Though a savings bank was useful in that it would ostensibly keep money secure until the freedmen had saved enough to buy property, the bank would do nothing to grow the wealth in the community. The Freedmen’s Bank was not a lending institution. The deposits were to be invested in safe government securities. The bank was a magnificently constructed, highly regarded, and heavily advertised piggy bank.
The bank appeared to be backed by the full faith and credit of the federal government, and indeed, many freed slaves were “induced to believe that the bank was a government institution or that at least the government was responsible for their funds."86 Massachusetts Senator Henry Wilson bragged that the depositors’ money “was just as safe there as if it were in the Treasury of the United States."87 Having been created the same day as the Freedmen’s Bureau, it seemed obvious that the bank would be backed by the government. A U.S. Senate hearing described the federal imprimatur as follows: “The pass book issued to the depositors in the Freedmen’s Bank bore on its cover the likeness of President Lincoln, General Grant, also General Howard and others whom the freedmen had learned to revere as the special benefactors of their race. The flag of the United States was draped over the buildings, and designed to assure them that the United States would protect their interest."88 How else could a bank run by whites convince newly freed blacks to trust them with their hard-earned savings?
The bank was also seen as trustworthy because of its prominent white leaders. John W. Alvord, the superintendent of the
Freedmen’s Bureau department of education, was the driving force behind the bank’s creation and became an original trustee. Alvord convinced Congress to create a board of trustees with fifty prominent citizens, including William A. Booth, Peter Cooper, John Murray Forbes, George Whipple, Thomas Webster, and John Jay. Many of these trustees lent their reputation to the bank, but were never involved in managing the bank.89 The charter of the bank also made clear that its purpose was to safeguard deposits and invest them in low-risk treasury notes and other U.S. securities.90 The bank’s charter stated that “the general business and object of the corporation hereby created shall be to receive on deposit such sums of money as may from time to time be offered, therefore by or on behalf of persons heretofore held in slavery in the United States or their descendants and to invest the same in stocks, bonds, treasury notes and other securities of the United States."91 However, Section 6 of the charter provided a small opening for future changes by stating that a third of the deposits, called “available funds," could be invested anywhere. The section was vague and open to abuse, and perhaps because of its benevolent mission, the trustees were vested with broad discretionary powers with little oversight.92
The response to the bank was remarkable. Within ten years, it handled more than $75 million of deposits made by more than 75,000 depositors, an amount that would be approximately $1.5 billion today.93 This number is even more impressive considering the poverty that pervaded the black community. It was immediately apparent that blacks not only trusted the institution, but also had faith in the promise that small savings would lead to landowner-ship.94 Most of these deposits were being saved to buy land and other productive goods such as tools or agricultural supplies. In the South, bank deposits were usually made by young men trying to save for land.95 Freedmen were using the savings bank in the way that they had been told to use it—to climb up the economic ladder, turning wages into landownership. Bank managers declared that the deposits were “irrefutable evidence of the colored man’s ability and intention not only to care for himself, but also to provide for the necessities of the future."96 The average account was less than $50, and parents opened accounts for their children of just a few pennies.97 Recently freed slaves, entire regiments of army veterans, black mutual aid societies, black churches, and some black entrepreneurs all opened accounts.
Because the bank appeared to be a benevolent gift from President Lincoln, was connected to the federal government, and was run by the country’s most prominent citizens—but also because the bank promised safekeeping and growing wealth—the freed slaves trusted the bank and deposited their money.98 It was a fagade. Most of the philanthropists who accepted their nominations immediately distanced themselves from the bank’s management, leaving a small minority of the acting trustees in control.99
The bank started its operations as a simple savings bank, and in 1865, the first year of operation, the bank opened eleven branches across the Southeast. The headquarters were on Wall Street, but from 1865 to 1867, the deposits sat idle in the bank and paid very little interest.100 The trustees decided to move its headquarters from New York City to an affluent neighborhood in Washington, DC, in 1867. The personnel turned over with the move. Alvord asked Henry Cooke to become the new finance chairman because of the prestige of his brother, Jay Cooke’s investment bank, the First National Bank in Washington. Henry did not have Jay’s business talent, but knew more about banking than Alvord and the other reformers. Jay Cooke was a friend of Treasury Secretary Salmon Chase and had made a fortune selling war bonds, but Henry was a careless spendthrift.
The change from safe banking to speculation was slow and imperceptible, and most of the depositors and trustees were never aware that the bank had changed. But slowly and surely, the piggy bank was raided. Flush with depositor funds, the bank quickly became a large private investment bank. Henry began to hold meetings at First National Bank and the Freedmen’s Bank deposits were used to finance First National Bank’s speculation.101
The whole point of banking is to collect money and to put it into productive use through lending. Yet the Freedmen’s Bank was purposefully set up as a savings bank, a teaching institution, rooted in a paternalistic and condescending mission of instructing blacks in the ways of thrift and capitalism. But the bank left out the most important part of capitalism—the part where capital is able to grow and multiply through credit. By not lending to depositors, the Freed-men’s Bank was counterfeit capitalism from its inception. It created a stagnant pool of money instead of a turbine like the one Alexander Hamilton had described. So much capital sitting idle was too much of a temptation for any banker to resist—especially one with loose morals and a speculative venture in need of funds like Henry Cooke.
The bank changed from a savings bank into a highly leveraged investment bank. In fact, Henry Cooke was using the funds to invest in the riskiest of all investments—railroad finance. As war bonds were no longer profitable, Jay Cooke turned toward financing the railroad, and in 1869 the Cookes used the Freedmen’s Bank’s deposits to bet on the railroads’ westward expansion. Without their knowledge or consent, the freedmen’s deposits were being used to finance what was essentially the first postwar asset bubble. Meanwhile, the well-meaning Freedmen’s Bureau and bank officials were providing “financial education" to freedman on the importance of thrift and of avoiding all gambling and speculation. Indeed, John Alvord, who was by all accounts clueless about Cooke’s speculation, chided freedmen for wasting money on lottery tickets and warned them of the terrible habit of gambling with their money.102
So successful were the returns on speculation after 1867 that the bank initiated a propaganda campaign to draw out more deposits. In 1868 the bank published its own monthly newspaper called the National Savings Bank, which it circulated to the freedmen. The advertisements were all about land—the man who saved “would buy his piece of land and become a thriving farmer!" “Let every man strive to become the owner of land—ever so small a tract even." The bank promised that land would mean “being your own master" and providing for your family.103 The advertisements also promised that “There is no speculation" and “no risk in this Bank"104
By 1871, the bank was operating thirty-five branches, spanning the entire Southeast.105 Thirty-two of the branches were in southern states, though the biggest branches and the bank’s management were in New York and Washington.106 Henry Cooke used reserve funds to purchase the extravagant Washington, DC, building, which cost the bank
$260,000, about $4.5 million today.107 The magnificence of the newly constructed headquarters was enough to convince even the most cautious depositors of the bank’s stability and its managers’ acumen. The building sat on the corner of Pennsylvania Avenue and Madison Place, and its graceful adornments were meant to reflect the future prosperity of the race.108
Though there was no federal oversight of banks during this time, with such supervision left to state banking regulators, this bank was chartered by Congress, and was officially under its auspices. But Congress was not a bank regulator, so it left the bank alone. The bank’s managers lobbied Congress to amend and deregulate its charter, which it did on May 6, 1870. Alvord, still believing that the bank was being run in the interests of freedmen, joined Henry Cooke in asking Congress to deregulate the bank so that they could use the money to buy more railroad bonds. Sumner, also unaware of what this meant, backed the charter revision and Congress granted the change without much protest. There was one voice of dissent—Lincoln’s former secretary of war Simon Cameron. Though he was “an especially corrupt politician in an era of stiff competition," according to Jonathan Levy, he had a significant background in banking and knew what Cooke was up to. He objected to the charter amendment on the grounds that it was immoral to speculate with the savings of freedmen.109 The charter revision passed and the Freedmen’s Bank turned into an investment bank.
This amendment lifted the original restrictions on permissible investments and authorized the trustees to invest deposits “to the extent of one-half in bonds or notes, secured by mortgage[s] on real estate in double the value of the loan."110 Even with the expanded charter, there was no enforcement of this rule, and bank cashiers did a notoriously poor job organizing and maintaining the bank’s books.111 The bank managers began speculating in real estate and then, quite simply, a close ring of managers with unfettered discretion plundered the savings of the freedmen.112 There were no black managers in this inner circle (even though virtually all of the bank’s depositors were black), though the bank’s management did use black tellers as a front in certain speculations. For example, a black cashier named Daddy Wilson was used often by the white management as a figurehead and a buffer in some of their speculative lending
schemes.113
Soon the self-dealing and fraud became endemic.114 Bank managers formed a “Washington Cabal," later dubbed “the Freedmen’s
Bureau ring,” who used their connection to the bank to extract favorable loans.115 By 1871, “there was hardly an officer . . . who was not connected with some outside interest that borrowed from the bank.”116 As one white observer explained, the white managers, entrusted with guarding the meager savings of the freed slaves, “looted the bank.”117
First National Bank even moved the worst of its liabilities onto the Freedmen’s Bank’s books and used the bank’s deposits to purchase worthless paper. Jay Cooke was using the Freedmen’s Bank’s deposits to finance a losing venture. As the railroad’s losses mounted, Cooke & Co. bled the freedmen for more deposits through increased advertisements. Again, they used land as bait.118
These vulnerabilities evaded detection by bank trustees, either because they were ignorant of the bank’s actual condition or because they did not care about its fate.119 The scheme began to unravel following the Panic of 1873, when railroad investments failed. The bank experienced several runs at the height of the panic. The panic would not have affected the bank if it had been a savings bank. But by 1866, the business of the bank had become, according to one observer, “reckless speculation, overcapitalization, stock manipulation, intrigue and bribery, and downright plundering.”120 Cooke’s speculation on his brother’s venture led to a loss of $2 million in deposits in eighteen months.121
In a last-ditch effort to save the bank, the trustees appointed Frederick Douglass as bank president in March of 1874. Douglass did not ask to be nominated, and the bank board knew that Douglass had no experience in banking, but they felt that his reputation and popularity would restore confidence to fleeing depositors.122 Once in office, Douglass set out to determine the bank’s viability.123 Based solely on the bank’s books and representations from managers, the bank appeared to be well situated to survive the panic. This perceived stability motivated Douglass to lend the bank $10,000 of his own money to cover the bank’s illiquid assets.124 Rather than validating his confidence, however, this loan tipped Douglass off that something was awry. Douglass quickly discovered that the bank was “full of dead men’s bones, rottenness, and corruption.”125
As soon as Douglass realized that the bank was headed toward certain failure, he imposed drastic spending cuts to limit depositors’ losses. He then relayed this information to Congress, underscoring the bank’s insolvency and declaring that he “could no longer ask [his] people to deposit their money in it."126 Despite the other trustees’ attempts to convince Congress otherwise, Congress sided with Douglass, and on June 20, 1874, Congress amended the charter to authorize the trustees to end operations. Within a few weeks’ time, the bank’s doors were shut for good on June 29, 1874, leaving 61,131 depositors without access to nearly $3 million in deposits.127 More than half of accumulated black wealth disappeared through the mismanagement of the Freedmen’s Savings Bank.128
“And what is most lamentable," noted prominent banker Arnett Lindsay decades later, “is the fact that only a few of those who embezzled and defrauded the one time liquid assets of this bank were ever prosecuted."129 It proved difficult to secure any convictions for wrongdoing in court. Congress did appoint a commission, led by John A. J. Creswell, to look into the failure and to attempt to recover as much of the deposits as possible. In 1880, Henry Cooke testified about the bank’s failure and said that the bank’s depositors were “victims of a widespread, universal, sweeping financial disaster."130 In other words, it was the market’s fault, not his.
The misdeeds of the bank’s management never came to light. Perhaps “because the bank was identified with the endeavors of the newly-freed Negro," wrote historians Kinzer and Sagarin, “anyone who dared to raise a cry against the mismanagement was charged with being anti-Negro; inasmuch as the enemies of the Negro were not interested in the bank, and the friends were effectively silenced with the anti-Negro charge, there was no exposure of the condition of the bank."131 The belief that the failures of black institutions could not be accurately studied because of the sensitivity of “the race issue," whether accurate or not, would be a recurring theme through history.
Because the bank had represented much more than just a place to store money, its failure cost the black population more than just their deposits. It cost them trust in the federal government, which ultimately bore responsibility for the bank’s misdeeds.132 Many blacks were convinced that they had been “deliberately swindled by the United States government."133
Not only did blacks lose confidence in the United States government; they lost faith in banks in general. A prominent black banker in the 1920s said of the Freedmen’s Bank, “this attempt at a bank had been so monstrous and so widespread that few, if any, private groups attempted an organization from 1864 to 1874. More than a decade passed after the closing of this bank before confidence was even partly restored."134 For many black leaders, the trauma lasted much longer. The bank caused financial ruin for many blacks who had been diligently saving their money to purchase a home, and those that were not ruined internalized a warning about banking. In summarizing a report on the state of black banking in the United States fifty years after the failure, Arnett Lindsay wrote that one conclusion he drew from the history of black efforts at banking was that “the so-called governmental aid which was given in establishing the Freed-men’s Bank proved to be an almost insurmountable obstacle for the Negroes who later attempted to organize banks of their own."135 This is because a solid banking system is built on trust and the rule of law, and the Freedmen’s Bank violated both of those pillars. In fact, even into the 1970s, commenters acknowledged that the black banking industry had
yet to shake “the unfortunate image" created by this colossal failure.136
W. E. B. Du Bois went so far as to claim that that “not even ten additional years of slavery could have done so much to throttle the thrift of the freedmen as the mismanagement and bankruptcy of the series of savings banks chartered by the Nation for their special aid."137 If the government and the philanthropists’ purpose was to teach the freed slaves thrift and responsibility, the lesson they actually learned was to distrust the government and philanthropists.
Though the bank’s failure sowed distrust of banking, some black leaders also claimed that the bank planted the seeds for a century of obsession with establishing successful black banking. Although few blacks were part of the management of the bank, many had become employed as clerks, tellers, and bookkeepers in the bank’s many branches. Economist Abram Harris claims that this training “built up a nucleus of business talent which in less than a decade and a half after the failure of the Freedmen’s Bank asserted its leadership in the organization of fraternal insurance societies and banks owned and managed by Negroes."138 Du Bois noted a different reason the bank led blacks into private banking: “Of all disgraceful swindles perpetrated on a struggling people, the Freedmen’s Bank was among the worst, and the Negro did well not to wait for justice, but went to banking himself as soon as his ignorance and poverty allowed.”139 That the bank was the only tangible outcome of the Freedmen’s Bureau made banking a focal point of black progress, or, as E. Franklin Frazier put it, it implanted “bourgeois ideals” in the freed slaves. Frazier claimed that the Freedmen’s Bank’s heavy propaganda campaign sparked the black community’s “obsession” with banking. Pamphlets and booklets containing pictures, poems, and stories taught blacks that thrift would lead to wealth.140
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