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The Freedmen's Savings and Loan (Freedmen's Bank) - What Happened and Why It Failed - $3 million - GONE!

In 1865, Congress chartered the non-profit "Freedman's Savings and Trust Company," a savings bank designed for a population of four million newly emancipated American slaves. By 1873, it had received a staggering $50,000,000 in deposits.

President Abraham Lincoln established the Freedman’s Bank on March 3, 1865 as part of the Freedman’s Bureau. As the Civil War drew to a close, the United States Congress and President Lincoln recognized the need to aid newly freed black men and women in their transition to freedom. To support the land grants and other elements of the Freedman’s Bureau Act, a Freedman’s Bank was established to help newly freed Americans navigate their financial lives. Call it the financial literacy program of its day.

During its existence, The Freedman’s Bank maintained some 37 offices in 17 states, including the District of Columbia. At its height, the Bank had over $57 million in deposits (adjusted for inflation) and 70,000 depositors.

Five weeks after the creation of the Freedman’s Bank, President Lincoln was assassinated. Seven years later, In June of 1872, the U.S. Congress voted to permanently close the Freedman’s Bureau. The Bank however remained operational and in 1874 Frederick Douglass was asked to run the Freedman’s Bank as its D.C. branch relocated to a new home across from the U.S. Department of Treasury, in a grand building which cost $260,000 to construct.

When Frederick Douglass arrived at the Bank’s new location in Washington D.C. he wrote:

“The whole thing was beautiful. I had read of this bank when I lived in Rochester, and had indeed been solicited to become one of its trustees, and had reluctantly consented to do so: but when I came to Washington and saw its magnificent brown stone front, its towering height, its perfect appointments, and the fine display it made in the transaction of its business, I felt like the Queen of Sheba when she saw the riches of Solomon, that ‘half had not been told me’.”

When Douglass came on as the Bank’s director however, he found rampant corruption within the Bank and risky investments across industries being made with depositor’s savings. The banking house Jay Cooke & Co. was charged with investing the freedpeople's savings, and when Jay Cooke & Co. failed during the panic of 1873, so did the Freedman's Bank. Liberated from their former masters, the freedpeople had very suddenly come face to face with the frenzied finance of the Gilded Age. In a desperate attempt to stabilize the Bank, Douglass invested $10,000 of his personal funds, but sadly, later that year, in June of 1874 the Bank failed against the backdrop of the political forces that undermined Reconstruction.

All the secrets of the operations of the bank will never be known, but a strange thing came to pass in 1870, when a movement was made in Congress to amend the charter of the bank to permit investment of the funds in real estate. The charter had provided for investment only in government or other easily negotiable securities whose stability could not be questioned. When the proposition was made to give the managers the legal privilege of engaging in real estate speculation it was easily recognized that this would prove fateful.

Despite the bank’s growth, heavy operating expenses and the desire to produce larger dividends prompted bank officials—who were always overwhelmingly white—to seek other sources of revenue. In 1870, they persuaded Congress to amend the charter to permit the bank to lend money. Although limited to investing in real estate securities, bank officials soon began to make large, unsecured loans and to speculate in a number of unauthorized ventures, thus transforming the bank’s mission from philanthropy and racial uplift to the pursuit of profit.

With its headquarters having been relocated to Washington, D. C., the bank now fell under the control of Henry Cooke, brother of Civil War financier Jay Cooke, and William S. Huntington of its finance committee. Cooke was a full partner in, and the Washington agent of, the financial house of Jay Cooke and Company. The Freedman’s Bank began investing heavily in Washington real estate and construction companies, as the city was experiencing a population boom, and it even undertook selling the bonds of Jay Cooke’s Northern Pacific Railroad. Moreover, the bank loaned large sums— without sufficient collateral—to companies in which bank officials or trustees held financial interests. By 1873, a major part of the bank’s assets were invested not in government securities but in real estate and unsecured loans to railroads and other companies.

The inability of Jay Cooke and Company to market its Northern Pacific Railroad bonds brought about the house’s collapse, precipitating the Panic of 1873 that caused hundreds of businesses nationwide to fail. Facing bankruptcy, bank officials undertook a number of measures in late 1873 and early 1874 to reassure nervous depositors, including naming Frederick Douglass as president in March. Douglass was not involved in daily bank affairs, however, and he was unable to prevent the bank from continuing to make unwise loans. Congress passed a bill in June to keep the bank alive, but confidence in it had been lost, as depositors continued to withdraw funds. On July 2, 1874, the board of trustees voted to close the bank for good.

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