How the Freedman's Savings Bank Failed Formerly Enslaved Americans

During the American Civil War, nearly 180,000 Black Americans fought for the Union, many of them escaped former slaves. They were paid for their service, albeit less than white soldiers received. But there were few banks at the time that would let a Black person open an account and safeguard their money.

In 1865, after the war ended, a white abolitionist preacher from New York named John Alvord successfully lobbied Congress to create a bank to serve these deserving soldiers and 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) from Black account holders who believed that the government bank had their backs.

Tragically, it didn't.

By 1874, less than a decade after it was founded, the 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 cent from the failed enterprise.

Good Intentions, Bad Execution

Tim Todd is a historian with the Federal Reserve Bank of Kansas City and has written two books about the history of Black banking in America, most recently, "A Great Moral and Social Force: A History of Black Banks." Todd says that the "spirit" behind the Freedman's Bank was good, to "create a bank that was going to primarily serve formerly enslaved individuals in the South."

Frederick Douglass, the prominent abolitionist and statesman, was a fan. Douglass wrote in his autobiography that he believed the Freedman's Bank could "instill into the minds of the untutored Africans lessons of sobriety, wisdom, and economy, and to show them how to rise in the world."

More than 100,00 people opened accounts, which could be started with as little as 5 cents. Many customers were saving to buy homes, land or farm animals. About half the staff employed in the bank branches (there were 37 eventually) were African American, a great source of pride in the Black community.

Unfortunately, the people put in charge of the Freedman's Bank didn't know a whole lot about banking. Alvord, the first president of the bank, was a preacher and the bank's 50-member board of trustees included figures like William Cullen Bryant, a celebrated poet and editor, but also not a banker.

In the rush to create the Freedman's Bank, Congress made some other fateful errors. The worst was to put lawmakers in charge of checking the bank's books, instead of the usual auditors at the Office of the Comptroller of the Currency. So, if the bank's managers made mistakes or purposely fudged numbers (which they did), it was unlikely that Congress would catch them.

Foolish Bets and Mounting Debts

The Freedman's Bank was supposed to be a simple, safe and secure institution. The bank wouldn't lend money, just hold savings accounts. Its operations would be funded by investing a percentage of those accounts in U.S. Treasury bonds, the safest security around.

But the Freedman's Bank's board of trustees was less careful with its finances. For example, they decided to move the bank's headquarters from New York City to Washington, D.C., where they built an ornate and expensive brownstone building just down the street from the White House for a price tag of $4 million in today's dollars.

It soon became clear that the Freedman's Bank wouldn't be able to balance its books by only investing in low-risk and low-yield securities like Treasury bonds. So, the board asked Congress to loosen its charter and allow the bank to make riskier bets on things like real estate.

Then came the Panic of 1873, a global economic collapse that briefly shuttered the New York Stock Exchange and bankrupted countless companies. All of those risky investments tanked and the Freedman's Bank was buried in debt. To make matters worse, some of the bank's own managers, like businessman Henry Cooke, had quietly funneled some of his company's debt onto the bank's books.

The Failure of the Freedman's Bank

In a last-ditch effort to right the ship, the board of directors sacked Alvord and hired none other than Frederick Douglass to be the president of the Freedman's Bank. Douglass, who had invested $10,000 of his own money in the bank, marveled at the grandeur of the bank's D.C. headquarters before he discovered the rotten truth behind the gleaming facade.

"They brought in Douglass well past the 11th hour," says Todd. "He took over unaware of the true condition of the bank until he sat down to work and realized, in his own words, that he 'was married to a corpse.'"

In June 1874, Congress voted to shutter the Freedman's Bank. Douglass led an effort to recover the squandered deposits of Black account holders, but most never saw a cent. Congress eventually authorized a program that would pay 62 cents for every dollar of deposits, but the application process was so arcane that most depositors walked away with little or nothing.

"In many cases, these were very small deposits, literally only a few dollars," says Todd. "It's even more tragic when you think that all you have is a few dollars, and now that's been lost."

In 1899, the Freedman's Bank headquarters was demolished. The location is now the site of the Treasury Annex building which was renamed the Freedman's Bank Building in 2016, to pay tribute to the bank and Black communities which supported it.

Todd says that in the wake of the Freedman's Bank's failure, Black Americans took it upon themselves to safeguard their money. The U.S. had as many as 100 Black-owned banks by the turn of the 20th century.

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