The Freedman's Saving and Trust Company, known as the Freedman's Savings Bank, was a private savings bank chartered by the U.S. Congress on March 3, 1865, to collect deposits from the newly emancipated communities. The bank opened 37 branches across 17 states and Washington DC within 7 years and collected funds from over 67,000 depositors. At the height of its success, the Freedman's Savings Bank held assets worth more than $3.7 million in 1872 dollars, which translates to approximately $80 million in 2021.
However, the rapid development of the bank was largely driven by false claims and was coupled with mismanagement and fraud. The bank failed in 1874, weighed down by speculative loans issued by the bank's white officials throughout its existence. Historians believe that the bank's failure not only destroyed the savings of many African Americans, but also their trust in financial institutions.
The site where the bank's headquarters once stood was later occupied by the Treasury Annex. The Annex was renamed the Freedman's Bank Building in 2016.
Establishment
At the end of the American Civil War, the poor economic conditions of the formerly enslaved freedmen were aggravated by the economic devastation of the Southern states. The newly freed Blacks had few economic resources or capital and even less exposure to private enterprise. Many soon turned to sharecropping and forced labor in the South. To help alleviate their socio-economic conditions, the Republican-controlled U. S. Congress established the Freedmen's Bureau, passing an act of incorporation and a charter for the Freedman's Saving and Trust Company, which was signed into law by President Abraham Lincoln on March 3, 1865 (13 Stat. 510).
Senator Blanche Bruce of the Select Committee on the Freedman's Savings and Trust Company, himself a former slave, wrote
The founder of the Freedman's Savings Bank, John W. Alvord, was inspired by the success of existing military savings banks. These military banks were created during the Civil War to collect the wages of Black soldiers. General Rufus Saxton established the first one in Beaufort, South Carolina, in 1864. Other examples include a bank in Norfolk, Virginia, established by General Benjamin Butler in late 1864, and a bank in Louisiana created by General Nathaniel Banks.
Many former slaves were liberated by the Union Army and were paid to join the army. Troops earned a little cash from their enrollment and participation, and the Freedman's Bank became the first banking entity to include them. Most accounts held between $5 and $50.
From 1865 to 1868, the expansion of the Freedman's Bank was largely driven by the money collected from Black soldiers. In the bank's first year, in 1865, two of the branches established were created through the transfer of existing local military savings institutions. Many other branch locations were chosen specifically based on the local Black soldier population. Bank officials made efforts to build the bank legitimacy and deposits raising part of the Black soldiers’ wages. For example, many cashiers at branches also worked as military disbursing officers.
Fraud and other financial misconduct
From the Freedman's Savings Bank's creation, there were several deficiencies in its governance and management that contributed to its ultimate collapse.
The bank trustees had little incentive to govern effectively. All fifty original trustees were White and were not required to give "any security for the faithful discharge of their trust." Many trustees had little to no involvement with the bank, some even denying they had agreed to join the board.
The bank's founding charter lacked any penal clauses to hold trustees personally liable for the bank's solvency. It prohibited lending until the amendment of 1870. While two-thirds of the bank's deposits were required to be invested in U.S. government securities, the use of the remaining funds was unrestricted; Osthaus wrote that this provision was "somewhat disquieting to those familiar with the history of savings banks, for they knew that available funds frequently became unavailable".