- Historic Sites
The Freedman’s Bank
A nineteenth-century blueprint for the savings-and-loan scandal
December 1993 | Volume 44, Issue 8
The other weakness was at the very top. In theory the Freedman’s Bank was governed by a board of fifty trustees. The original list was a who’s who of the American business establishment of the day. But seven of the most prominent members resigned almost immediately. Apparently their names had merely been used as window dressing to impress Congress, and their consent to serve had never been obtained.
The bank’s board of trustees, in fact, never kept close tabs on what the bank and its officers were up to. By 1870 power at the Freedman’s Bank was effectively in the hands of these officers and a three-man finance committee, with no one monitoring their performance. If anything is clear from the history of American banking, it is that whenever a few people, with interests of their own and little supervision, find themselves in charge of large sums of other people’s money, disaster is on the way.
The officers of the bank began lobbying Congress for changes in the charter. Soon a bill allowing the bank to invest in real estate—the most illiquid, thus potentially the most troublesome, form of investment—passed the House without debate.
In the Senate only two senators raised objections. Significantly, one of them was Simon Cameron, the boss of the Pennsylvania Republican party, who had made his own very considerable fortune in the banking business. “Depend upon it,” he warned, “the moment you allow them to put their money … in real estate, that moment you weaken the credit of the institution and its stability.”
The moment you let the bank invest in real estate, warned one senator, “that moment you weaken the credit of the institution.”
But the Senate did not listen to Cameron, and the bank was allowed to make loans on real estate.
With the new amendment to the charter, the Freedman’s Bank, with astonishing swiftness, became highly speculative. It began lending its available fund, money supposed to be at hand to meet any demand for withdrawal, on such dubious security as railroad bonds, often the junk securities of the day. The trustee who proposed this, in fact, was the director of a railroad that promptly borrowed $175,000 from the Freedman’s Bank.
And incompetence vied with speculation and fraud to hasten the bank’s end. Anson Sperry had been with the bank since its earliest days and had a genuine interest in helping the freedmen. But as the bank’s inspector, charged with checking each branch’s books, he was hopeless. “I should have known more and had less enthusiasm,” he admitted after the bank’s failure. Indeed. He certified many of the bank’s book balances, labeling them as “correct, E&OE.” Asked what that meant by mystified congressional investigators after the collapse, he admitted that “E&OE” stood for “errors and omissions excepted.” That’s rather like certifying a ship as seaworthy except for whatever holes may be found in the hull.
The panic of 1873 dealt a deathblow to the bank as depositors rushed to withdraw their money. It weathered the immediate storm by liquidating most of its government bond portfolio. The incompetent John Alvord was replaced as president by Frederick Douglass, in the hope that the great man could reassure the black depositors.
But the comptroller of the currency quickly reported a deficit of $217,886.15. With total assets, many of them questionable, of only $3,000,000, this was no small sum, and panic withdrawals resumed. Douglass, who had been misled prior to accepting the presidency, quickly realized that the situation was hopeless, and on July 2,1874, the bank closed. Few depositors ever saw a dime of their hard-earned savings as many of the loans proved uncollectible. The bitterness in the black community over the debacle lingered for decades.
To quote Santayana correctly for once, “Progress, far from consisting in change, depends on retentiveness. … Those who cannot remember the past are condemned to fulfill it.” The Freedman’s Bank and the S&L disaster are perhaps the best examples of that truth I know. I hope that the well-meaning apostle of change now in the White House may read this and know that good intentions are never enough.