Selling Risk to the Newly Free

President Abraham Lincoln signed the Freedman’s Bank into law on March 3, 1865 — the same day he authorized the Freedman’s Bureau, a federal agency tasked with assisting newly emancipated people. Even though the bank was technically a private institution and the bureau a public one housed in the War Department, their fates were inextricably linked. This owed not merely to the similar names, but also the overlapping personnel between the two organizations and, most importantly, the misleading advertising done by the bank’s trustees to attract depositors.

The commissioner of the Freedman’s Bureau, General Oliver Otis Howard, himself regarded the privately administered bank as an “auxiliary” to his public agency. It was Howard’s own superintendent of education, Rev. John W. Alvord, who founded the Freedman’s Bank and would eventually serve as its third president.

Chartered as the Freedman’s Savings and Trust Company, the organization began its life as a savings and loan bank. Savings and loan banks occupied the safe side of the financial landscape of nineteenth-century America. They braided together economic and civil uplift, fastened with good old-fashioned patriotism and bootstrap self-reliance.

By law, the Freedman’s Bank was limited to investing only in government debt — “stocks, bonds, treasury notes, and securities of the United States” — a seemingly safe strategy, especially when stacked up against the bonanza of speculative ventures that punctuated nineteenth-century America.

Commercial investment banks were riskier endeavors. They existed to make a profit, and accomplished this by extending loans of calculated risk in the hope of paying higher returns to the bank’s investors. As Karl Marx observed in Capital — first published in 1867, two years after the founding of the Freedman’s Bank — capital needs to circulate within the market in order to grow. Simply retaining depositors’ money under the marble mattress of the savings bank did nothing to promote growth. It was all safety, no risk, and, for the capitalist, no reward.

Whether mission-based or growth-oriented, all banks needed depositors. Rev. Alvord and the bank’s first vice president, Mahlon Hewitt, toured the South to elicit participation from freed people in “their” bank and, in Edwards’s words, “spread the gospel of the Freedman’s Savings and Trust Company” and the virtue of thrift. They targeted black churches.

The overwhelming priority for newly emancipated people was economic. They sought stability and independence and accordingly regarded landownership as the surest path to economic security. Most lacked both the capital and appetite for financial risk. They were wary of abstract figures in ledgers and preferred tangible forms of wealth — things they could put in their pockets or sink their plows into and call their own.

Many freed people held out hopes for the long-awaited promise of land redistribution, as forecasted by directives such as General William T. Sherman’s Field Order No. 15, announced in January 1865, which set aside 400,000 acres in coastal Georgia and South Carolina for the exclusive settlement of black families on 40-acre plots.

By January 1866, however, that dream had unraveled. President Andrew Johnson, once regarded as the scourge of the planter class, reversed course and denationalized hundreds of thousands of acres confiscated from rebel slaveholders during the Civil War. Despite the nightmare of restored Confederate landownership, freed people began putting their trust in the Freedman’s Bank. By March 1867, they had deposited the present-day equivalent of $33.2 million.

Yet Edwards identifies serious warning signs early on. The bank was growing too fast, and the trustees struggled to meet the demands of a growing base of black depositors. There were not enough branches. Trustees also worried that freed people did not keep their deposits in their accounts long enough to earn any interest or afford the trustees an opportunity to accrue earnings from their investments. Most important, they felt constrained by the bank’s charter, which restricted investments to government securities.

To address these issues, Alvord lobbied for more branches to open in cities across the South and persuaded the trustees to relocate the bank’s headquarters from New York City to Washington, DC. The capital offered both symbolic and strategic advantages: proximity to larger black communities and the illusion of federal backing. “The relationship between banking and citizenship,” Edwards demonstrates, “became central to the bank’s propaganda to black depositors.”

From Philanthropy to Pillage

The bank’s headquarters relocated from Wall Street to Washington in the spring of 1867, though the more consequential move was the addition of financier Henry D. Cooke to the board of trustees. Back in December 1861, Cooke had partnered with his brother to form the nation’s first investment bank: Jay Cooke & Company.

The Cooke brothers raised millions of dollars during the Civil War to finance the Union war efforts through the selling of government bonds. Having “saved” the Union, Cooke must have felt entitled to join a board staffed with former abolitionists and avowed philanthropists. He sat on the bank’s moribund finance committee and quickly set about remaking it in his image.

Cooke embodied the bank’s fateful transformation: the union of high finance and high politics. Leveraging his influence, Cooke promptly brought on board two close colleagues: Daniel L. Eaton and William S. Huntington. Eaton received the bank’s first illegal loan, valued at about $21,000 today, just two weeks before he began serving as the bank’s actuary. This loan, though modest, was but the first trickle out of a dam about to burst. In February 1868, the board authorized Cooke and Eaton to use $300,000 (about $7 million today) to buy railroad bonds instead of government securities. These bonds were brokered by Jay Cooke & Company.

By March 1868, Alvord was elected president of the Freedman’s Bank, which held today’s equivalent of $76.1 million and would, in a year, hold more than $161 million. And Cooke continued the lending spree. Burdened with rising operational costs and buoyed by the allure of more lucrative investments, Cooke and the board appealed to Congress — which had afforded the bank zero oversight — to amend its charter so trustees could take out low-interest loans.

Congress approved the bill to amend the charter of the Freedman’s Bank on May 3, 1870, retroactively legalizing what had already become common practice. The trustees had transformed a savings institution for formerly enslaved people into their personal slush fund — raiding more than $292 million (in today’s dollars) from nearly 45,000 depositors. Consolidated in the hands of Cooke, Eaton, and Huntington, the Freedman’s Bank extended hundreds of loans between 1870 and 1872. Most of these loans went to men who enjoyed personal connections with the trio.

The first whistleblower sounded off in early 1871. Edgar Ketchum, the bank’s secretary, had long been a proverbial thorn in the side of Cooke and his cronies. After months of questioning the bank’s investment portfolio, Ketchum convinced the board to start calling in its many loans in January 1872 — beginning with the one extended to Jay Cooke & Company. The board demanded the return on February 6.

The recall read like writing on the wall. Cooke resigned two days later.

Counseling Thrift as a Cover for Theft

Though unique in its stated mission to promote the financial well-being of freed people, the Freedman’s Bank ultimately came to typify the reckless financialization of Gilded Age capitalism. It also served as a canary in the coal mine for the larger American economy: the financial panic of 1873 began with the collapse of none other than Jay Cooke & Company. In many ways, the Freedman’s Bank had become its auxiliary.

After nine years of deceptive solicitation, a dizzying period of reckless and illicit lending, and the “retirement” of President Alvord, the trustees of the Freedman’s Bank sought a public relations makeover. For that they turned to the most famous black man in America: Frederick Douglass.

A longtime advocate of the Freedman’s Bank, Douglass accepted the bank’s presidency in March 1874 completely unaware of its imminent insolvency. Black allies on the board, including Prof. John Mercer Langston and Dr. Charles Purvis, hoped Douglass’s ascent to the position would reverse course and re-inspire confidence in the institution. But the motives of their white counterparts on the board were entirely cynical. They needed a fall guy. And, to sufficiently bear the public shame of financial irresponsibility, he needed to be black. “The narrative would be,” Edwards forecasts, “that black administrators mishandled the bank and black depositors were unable to handle the economic responsibility of freedom.”

On June 29, 1874, the trustees decided to end operations. In the fallout after the bank’s demise, as tens of thousands of depositors struggled — and failed — to recoup their deposits, Congress finally launched an investigation into the misconduct of the bank’s leadership. The committee recommended that charges be brought against several key figures, including Alvord and the Cooke brothers, but no legal action was ever taken.

Still, the investigation continued, albeit at an agonizing pace. Like his Democratic counterparts, Senator Blanche K. Bruce also wanted the bank’s trustees to be held accountable for swindling depositors. But Bruce and other black leaders took very different lessons from the bank’s failure. They learned, according to Edwards, to keep their savings — and their trust — to themselves.

Small Sums and Grand Thefts

For Edwards, the story of the Freedman’s Bank is more than a cautionary tale. It left a lasting impression on black political consciousness and was an early prototype for how economic inclusion could be paired with dispossession — not only along racial lines, but through class hierarchies — under the guise of institutional legitimacy. The bank taught black people to mistrust white financial institutions and — through a massive transfer of wealth away from four million freed people (some $1.5 billion today) — deepened the racial wealth gap during a critical period of emancipation and inclusion. It is not that black wealth was nonexistent in the early years after 1865; rather, it’s that black people’s hard-won accumulation was systematically targeted and stolen.

The word plunder has come to occupy a central place in describing this history, both for its rhetorical precision and moral clarity. (A recent work by historian of slavery Calvin Schermerhorn is pointedly entitled The Plunder of Black America: How the Racial Wealth Gap Was Made.) Though the term evokes images of raiding and pillaging, the actual perpetrators —then as now — wore suits, cited laws, and operated with impunity, as any observer of the 2008 financial crash and bailout saga must acknowledge.

A broader lesson, emphasized by scholars like Keeanga-Yamahtta Taylor and K-Sue Park, is that economic inclusion has often coincided with exploitation and predation. The white trustees of the Freedman’s Bank were incentivized to attract as many black depositors as possible and, using their savings, extend increasingly risky loans to generate more revenue for the bank.

In doing so, they capitalized on the inexperience of a population newly thrust into the free market — a people not only denied meaningful participation in formal financial institutions but who were once themselves regarded as capital. The dictates of financial capitalism remade self-stylized protectors into predators. Bank leaders consciously manufactured a false image of the Freedman’s Bank as a federal institution, and that patronizing the institution with their “small sums” was freed people’s patriotic duty.

As amply demonstrated by the tragedy of the Freedman’s Bank, the inclusion of former slaves into the American economy through the threadbare morality of thrift and the extremely dubious vehicle of banks was bound to fail. Far from being insulated from the pressures of financial capitalism, such normalizing ideologies and institutions were — and remain — foundational to it.