loan terms. By 1873-74, something like 75 percent of the loan volume was overdue. Interestingly, one of the biggest loans went to Cooke himself to support investments that he and his brother, a leading investment banker, were making in American railroads. When their investments in the railroad started to not pay off, a trans-Atlantic financial crash occurred, sparking the Panic of 1873.

Ben: Crazy. When I was reading about these ginormous levels of fraud, ineptitude, and deception, I couldn’t help but think of tech bros today. It sounds like 1873 WeWork.

JHE: I’m glad it resonated. One of my goals was to show that these types of phenomena go in cycles. We certainly continue to see this type of risky behavior... with cryptocurrency, for example.

Ben: No need to hesitate. This is a crypto-critique safe space.

In other parallels, people like Cooke were never held to account, while the people who lost their deposits had a lot of trouble getting it back.

JHE: Yes. Henry Cooke was booted out of the board of trustees, but that was about the only blowback he suffered. Meanwhile, depositors made bank runs once they heard about the financial crash, but the bank, consistently overleveraged, didn’t have enough money to meet depositor demands.

To try and assure depositors that their money was safe, two Black trustees of the bank tapped Frederick Douglass to replace Alvord as president. Douglass accepted, thinking he could maybe right the ship, but once he saw the bank’s books, he realized the bank was in horrible condition. There was no way depositors could get all their money back.

Ben: As Douglass later wrote of the bank, “The fact is, and all investigation shows it, that I was married to a corpse.” And here I thought only Mitch McConnell’s wife would ever say such a thing.

JHE: Haha. I mean, he was just shocked and saddened and afraid that he was president and there was nothing he could do.

The bank was forced to shut its doors in July 1874. The 61,000 depositors who still had accounts with the bank had to jump through a variety of hoops to recoup their money.

Ultimately, over the next 15 years, about 60 percent of depositors recovered their money, but about 40 percent of depositors couldn’t. This saga continued really into the 1930s and 40s, with African Americans appealing to federal authorities, even U.S. presidents, begging them for money that their family members had in Freedman's Bank accounts.

Ben: You write, “The depositors of the Freedman’s Bank learned that they would have to think twice about putting their economic trust and faith in white financial institutions... This lesson about distrust,” you add, “influences the fraught relationship between African Americans and the financial services industry today.”

JHE: Absolutely. Today, we have lots of conversations about the racial wealth gap. We often think of financial inclusion as a 20th-century problem. But we have to go back to Reconstruction to understand it. There's a kind of generational knowledge that's been passed down about banking since then, whether we acknowledge it or not.

I think this story gets to the heart of problems of trust; of why African Americans are most likely among Americans to be underbanked and unbanked. If we are going to attack these problems and the racial wealth gap, the story of the Freedman’s Bank has to be part of the conversation.