Pet banks were state banks that the federal government used to hold and spend public money after closing the Bank of the United States in 1833
When President Andrew Jackson ordered the federal government to stop depositing money into the Bank of the United States in 1833, the Treasury had nowhere to put the nation's funds. Instead of creating a new central bank, Jackson's administration distributed the money to selected state banks across the country. These banks became known as pet banks because Jackson's political allies controlled many of them, and the government seemed to favor them with deposits and business.
The pet banks system lasted from 1833 until the Civil War forced a complete restructuring of American banking. During those three decades, the pet banks held federal tax revenue, managed government payments, and loaned money to the Treasury when it needed cash. The system was chaotic, inefficient, and ultimately contributed to a financial panic that damaged the economy.
Key Takeaways
- Pet banks were state-chartered banks that received federal government deposits after Jackson closed the Bank of the United States in 1833.
- The government chose which banks would receive deposits, and many were owned by Jackson's political supporters, which is why they earned the nickname "pet banks."
- Without a central bank to manage the money, the pet banks system created instability because different banks had different rules and some failed.
- The pet banks eventually contributed to the Panic of 1837, a severe economic downturn that lasted years and damaged public confidence in the banking system.
Why Jackson closed the Bank of the United States
The Bank of the United States was a private corporation chartered by Congress to act as the nation's central bank. It held federal deposits, managed the money supply, and regulated state banks by refusing to accept their notes if they issued too much currency. Jackson believed the bank was unconstitutional, too powerful, and controlled by wealthy Eastern interests who did not represent ordinary Americans.
In 1832, Jackson vetoed a bill to renew the bank's charter. He won reelection that year partly on his promise to destroy what he called a "monster" institution. After his victory, Jackson ordered Secretary of the Treasury Roger Taney to stop depositing federal revenue into the Bank of the United States and to withdraw the money already there. By 1833, the bank was effectively dead as a government institution.
How the pet banks system actually worked
The Treasury needed somewhere to put the federal government's money—tax revenue from tariffs, land sales, and other sources. Taney and Jackson decided to distribute deposits among state banks that met certain basic requirements. A bank had to be chartered by its state, maintain a certain amount of capital, and agree to hold federal funds and make payments on the government's behalf.
The number of pet banks grew from about 7 in 1833 to more than 90 by 1836. Each bank received deposits based partly on its size and location, but also based on political connections. Banks owned by Jackson supporters or located in politically important states received larger deposits. This favoritism is what earned them the name "pet banks"—they were the administration's favorites.
The pet banks performed basic Treasury functions: they held money, paid government bills, and sometimes loaned money to the federal government when it needed short-term cash. But without a central authority like the old Bank of the United States to coordinate them, the system had no real oversight. Each bank operated independently, and there was no mechanism to prevent them from taking excessive risks or failing.
The problems that made pet banks unstable
The pet banks system created several serious problems. First, the banks had no incentive to be conservative with federal money. Because deposits were distributed based on politics rather than banking soundness, some pet banks were poorly managed or undercapitalized. A few were run by speculators who used federal deposits to fund risky ventures.
Second, without a central bank to regulate the money supply, state banks issued far too much currency. Each pet bank printed its own notes, and there was no authority to stop them. The money supply expanded rapidly, driving up prices and encouraging wild speculation in land and other assets. This overheating of the economy made a crash inevitable.
Third, the pet banks competed with each other rather than cooperating. When one bank faced trouble, others did not help stabilize it. This meant that bank failures could spread quickly and unpredictably, which is exactly what happened.
The Panic of 1837 and the end of the pet banks
In 1837, the economy collapsed. Land prices crashed, banks failed, and businesses went bankrupt. The Panic of 1837 lasted for years and caused widespread unemployment and hardship. Many historians point to the pet banks system as a major cause: the lack of central coordination, the overexpansion of the money supply, and the failure of weak banks all contributed to the disaster.
The pet banks themselves suffered badly. Some failed outright, taking federal deposits with them. Others survived but lost public confidence. By the time the Civil War began in 1861, the pet banks system was already dying. The war forced the federal government to create a new national banking system with federally chartered banks and a uniform currency, which finally provided the stability that the pet banks had lacked.
How the pet banks compare to modern banking
Today's banking system is nothing like the pet banks era. The Federal Reserve, created in 1913, acts as a true central bank with the power to regulate the money supply, set interest rates, and supervise all banks. The federal government deposits its money in accounts managed by the Federal Reserve, not in individual commercial banks chosen for political reasons.
Modern banks are also regulated far more strictly. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000, so if a bank fails, depositors do not lose their money. Bank examiners from federal and state agencies inspect banks regularly to make sure they are not taking excessive risks. These safeguards did not exist during the pet banks era, which is why the system was so unstable.
Why the pet banks story still matters
The pet banks are a historical example of what happens when a government tries to manage its finances without a stable, centralized banking system. The system failed because it mixed politics with banking, lacked oversight, and created perverse incentives. The lesson is that a functioning economy needs a central bank with real authority to regulate the money supply and supervise other banks.
The pet banks also illustrate the danger of using government power to favor certain businesses over others. Jackson's supporters benefited from the deposits, but ordinary Americans suffered when the system collapsed and the economy crashed. The political favoritism that made them "pet" banks ultimately harmed the people Jackson claimed to represent.
Frequently Asked Questions
Why did Jackson call the Bank of the United States a "monster"?
Jackson believed the bank was unconstitutional because Congress had no power to charter a private corporation. He also thought it was too powerful—it could control state banks and influence the economy in ways that favored wealthy merchants over farmers and working people. He saw it as a tool of Eastern elites.
Did all pet banks fail during the Panic of 1837?
No, but many did. Some pet banks survived the panic and continued operating for decades. However, the system as a whole lost credibility, and the federal government gradually stopped using state banks to hold its money as the Civil War approached and a new national banking system was created.
Could the pet banks system happen again?
Unlikely. Modern banking law requires the Federal Reserve to manage federal deposits and regulate the money supply. The FDIC insures deposits, and bank examiners have real authority to shut down banks that are taking excessive risks. These protections did not exist in Jackson's time.
How much federal money did the pet banks hold at their peak?
The amount varied, but by 1836 the pet banks held tens of millions of dollars in federal deposits—a very large sum for that era. Exact figures are difficult to pin down because record-keeping was inconsistent, but the deposits were substantial enough that bank failures during the panic caused real damage to the federal government's finances.