What Is a Pet Bank? The History of Jackson’s Banks

The term “pet bank” refers to a significant and controversial financial phenomenon in early American history that emerged during the 19th century. These institutions played a notable role in shaping the development of the United States financial system, reflecting a period of intense debate over centralized banking versus state control. Their establishment marked a pivotal moment in the nation’s economic narrative, highlighting the ongoing tension between federal fiscal policy and the autonomy of state-chartered financial entities.

Defining “Pet Bank”

A “pet bank” was a pejorative term used to describe state-chartered banks specifically chosen by the U.S. Department of the Treasury to receive federal government deposits. These banks were not a new type of financial institution, but rather existing state banks that gained favor through their selection. Their primary role was to serve as repositories for substantial federal funds, distinguishing them from other state banks. The Treasury Department, under executive branch direction, conducted the selection process to house federal revenues and manage government disbursements. This arrangement distributed federal funds among various state institutions, departing from sole reliance on a national bank.

Historical Context and Establishment

The pet bank system originated from the “Bank War,” a struggle between President Andrew Jackson and the Second Bank of the United States. Jackson viewed the Second Bank as favoring elite interests and holding excessive power over the nation’s currency and credit. Distrusting centralized banking and believing in states’ rights, Jackson sought to undermine the Second Bank.

After his 1832 re-election, President Jackson ordered the removal of federal deposits from the Second Bank of the United States in 1833. These funds, totaling approximately $9 million to $10 million, were then placed into various state banks. This move aimed to weaken the Second Bank’s financial standing, contributing to its demise when its charter was not renewed in 1836. Jackson’s political opponents labeled these chosen state banks “pet banks.”

Operational Mechanics

Once selected, federal funds transferred from the Second Bank of the United States to these designated state institutions. The pet banks acted as depositories for government revenue, including tax collections and public land sales. They also disbursed government payments for federal projects or salaries. This influx of federal money provided these state banks with substantial capital, exceeding their previous deposit bases.

The large government deposits directly influenced the pet banks’ lending practices. With increased reserves, these institutions expanded credit offerings, making loans more readily available. This credit expansion facilitated the issuance of more paper money, as banks printed banknotes backed by their deposits. While this spurred economic activity, the volume of paper currency grew considerably, often without a corresponding increase in specie (gold and silver) reserves.

Economic Consequences

The pet bank system led to a rapid expansion of credit nationwide. Fueled by federal deposits, state banks increased lending and paper money issuance. This surge in the money supply contributed to inflationary pressures, as more currency chased a stable supply of goods and services. The increased availability of credit made it easier to borrow, leading to a boom in speculative investments.

A consequence was land speculation, particularly in the western territories. Individuals and companies borrowed heavily to purchase vast tracts of public land, anticipating quick profits as land values rose. The ease of obtaining loans and the proliferation of paper currency encouraged this speculative bubble. This environment of excessive credit and speculation created instability within the financial system, characterized by inflated asset prices and an economy reliant on unbacked paper money. These conditions laid the groundwork for a future financial downturn.

Dissolution of the System

The instability of the pet bank system led to its collapse. Recognizing speculative excesses and currency depreciation, President Jackson issued the Specie Circular in July 1836. This executive order mandated that all payments for public lands be made in gold or silver, or notes of equivalent value. The Specie Circular impacted pet banks by draining their specie reserves, as land speculators converted paper money to gold or silver, or found banknotes unacceptable for land purchases.

The sudden demand for specie exposed the fragile backing of many pet bank banknotes, leading to credit contraction. This, combined with other economic factors, contributed to the Panic of 1837, a financial crisis with widespread bank failures, business bankruptcies, and high unemployment. The panic demonstrated the vulnerabilities of a decentralized banking system without a strong central authority. In response, the U.S. government moved towards an Independent Treasury System, aiming to separate government funds from private banking institutions.