Traumatic Financial Experiences and Persistent Changes in Financial Behavior: Evidence from the Freedman's Savings Bank

Vellore Arthi, Gary Richardson and Mark Van Orden

No 19304, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

JEL-codes: D63 G21 G22 G51 G52 I30 N21 N22 N31 (search for similar items in EconPapers)
Date: 2024-07
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