Societal Trust and Financial Market Participation: Evidence from the Freedman's Savings Bank

Abstract

Using a novel dataset from the Freedman's Savings Bank, we examine how societal trust impacts policy makers' goals of increased financial participation and economic integration. We find that events that impact trust in political representation and public safety also impact financial participation. Factors which provide stability to minority communities also influence the reactions to financial panics, increasing the likelihood of having wealth destroyed in a failure and creating a welfare transfer to better informed non-minorities. Our results demonstrate how the inherent fragility of financial institutions can cause disproportionate damage to minority communities.

Keywords: banking, bank runs, financial participation, development economics, African American economic history, access to finance

JEL Classification: G21, N11