Using detailed depositor arrival data from the Freedman’s Savings and Trust, we examine how the failure to prevent racial violence impacts bank participation. From 1866 to 1873, we find that events of racial violence perpetrated against Black Americans decrease new account openings at branches in the same region by 23% relative to other branches in the 30 days after the event. Alternatively, events that increased political representation and protections increase the relative arrival of new depositors at the bank by around 50% for the affected branches. We also show that those who opened accounts in the wake of a violent event were less likely to close an account before the bank’s eventual failure, suggesting that those who were resistant to the impact of political violence may have tragically been more exposed to other institutional failures.
Racial Violence, Political Representation, and the threat to Banks as Open Access Institutions (February 20, 2024). Available at SSRN: https://ssrn.com/abstract=4390992 or http://dx.doi.org/10.2139/ssrn.4390992
Incidents of racial violence erupting from local efforts to suppress Black minorities lead to a decline in local financial participation
Unexpected successes in political representation and action to protect Black citizens lead to an increase in participation
Resilience to violence is a double-edged sword, as those depositors who did open accounts in the wake of targeted violence were also more likely to have wealth destroyed when the bank failed.
Using a combination of new account records, depositor level transactions, and ledger records from the final accounts of the bank, we construct a detailed account of depositor behavior during the operation of the bank from 1865 to 1874. During this period, civil unrest and racial violence plagued a number of hot spots in the United States, with varying degrees of state and federal response. We demonstrate that new deposits to branches in the affected regions fell sharply after significant incidents of racially motivated violence, demonstrating that societal stability and a trust in government enforcement of public safety has a direct impact on participation. This reaction is particularly troubling because part of the functional purpose of the bank was to protect savings from theft by violent actors. Furthermore, it suggests that direct disruptions to economic stability by violent actors have a compounding effect on this stability through its indirect impact on savings and financial participation.
Conversely, we also examine the impact of two positive shocks to trust in society and the legal system more broadly: the ascension of P. B. S. Pinchback to the Governorship of Louisiana, the first African American governor of any state; and the imposition of martial law in South Carolina to quell racial violence. We find that both of these events correspond with a significant relative increase in deposits at nearby branches. Together, these reactions demonstrate how shocks to trust in legal and political institutions, unrelated to the health of the bank itself, can have spillover effects on financial participation and the goals of economic integration. However, this strength in the face of the failure of political institutions can be further undermined by the ultimate failure of financial institutions.