Financial Scarring and the Failure of the Freedman's Savings Bank
Abstract
Even controlling for income and demographics, Black Americans are likelier to hold life insurance than their white counterparts. Moreover, Black households place a significant fraction of savings in life insurance, and are less likely to hold equities or bank accounts, which potentially contributes to the persistence of racial wealth gaps, as recent research has implicated racial differences in portfolio composition as a major factor in these disparities.In this paper, we test the role of race-specific financial scarring as a contributor to the historical prevalence of insurance as a savings strategy among Black households. Specifically, we focus on a racially salient and economically devastating event: the 1873 collapse of the Freedman’s Savings Bank (FSB), a bank specifically aimed at Black depositors. We draw on rich county-level data from 1850-1940 to ask how the failure of the FSB affected households’ insurance holdings on a race-specific basis. We find that following FSB failure, households residing in high-FSB-exposure counties demanded more life insurance than households in low-exposure counties. These changes were driven by increases in Black demand, are persistent across time and space, and are robust to a variety of specifications which address endogeneity concerns.
Our findings suggest that the failure of the Freedman's Savings Bank was a traumatic, racialized, and economically consequential event—one that significantly altered Black household preferences towards risk-averse and low-return life insurance products. Intergenerational transmission of preferences helps explain the persistence of these patterns. Crucially, this shift in preferences may help explain enduring racial wealth disparities.