Along similar lines, the 1874 failure of Freedman’s Savings and Trust (FST) caused heavy losses predominantly for recently freed slaves who were persuaded to deposit their hard-earned greenbacks in an institution named for them and whose deposit funding model revolved around them. In the end, depositors recovered a mere 20 percent of their funds. Justene Hill Edwards’s book Savings and Trust chronicles this failure. Edwards is an associate professor of history at the University of Virginia and author of the 2021 book Unfree Markets, a study of the US slave economy.

Birth of Freedman’s / On March 3, 1865, President Abraham Lincoln signed “An Act to Incorporate the Freedman’s Savings and Trust Company.” The express purpose of the institution was to “receive on deposit such sums of money as may from time to time be offered therefor, by, or on behalf of persons heretofore held in slavery in the United States, or their descendants.”

Edwards places the act in perspective by discussing milestone pieces of legislation that immediately preceded it, which were integral to the development of the nascent US financial system. These were the Legal Tender Act of 1862, which codified the power for the federal government to issue a national currency, and the National Banking Acts of 1863 and 1864, which created the Office of the Comptroller of the Currency (OCC), which to this day charters, supervises, and regulates national banks.

Rather than traverse a chronological summary of the downfall of FST, I will enumerate a number of the underlying causes for the failure. Those causes were common to many of the US bank failures over the past 200 years.

Explosive growth / One of the telltale signs of future financial institution failure is a rapid burst of growth over a relatively short period of time. According to Edwards, total FST deposits grew from $305,000 in 1866 to over $31 million in 1872. Under its enabling legislation, the FST was allowed to operate as a nationwide deposit taker. Thus, it was not limited to a single state, as would have been the case if it were chartered by one of the individual states or if it were chartered by the newly created OCC.

The FST took full advantage of this power to operate interstate branches in “such points as the interest of the Freedmen may require.” Thirty-four branches were opened from 1865 to 1870, stretching down the US East Coast from New York City to Jacksonville, FL, extending along the Gulf Coast to New Orleans, then north to St. Louis. Edwards provides two visuals of this growth: a chronological list of the 34 branches and a US map of their locations.

The FST branch network proved unwieldy, contributing to the weak financial position of the institution. That prompted its trustees to close five branches, but those closures proved too little too late to stabilize the institution.

Civil rights leader Frederick Douglass took the job of president of FST in the hope of turning it around. In an unfamiliar role as a bank administrator and with the institution already in a hopeless financial position, he lasted only four months before it closed. As Edwards describes it: “After nine years of operations, the bank’s exponential growth came to an abrupt stop. On July 2, 1874, the bank officially closed its doors.”

Questionable investments / The federal charter that guided FST’s operations described it as a savings and trust institution—a common form of non-bank that emerged in the 19th century—“to encourage working-class populations to develop the habit of saving…. In contrast to commercial banks, which were created to generate profits for shareholders, savings banks had a benevolent, as opposed to moneymaking, mission.”

Edwards explains:

By design, savings banks were supposed to operate with less risk. These institutions did not make loans or seek to aggressively make a profit…. The Freedman’s Bank mandate aligned with avoiding the unpredictability associated with operating a commercial bank.

The FST’s enabling legislation indicated a low-risk business model, limiting its power to invest in “stocks, bonds, treasury notes and securities of the United States.” Up to one-third of depositor funds could be invested in those instruments, but the remainder of the money was to be dedicated to an “available fund” to meet depositor and other payment demands, with the residual placed on deposit or in some other “available form.”

Edwards critiques the FST legislation and the haste with which it was assembled and signed into law. She argues that clear guidance for operations was lacking:

Speed would have its consequences. The swiftness with which Congress moved to get an approved bank-charter bill ready for Lincoln’s signature meant that they overlooked key inconsistencies.

This language and the interpretation of it led to some questionable investments, one of the most obvious of which was in railroad bonds, a risky move at the time. The bond broker for the transaction was the Banking House of Jay Cooke, a 19th century investment bank. According to Edwards, that transaction was likely supported by Henry Cooke, a Freedman’s trustee, chair of its finance committee, and business partner and sibling of Jay Cooke. She labels this a “conflict of financial interest” because Henry Cooke “benefited from the sale since, as the broker, he reaped a percentage of the bonds that he sold.” Other trustees also abused their positions: “The number of trustees who received loans between 1870 and 1872 was staggering. In direct contravention of section 12 of the charter, at least six of the trustees took out loans.” The collateral for the loans was less than required. In at least one case there was no collateral, and in another case no interest was levied.

Another questionable investment was the purchase of an over-the-top headquarters building as the flagship branch when FST moved from New York to Washington:

Despite the bank’s fiscal concerns, in 1869 the trustees decided to make a monumental gamble with its crumbling finances. This revolved around the bank’s transition to Washington. It became clear, at least to the trustees, that they needed a new office.… The trustees decided that they were entitled to more than a simple office … [and] decided to find a proper building site for a Banking House…. The trustees agreed to put a bid of $80,000 for a building on the corner of 16½ Street and Pennsylvania Avenue.

The New York Times felt the need to comment on the investment:

The board’s decision to spend such a large amount of money on a building of no real necessity was not a prudent one…. The deposits of free people did not deserve to be spent on such an extravagance.

Breakdown in oversight / Another consistent thread in the history of major financial institution failures is that supervisors or other overseers often missed or were in denial of signs of deterioration. In this case, it was Congress that did not take its responsibility seriously and failed to act. Oversight of FST was clearly addressed in its enabling legislation, which required “that the books of the corporation shall, at all times during the hours of business, be open for inspection and examination to such persons as Congress shall designate or appoint.” But in the case of FST:

There was no formal examination of the bank’s business. There was no regulation, no oversight. Since the bank opened for business in March 1865, Congress had not conducted a single official examination of its finances.

As a result, the depositors were without the benefit of an outside party or a supervisor at the state or federal level.

In early 1872, the board of trustees created a committee on inspections to examine FST’s finances, but it was too late to halt the slide. The OCC became involved in assessing its condition while conducting its maiden formal supervisory examination in early 1873. FST was already illiquid and well on its way to insolvency.

OCC examiner Charles A. Meigs submitted his findings to the Senate Committee on Finance in February of that same year. Edwards writes, “His report painted an unflattering picture of the bank and highlighted its shady financial dealings.” Meigs conducted a follow-up examination in January of 1874: “He reported that the bank held $3.12 million in assets but $3.33 million in liabilities. The bank was in dire straits.”

All that scrutiny only added to the cost that was ultimately borne by depositors. “In the end,” notes Edwards, “the depositors had to forgo approximately $330,000 paid to the commissioners, examiners and investigators who uncovered the reasons for the bank’s demise.”

Panic of 1873 / Most well-known institution failures or near failures (bailouts) in US history occurred during bank panics or financial crises, when the weaknesses of financial institutions tend to manifest themselves. This occurred with trust institutions during the Panic of 1907, the Great Depression that brought down the Bank of United States, and the Great Recession of 2008–2009 when institutions like Lehman, Citigroup, and AIG crashed and burned.

The downfall of FST coincided with the Panic of 1873. Freedman’s was affected because of its relationship with the Cooke empire, which collapsed when its investment bank filed for bankruptcy:

Jay Cooke & Company’s collapse affected the Freedman’s Bank immediately. The bank’s connection to the company was widely known, especially in Washington…. Henry Cooke had been borrowing extensively from freed people’s deposits in the Freedman’s Bank to fund the [Northern Pacific Railroad]. News of a bank run [at FST] soon trickled out…. Depositors, fearful of not having access to their funds, stormed the bank’s beautifully appointed office building, demanding to withdraw their money.

Conclusion / Savings and Trust is well written and is an engaging read for historians, financial experts, and a general audience alike. It weaves into the narrative the role of historical figures such as Lincoln and Andrew Johnson, as well as Douglass.

One frustrating facet is that, at times, Edwards drops in rants about the “white capitalists” on the board of trustees and “capitalism” more broadly. The incompetence and abuse perpetrated by these insiders cannot be blamed on capitalism because those traits are also inherent in the actions of managers in socialist financial systems. It was a capitalist system that led to the exit of FST from the system once market forces led to a run and the previous lack of oversight by Congress became obvious.

That point aside, Edwards’ book is a fascinating and well researched tale of a very sad chapter in the nation’s banking history.