Pet banks are state-chartered banks that received federal deposits during Andrew Jackson's presidency, roughly 1833 to 1841
The term "pet bank" refers to a specific group of banks that the federal government used to hold and distribute public money during the Jackson administration. When Jackson withdrew federal deposits from the Second Bank of the United States in 1833, he redistributed that money to selected state banks across the country. These banks became known as "pet banks" — partly because critics saw them as favored institutions, and partly because the administration chose them based on political loyalty rather than financial strength.
Pet banks were not a separate category of bank with different rules or purposes. They were ordinary state-chartered banks that happened to receive federal deposits. The deposits gave them access to large sums of government money, which they could then lend out to businesses and individuals in their regions. This arrangement lasted until the financial panic of 1837, which exposed weaknesses in many of these banks and led to their collapse or consolidation.
Key Takeaways
- Pet banks were state banks chosen by President Andrew Jackson to hold federal deposits after he withdrew money from the Second Bank of the United States in 1833.
- Jackson selected these banks based partly on political support rather than financial soundness, which made them controversial at the time.
- The pet bank system allowed the federal government to distribute money to regional banks, which then lent it to local businesses and farmers.
- The financial panic of 1837 caused many pet banks to fail, ending the system and demonstrating the risks of using banks for political purposes.
Why Jackson created the pet bank system
Jackson opposed the Second Bank of the United States, viewing it as too powerful and too aligned with wealthy merchants and financiers. He believed the bank favored the East Coast over the West and South, and that it concentrated too much control over the nation's money in private hands. When his reelection in 1832 gave him political momentum, he moved to withdraw federal deposits from the Second Bank and place them elsewhere.
Rather than hold the money in a single alternative institution, Jackson's administration distributed deposits to multiple state banks. This approach served two purposes: it weakened the Second Bank by removing its federal deposits, and it put money into banks that supported Jackson's political agenda. Treasury Secretary Roger Taney oversaw the selection process, choosing banks in states and regions where Jackson had strong support.
How pet banks operated with federal money
Once a bank received federal deposits, it could use that money as part of its lending capital. A pet bank might receive $100,000 in federal deposits and then lend out a portion of that sum to local farmers, merchants, and manufacturers. The bank earned interest on these loans, which helped it grow. The federal government, in turn, could draw on the deposits when it needed to pay for government operations or military expenses.
This arrangement created a conflict of interest. Banks had an incentive to lend aggressively to maximize profits, but the federal government needed to know its deposits were safe. There was no federal deposit insurance at the time, and state banking regulations were weak. A bank could make risky loans, lose money, and then be unable to return federal deposits when the government demanded them.
The political controversy around pet banks
Opponents of Jackson's policy called these banks "pet banks" as a criticism. They argued that Jackson was using federal money to reward political allies rather than to serve the public interest. Banks that had opposed Jackson or supported the Second Bank were excluded from receiving deposits, which seemed like punishment for political disagreement.
Supporters of Jackson saw the system differently. They believed distributing money to state banks strengthened local economies and reduced the power of a single, centralized financial institution. They argued that state banks were closer to the people and more responsive to regional needs than the Second Bank had been.
The financial panic of 1837 and the end of pet banks
The pet bank system collapsed during the financial panic of 1837. Many of the banks that had received federal deposits had made poor lending decisions and could not survive the economic downturn. Banks failed across the country, taking federal deposits with them. The government lost money, and the public lost confidence in the system.
The panic revealed that using banks for political purposes, rather than selecting them based on financial stability, was dangerous. After 1837, the federal government moved away from depositing money in individual state banks. The system was replaced by other arrangements, including eventually the creation of the national banking system during the Civil War.
Pet banks in historical context
The pet bank episode is often studied as an example of how political decisions about money can have unintended economic consequences. Jackson's goal was to reduce the power of a centralized bank, but his method — distributing deposits to politically friendly state banks — created instability instead. The panic of 1837 was partly caused by the reckless lending that pet banks engaged in once they had access to federal funds.
Historians and economists point to the pet bank system when discussing the importance of separating banking decisions from political loyalty. The episode also illustrates why deposit insurance and banking regulation became necessary. Modern federal deposit insurance, created in 1933, was designed partly to prevent the kind of bank failures that occurred during the pet bank era.
Frequently Asked Questions
Were pet banks only in certain states?
No. Pet banks were distributed across the country, though they were concentrated in states where Jackson had political support. Banks in the South and West were more likely to receive federal deposits than banks in the Northeast, which had supported the Second Bank of the United States.
Did pet banks have different rules than other state banks?
No. Pet banks were ordinary state-chartered banks. The only difference was that they held federal deposits. They followed the same state banking laws and regulations as any other state bank in their region.
How much money did the federal government lose when pet banks failed?
The exact amount is difficult to calculate, but historians estimate that the federal government lost millions of dollars when pet banks collapsed during the panic of 1837. The losses contributed to a federal budget deficit that lasted for years.
Could a bank lose its pet bank status?
Yes. If a bank's political alignment changed or if the Treasury Department lost confidence in its management, the government could withdraw its deposits. Some banks lost federal deposits before the panic of 1837 simply because they fell out of political favor.
Is there anything like pet banks today?
No. Modern banking regulations and federal deposit insurance prevent the government from using banks as political tools. The Federal Reserve, created in 1913, handles the distribution of federal funds through a system designed to be independent of political pressure.