The failure of the Freedman's Savings Bank (FSB), one of the only Black-serving banks in the early post-bellum South, was an economic catastrophe and one of the great episodes of racial exploitation in post-Emancipation history. It was also most Black Americans' first experience of banking. Can events like these permanently alter financial preferences and behavior? To test this, we examine the impact of FSB collapse on life insurance-holding, an accessible alternative savings vehicle over the late 19th and early 20th centuries. We document a sharp and persistent increase in insurance demand in affected counties following the shock, driven disproportionately by Black customers. We also use FSB migrant flows to disentangle place-based and cohort-based effects, thus identifying psychological and cultural scarring as a distinct mechanism underlying the shift in financial behavior induced by the bank's collapse. Horizontal and intergenerational transmission of preferences help explain the shock’s persistent effects on financial behavior.
Authors
- Acknowledgements & Disclosure
- This paper was previously circulated under the title "Financial Scarring and the Failure of the Freedman's Savings Bank." For funding, we thank the National Science Foundation (Award #SES-2049393/SES-2049401), the Russell Sage Foundation (Award #2011-29614), the UCI Irvine School of Social Sciences, and the UCI Center for Population, Inequality, and Policy. We are grateful to Marcella Alsan, Claire Celerier, Rick Hornbeck, Maggie E.C. Jones, and Luke Stein; seminar participants at Northwestern University, University of Southern California, Caltech, University of Maryland Baltimore County, Grinnell College, the University of Hong Kong, Beijing University, Tsinghua University, Wuhan University, University of California, Irvine, the Seattle Economics Council, and the Washington Area Economic History Seminar; as well as to participants at the NBER DAE Spring Meetings, Chicago Fed Workshop on Monetary and Financial History, the Economic History Association Annual Conference, the AEA/ASSA Annual Conference, and the All-UC Graduate Students Workshop in Economic History, for helpful comments on earlier versions of this work. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w32576
- Published in
- United States of America
Table of Contents
- Introduction 3
- Related literature 6
- Empirical setting 9
- The Freedman's Savings Bank 9
- Life Insurance 11
- Estimation strategy 12
- Difference-in-Differences Using Two-Way Fixed Effects 13
- Threats to Identification 13
- Data 15
- Main Results 16
- Two-Way Fixed Effects 16
- Doubly-Robust Methods 19
- Instrumental Variables 20
- Summary 21
- Mechanisms & Additional Checks 23
- Are Results General or Race-Specific? 23
- Do Results Merely Reflect the 1873 Panic? 26
- Do Results Merely Reflect a Decline in Banking Options? 28
- Do Results Merely Reflect Broader Local Development? 30
- Did the FSB Collapse Shape Beliefs and Preferences? 32
- Migration as a Transmission Mechanism: Own FSB Exposure 34
- Sources of Intergenerational Persistence: Family FSB Exposure 36
- Did FSB Migrant Tastes Spread to New Friends and Neighbors?: Exposure to Community Influencers 37
- Interpreting Mechanisms 39
- Conclusion 42
- Online Appendix: Empirical Setting 47
- The Freedman's Savings Bank: Additional Background 47
- Contemporaneous Perceptions of FSB Failure 50
- Context for the Appeal of Life Insurance 52
- Life Insurance Industry: Background 54
- Online Appendix: Estimation Strategy 54
- Doubly Robust Methods 54
- Instrumental Variables 55
- Online Appendix: Data 56
- Online Appendix: Results 58
- Main Results 58
- Additional Evidence: Doubly-Robust Methods 58
- Additional Evidence: Instrumental Variables 60
- Robustness and Mechanisms 61
- Urban Status 61
- Pent-Up Demand 62
- Intensive Exposure to FSB 62
- Pre-Period Checks 63
- Race-Specific Demand 63
- Jim Crow 64
- Change in Financial-Sector Employment 65
- Migration Analysis 65
- Migration Data and Methods 65
- Additional Migration Results 67
- Online Appendix: Discussion 70
- Likely Consequences of the Change in Savings Behavior 70
