African-Americans and Financial Crises, Part I

This ought to be known.

I visited the National Museum of African-American History and Culture this week, and it got me thinking. Well actually, I’ve been thinking about this for a little while now. When I visited a class of teen moms in southeast D.C. to give a personal finance lesson, my co-teacher and I were shocked when the audience told us they didn’t have bank accounts and didn’t plan to get them. Getting a checking account was step numero uno in our personal finance prescriptions.

“How do I know they’re not gonna take it?” said one.

We’d heard the “if the bank gets robbed your money’s gone” concern at other high schools, but there was a real suspicion of banks here. We explained how deposit insurance worked, and from there the girls wanted to know how to open accounts. To me, their fears were unfounded, even irrational.

Then many months later, after the Treasury decided to rename its annex building, I found out about the Freedman’s Bank:

But the role of finance in worsening African-American welfare didn’t start there. It started, of course, with slavery. It’s often been said that this country was “built on the backs of slaves,” and that’s common knowledge–to historians, anyway. (Not that it was entirely profitable; slavery actually imposed significant costs on the economy.) The U.S. economy was defined by a slaveholding South that exported cotton to the manufacturing-based North and England, which then exported textiles around the world. In fact, when challenged on their “peculiar institution,” Southerners would accuse Northerners of hypocrisy, since they clearly benefited from cotton, too.

World trade in the 18th century. (If you don’t see arrows going both ways, it’s probably silver.)

Finance played a large role in this system, something I was reminded of when the Museum showcased some samples of “slave-backed bonds.” I blinked. Did America create the slave equivalent of mortgage-backed securities?

(LaBarre Galleries)

That’s a yes, according to The Half Has Never Been Told:  Slavery and the Making of American Capitalism:

The financial product that such banks as Baring Brothers were selling to investors in London, Hamburg, Amsterdam, Paris, Philadelphia, Boston, and New York was remarkably similar to the securitized bonds, backed by mortgages on US homes, that attracted investors from around the globe to US financial markets from the 1980s until the economic collapse of 2008. Like CAPL [Consolidated Association of Planters of Louisiana] bonds, mortgage-backed securities shifted risk away from the immediate originators of loans onto financial markets while promising to spread out and thus minimize the consequences of individual debtors’ failures. Investors who purchased latter-day mortgage-backed securities planned to share in streams of income generated by homebuyers’ mortgage payments. Likewise, the faith bonds of the 1830s generated revenue for investors from enslavers’ repayments of mortgages on enslaved people. This meant that investors around the world would share in revenues made by hands in the field. Thus, in effect, even as Britain was liberating the slaves of its empire, a British bank could now sell an investor a completely commodified slave: not a particular individual who could die or run away, but a bond that was the right to a one-slave-sized slice of a pie made from the income of thousands of slaves.

Wall Street and London weren’t doing it on their own. Calvin Schermerhorn writes in The Business of Slavery and the Rise of American Capitalism, 1815-1860:

The genius of credit permitted owners to leverage land and enslaved property into more…

…the Second Bank of the United States under Nicholas Biddle promoted slaveholder interests… Responding to the fact that cotton exports represented the largest domestic interest, the Second Bank attempted to decrease the range of seasonal fluctuations in the foreign exchange market… Nicholas Biddle was slaveholders’ best unpraised friend of the decade… The expansion of state banking together with Second Bank policies created an efficient national framework that promoted growth in slave-reliant industries.

Now I’m not sure Biddle, a Pennsylvanian whose archenemy was Andrew Jackson (who owned 150+ slaves), intentionally meant to shore up slavery, rather his Bank meant to promote the economy in a broad sense, an economy built around slave labor. Of course, as John Oliver highlighted this week, “you don’t have to be intentionally racist to have racist effects.”

But without a central bank, America’s economy had the potential to get much worse for African-Americans–which brings us to the Freedman’s Bank. Basically, the Freedman’s Bank was a congressionally-chartered credit union for freed slaves. The bank had black board members (it was founded by whites), worked with schools and churches, and got to be quite popular.

(Office of the Comptroller of the Currency)

Like the rest of the country’s banks, the bank got seduced into speculation; the bank’s board convinced Congress to modify the charter’s requirement that the bank invest exclusively in government securities (Treasury bonds). Bad management and corruption certainly didn’t help; I don’t think the Freedman’s Bank was unique in this way, as bank failure was ludicrously common in 19th century America, as was corruption (think the “Gilded Age”). America experienced one of its worst financial panics in 1873, and there was no central bank to stem it this time.

The Freedman’s Bank couldn’t call in its loans, and depositors couldn’t withdraw their money. As he became bank president, Frederick Douglass, in true It’s A Wonderful Life fashion, tried to save the bank by injecting his own savings, but to no avail. He appealed to Congress to step in, but still the bank couldn’t be salvaged. This is all sad, but arguably nothing more could be done given the circumstances. But  then:

Congress established a program that made depositors eligible to receive up to 62 percent of what they were owed; many never received even that much, however. For decades depositors and their descendants campaigned to persuade the federal government to assume some responsibility, arguing that investors had been led to believe that their savings were ensured by the government. They were never compensated.

Naturally, this bred mistrust of the financial system in the black community. Moreover, the Freedman’s Bank drama was just one in a series of failures by the federal government to protect the rights and promote the welfare of the people who were now free from a slavery it had previously defended. In fact, the Panic of 1873 was what set the end of Reconstruction in motion:

Voters reacted to the depression by turning against the party in power and reversing the Republican stranglehold on Congress by the mid-1870’s. It would not be until 1896 that Republicans would gain control of both houses. Northerners began to turn away from Reconstruction policies, and African Americans’ hopes for social reform began to fade, as educational opportunities and social and industrial progress stagnated in the South. The effects of the panic were devastating because of the emerging factory system in the region. Poor whites and African Americans were forced to depend on cotton as the primary cash crop once again, and they became dependent on sharecropping and tenant systems until the mid-twentieth century.

As the Museum notes, to settle the election of 1876–the most disputed presidential election in history, and we still don’t know who won–the Republicans exchanged ending Reconstruction for the presidency, and the floodgates were opened for the KKK, Jim Crow, and another century of oppression.

The Museum didn’t tell this whole story, but the important thing was that it made me ask the right questions. The saga of African-American experience in the financial system is a long one, so let me continue into the 20th century in the next post.



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