Black Americans' rocky relationship with banks can be traced back to an institution that promised wealth but collapsed after just 9 years
- When the enslaved population was first freed, the Freedman's Bank was established to provide a savings and wealth-building tool.
- But just nine years after it opened, the bank collapsed thanks to risky investments and mismanagement by the bank's all-white, all-male board. Black bank customers lost millions in deposits.
- I know from my own family's history that the Freedman's Bank collapse is to finance what the Tuskegee experiments are to healthcare — the spark that lit the fire of mistrust.
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The 2008 housing market crash hit African Americans hardest. Predatory lenders targeted poor and minority homeowners with high-interest refinancing options and balloon payment structures. In addition, Black and Latinx households were nearly 50% more likely to face foreclosure than their white counterparts, according to a report from the US Department of the Treasury.
This was not the first time Black people were exploited financially.
The broken promise of Freedman's Bank
A section of the 13th Amendment originally promised 40 acres and a mule to newly freed slaves. This proposal faced violent backlash from Southerners and their northern supporters, so it was eliminated from the legislation. Instead, the final bill President Lincoln signed included a provision to establish the Freedman's Savings and Trust Company in New York City in March, 1865.
Black Americans could open an account for as little as a nickel; interest was paid on deposits of $1 or more. More than 100,000 Black people became customers. They included Black Union soldiers who had earned money in exchange for their military service in the Civil War, and skilled laborers such as cooks, barbers, seamstresses, and carpenters. The bank's headquarters moved to Washington, DC in 1867, and eventually 37 branches were opened across the South.
According to research by Constantine Yannelis, assistant professor of finance at the University of Chicago's Booth School of Business, and his partner, Luke C. D. Stein, assistant professor of finance at Babson College, the short-term effects of being properly banked included raised incomes and literacy levels, and allowed the formerly enslaved population to accumulate wealth through land ownership.
It also allowed individuals to smooth out the seasonality of farming by building up a cash cushion. Historians believe this is likely due to limitations on how much money could be withdrawn from the bank at one time, so that bank customers were forced to save. This also facilitated the fraud that was to come.
When Freedman's Bank closed
A short nine years after opening, the Freedman's Bank closed in 1874. The bank's deposits had been invested into risky, speculative ventures, and the First National Bank had offloaded its liabilities onto Freedman's Bank books with the express consent of an all-white, all-male board of trustees. The board had modified the bank's original charter, ending the requirement that the deposits be invested only in government-backed securities. The board also didn't notify their customers about this revision to the charter.
Over 60,000 depositors lost over $3 million (in today's dollars, that's $68.2 million). Frederick Douglass, who was brought on board as the bank's president and invested $10,000 of his own money to prop up the bank, quickly resigned after recognizing the extent of the bank's losses.
Douglass noted that the collapse of the Freedman's Bank "was equivalent to adding another 10 years of slavery to the Negro man." The Federal Deposit Insurance Corporation did not exist until 1933, but, concerned about a race riot, Congress authorized bank customers to receive up to 62 cents for every dollar lost. Most weren't able to collect.
The Freedman's Bank collapse destroyed Black people's trust in financial systems
My grandmother had a bank account. I remember watching her at the beginning of the month, seated at her dining room table, writing out checks and putting them in their respective envelopes. I got to "help" by sealing the envelopes and putting on the stamps.
In the 1960s and '70s, there weren't many bank branches in our neighborhood on the south side of Chicago. Moreover, banks' business hours were limited, so if you needed cash you had to plan on going on your lunch hour, or wait in long lines on Saturday morning. ATMs didn't exist. Most people used currency exchanges.
My grandmother also kept cash in her house — new, crisp bills in denominations of $5, $10, and $20. I never knew how much, and I didn't dare ask. I did know that it was enough to cover "an emergency." However, that wasn't the only reason to have cash. My grandmother didn't trust banks.
Born at the end of World War I, my grandmother didn't experience the demise of the Freedman's Bank firsthand. Her grandparents were slaves in Georgia, who then relocated to Chicago during the early days of the Great Migration, refugees in their own country. Even if the family didn't experience a loss of funds directly, they would have heard about Freedman's Bank closing. The collapse of that bank echoed across distance and generations. It left many African Americans with a distrust of financial institutions. In short, in the African American community, the Freedman's Bank collapse is to finance what the Tuskegee experiments are to healthcare.
Combined with the history of redlining, housing covenants and zoning laws, predatory lending and inequitable mortgage rates, as well as other federal- and state-sanctioned rules barring Black people from living in certain neighborhoods and generating wealth, it's no wonder that, according to the Brookings Institution, in 2016 white families had on average a net worth of $171,000 while Black families had a net worth of $17,150.
Instead, the wonder is that, nevertheless, Black families have persisted, waiting for the time when it becomes clear that, as a former president once stated, "A country cannot succeed when a shrinking few do well and a growing many barely make it."
This story is part of Business Insider's "Inside the racial wealth gap" series.
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