Pet banks were state banks that the federal government used to hold and spend public money after Andrew Jackson shut down the Second Bank of the United States in 1833.

When Jackson ordered the withdrawal of federal deposits from the Second Bank of the United States, the Treasury needed somewhere else to put that money. Instead of creating a new federal bank, Jackson's administration distributed the deposits across dozens of state-chartered banks—mostly ones friendly to the Democratic Party. These banks became known as "pet banks" because they were chosen for political loyalty rather than financial strength or geographic need.

The system worked like this: the federal government would deposit tax revenue and other public funds into these selected state banks. The banks could then lend that money out to businesses and individuals, keeping the interest earned. In return, they were expected to be reliable custodians of federal money and to support the administration's political goals. By 1836, the Treasury had distributed deposits across more than 80 state banks, scattered from Maine to Missouri.

Key Takeaways

  • Pet banks were state-chartered banks chosen by Andrew Jackson's administration to hold federal deposits after he closed the Second Bank of the United States in 1833.
  • The banks were selected primarily for political loyalty to the Democratic Party, not for financial stability or banking informed.
  • Federal money deposited in pet banks could be lent out at the banks' discretion, allowing them to profit while holding public funds.
  • The system collapsed during the financial panic of 1837, when many pet banks failed and the federal government lost access to its own money.
  • Pet banks demonstrated the dangers of mixing politics with banking and influenced how the federal government manages its money today.

Why Jackson closed the Second Bank and created the pet bank system

The Second Bank of the United States, chartered in 1816, was a private corporation that acted as the federal government's banker. It held government deposits, managed the currency, and regulated state banks through its control of credit. Jackson and his supporters saw it as a tool of wealthy Eastern interests and a threat to state sovereignty and democratic control of money.

Jackson's first term focused on attacking the bank's legitimacy. When the bank's charter came up for renewal in 1832, Jackson vetoed the rechartering bill, calling the bank unconstitutional and dangerous. He won reelection on this issue in 1832 with strong popular support. In his second term, Jackson ordered Treasury Secretary Louis McLane (and later Roger Taney) to withdraw all federal deposits from the Second Bank and place them in state banks instead.

The Second Bank's charter expired in 1836, and the institution was liquidated. By then, federal money was already flowing through dozens of state banks. Jackson believed state banks would be more responsive to local needs and less likely to concentrate financial power in the hands of a few wealthy men.

How the pet bank system actually worked

When the Treasury deposited federal money into a pet bank, that bank became the custodian of public funds. The bank could use that money for its own lending operations—making loans to farmers, merchants, and manufacturers—as long as it kept enough on hand to meet federal withdrawal requests. The interest earned on those loans was the bank's to keep.

This created an obvious conflict of interest. A bank holding $500,000 in federal deposits could lend out most of that money and pocket the interest, while the federal government earned nothing. The bank had an incentive to lend aggressively to maximize profits, even if those loans were risky. There was no federal insurance, no regulatory oversight, and no requirement that the banks maintain reserves proportional to their deposits.

The system also became a tool of political patronage. Banks that supported Jackson's policies and the Democratic Party received deposits. Banks that opposed him or supported the Whig Party were excluded. This meant that a bank's access to federal money depended partly on its political alignment, not solely on its financial soundness or location.

The financial collapse that ended the pet bank era

The pet bank system accelerated inflation and speculation in the early 1830s. With federal money flowing into state banks, credit became cheap and abundant. Land prices soared, especially in the West. Banks lent freely on the assumption that land values would keep rising forever. Speculators borrowed heavily to buy western property.

In 1836, Jackson issued the Specie Circular, an executive order requiring that federal land sales be paid for in gold or silver rather than paper currency. This sudden shift shocked the market. Speculators who had borrowed paper money to buy land now had to find gold or silver to pay for it. Demand for specie spiked, and banks began to fail because they did not have enough gold and silver on hand to meet withdrawal requests.

The panic of 1837 hit hard. Dozens of pet banks collapsed. The federal government, which had deposited millions of dollars across these institutions, lost access to its own money. Some funds were recovered eventually, but others were lost entirely when banks failed. The crisis revealed that the pet bank system had no safeguards against bank failure and no way to protect public funds.

What happened to the pet banks after 1837

The pet bank system was abandoned during the panic of 1837 and never formally revived. The federal government eventually moved toward keeping its money in an independent Treasury—a system of federal vaults and depositories that did not rely on private banks. The Independent Treasury Act, passed in 1846, created a network of federal offices to hold and disburse government money directly.

Some pet banks survived the panic and continued operating as ordinary state banks. Others failed and closed. The banks that survived did so because they had been more conservative in their lending or had access to additional capital from their owners. But none of them retained the special status they had enjoyed under Jackson.

The pet bank episode became a cautionary tale in American financial history. It showed that mixing politics with banking, allowing private institutions to profit from public deposits without oversight, and concentrating federal money in weak institutions could lead to disaster. These lessons influenced debates about banking regulation for decades afterward.

How the pet bank system shaped modern federal banking

The failure of pet banks led to a fundamental shift in how the federal government manages its money. Rather than trusting private banks with federal deposits, the government created its own system of Treasury offices and vaults. This separation of government money from private banking operations became a core principle of American finance.

The pet bank experience also contributed to arguments for a stronger federal banking system. While Jackson had opposed the Second Bank as a threat to democracy, the chaos of the pet bank era and the panic of 1837 showed that having no federal bank at all created its own problems. The National Banking Acts of 1863 and 1864 created a new system of federally chartered banks with federal oversight, though these were still private institutions.

Today, the federal government does not deposit its money in private banks the way it did with pet banks. The Federal Reserve, created in 1913, serves as the government's banker. Federal funds are held in Treasury accounts and Federal Reserve banks, not in private commercial banks chosen for political reasons. The principle that public money should be separated from private banking interests, learned painfully during the pet bank era, remains embedded in how American finance works.

Frequently Asked Questions

Why were they called "pet banks"?

The term "pet banks" was used by critics and opponents of Jackson's policy, who saw the banks as his political favorites—pets that received federal money in exchange for loyalty. The name stuck because it captured the reality that banks were chosen for political reasons rather than financial merit. Supporters of the system did not use the term; they called them "deposit banks" or straightforward "state banks."

Did the pet banks actually fail because they were poorly run?

Some pet banks were poorly managed, but the system itself was the real problem. Even well-run banks could not survive when they were required to hold federal deposits that could be withdrawn suddenly, while also being expected to lend out most of that money. The panic of 1837 created a liquidity crisis that would have damaged even conservative banks. The lack of federal oversight and insurance meant there was no safety net.

Could a system like pet banks happen again today?

No. Modern banking regulations, federal deposit insurance, and the Federal Reserve system all exist partly because of lessons learned from the pet bank era. The federal government now holds its money in Federal Reserve banks and Treasury accounts, not in private commercial banks. Private banks that hold government money must meet strict capital and reserve requirements. The separation of government money from private banking is now a legal requirement, not just a policy preference.

Did Andrew Jackson intend for the pet bank system to fail?

Jackson intended to weaken the Second Bank and shift financial power to state institutions and local communities. He did not foresee the panic of 1837 or the collapse of the pet banks. By the time the crisis hit, Jackson had left office. His successor, Martin Van Buren, inherited the financial disaster and had to manage the fallout. Jackson's opposition to centralized banking was ideological, but the pet bank system proved that his alternative was not workable without federal oversight.