Pet banks were state banks that the federal government used to hold and spend public money instead of the Bank of the United States
In the 1830s, President Andrew Jackson removed all federal deposits from the Bank of the United States and distributed them to selected state banks. These state banks became known as pet banks because Jackson chose them based on political loyalty rather than financial strength or merit. The term was not flattering—critics used it to mock the arrangement as favoritism.
Before pet banks existed, the Bank of the United States held the government's money and managed federal finances. When Jackson decided to destroy what he saw as a corrupt monopoly, he needed somewhere else to put that money. He chose state banks run by his political allies. By 1836, the federal government had deposits in more than 80 pet banks scattered across the country.
The pet bank system lasted only a few years but had lasting consequences. It destabilized the banking system, contributed to a financial panic, and demonstrated how political decisions about money could ripple through the entire economy.
Key Takeaways
- Pet banks were state banks that held federal government deposits after President Jackson removed money from the Bank of the United States in 1833.
- Jackson selected these banks based on political support for his administration, not on their financial soundness or banking practices.
- The system grew to include over 80 banks by 1836, spreading federal money across state institutions with varying levels of stability.
- Pet banks contributed to reckless lending, inflation, and the financial panic of 1837, which caused a severe recession.
- The pet bank era ended when the federal government moved toward a different system, but it revealed the dangers of mixing politics with banking.
Why Jackson created the pet bank system
Andrew Jackson believed the Bank of the United States was corrupt and dangerous. He saw it as a tool of wealthy elites and Eastern financial interests that harmed ordinary Americans. When his attempt to recharter the bank failed in 1832, Jackson decided to withdraw all federal deposits and place them elsewhere.
Rather than create a new federal bank or keep the money in the Treasury, Jackson chose to distribute deposits to state banks. He selected banks whose owners and managers supported his political agenda. This was a deliberate political strategy: by placing money in friendly banks, Jackson rewarded his supporters and punished his opponents.
Jackson's Secretary of the Treasury, Roger Taney, oversaw the distribution. Taney and Jackson believed that spreading federal money among state banks would democratize banking and prevent any single institution from holding too much power. In theory, this sounded reasonable. In practice, it created chaos.
How the pet bank system actually worked
The federal government collected taxes and other revenue. Instead of depositing this money in one central bank, the Treasury sent it to multiple state banks across the country. These banks held the deposits and made payments on behalf of the government when the Treasury ordered them to do so.
The problem was that these state banks were not selected for their financial stability or banking expertise. Many were small, poorly managed, or undercapitalized. Some were run by men with no real banking experience—they were simply Jackson supporters who happened to own a bank or had the connections to start one.
Once they held federal deposits, these banks had access to large sums of money that they could lend out. With federal money in their vaults, they could make more loans than their own capital would normally allow. Many pet banks used federal deposits recklessly, lending to speculators, land companies, and risky ventures. This fueled wild speculation in land and other assets.
The financial consequences of pet banking
The pet bank system contributed directly to the economic crisis of 1837. As pet banks lent federal money freely, prices rose, land values soared, and speculation became rampant. The economy overheated. Credit expanded far beyond what the actual economy could support.
In 1836, Jackson ordered the Treasury to distribute a federal surplus to the states. This injected even more money into the pet banks and the broader economy, pushing inflation higher. At the same time, Jackson issued an executive order requiring that land be purchased only with hard currency—gold and silver—rather than paper money or credit. This sudden restriction on credit caused panic.
Banks that had lent out federal deposits freely suddenly faced demands for payment in gold and silver. Many could not meet these demands. Banks failed. Credit dried up. Businesses that depended on loans collapsed. The panic of 1837 triggered a severe recession that lasted years. Unemployment rose, prices fell, and ordinary people suffered.
Why the term "pet banks" stuck
Critics of Jackson's policy used the term "pet banks" as an insult. The word "pet" suggested that these banks were favored playthings of the president, chosen for personal or political reasons rather than merit. Opponents argued that Jackson was using public money to reward his friends and punish his enemies.
The term was accurate. Jackson had explicitly chosen banks based on political loyalty. He had removed deposits from banks run by his opponents and placed them in banks run by his supporters. This was not hidden—it was the stated policy. But Jackson believed he was fighting corruption and protecting democracy from a financial elite.
Supporters of Jackson saw the pet banks as a victory against monopoly and centralized power. Critics saw them as proof that Jackson was corrupt and reckless. The debate reflected a deeper disagreement about what role government should play in banking and finance.
The end of the pet bank system
The pet bank system did not survive long. The financial panic of 1837 discredited the entire arrangement. It became clear that spreading federal deposits among politically selected state banks was not a solution to the problem of centralized banking power—it was a different kind of problem.
By the 1840s, the federal government moved toward a different approach. The Treasury began holding deposits in its own vaults and managing them more carefully. States eventually developed their own banking regulations and oversight. The pet bank era faded into history.
However, the pet bank system left a lasting mark. It demonstrated that political decisions about money could have serious economic consequences. It showed that banks selected for political reasons rather than financial competence could destabilize the entire economy. These lessons influenced banking policy and financial regulation for decades to come.
Pet banks versus the Bank of the United States
The Bank of the United States was a private bank chartered by the federal government to manage public finances. It was controversial because it held a monopoly on federal deposits and had enormous power over the money supply. Critics argued it favored wealthy merchants and hurt farmers and working people.
Jackson's supporters believed destroying the Bank of the United States would reduce the power of Eastern financial elites. They thought distributing deposits to state banks would be more democratic. What they did not anticipate was that state banks would use federal deposits to fuel speculation and reckless lending.
In hindsight, the pet bank system was not a real solution to the problem of centralized banking power. It simply replaced one form of centralization with chaos. Neither system worked well. The debate over how to structure banking and manage federal money continued long after Jackson left office.
Frequently Asked Questions
How many pet banks did Jackson create?
Jackson did not create the pet banks—they already existed as state banks. He selected existing state banks to hold federal deposits. By 1836, the federal government had deposits in more than 80 pet banks. The number grew as more state banks competed for federal money.
Did pet banks fail during the panic of 1837?
Many pet banks did fail or nearly fail during the panic of 1837. Banks that had lent out federal deposits recklessly could not meet demands for payment in gold and silver. The panic revealed that these banks were not financially sound and should never have held federal money in the first place.
Was Jackson's policy illegal?
No, Jackson's policy was not illegal. As president, he had the authority to direct where federal deposits were held. However, Congress opposed the policy and investigated it. The debate over Jackson's actions contributed to the formation of the Whig Party, which opposed Jackson's use of executive power.
Could pet banks refuse to hold federal deposits?
No. Once the Treasury selected a bank to hold federal deposits, the bank had to accept them. However, banks competed fiercely to be selected because holding federal deposits gave them access to large sums of money they could lend out and profit from.
What replaced the pet bank system?
After the pet bank era ended, the federal government moved toward keeping deposits in the Treasury itself and managing them more carefully. Later, the National Banking System was created in 1863, which established a network of federally chartered banks with federal oversight. This was a different approach to managing federal finances.