What Are Pet Banks? Understanding Jackson’s Controversial Policy

The tumultuous era of the 1830s in America was marked by significant political and economic upheaval, largely centered around President Andrew Jackson’s opposition to the Second Bank of the United States. A key element of Jackson’s strategy to dismantle the national bank involved the controversial transfer of federal funds to state-chartered banks, famously known as “pet banks.” These institutions became central to the economic debates of the time and are considered by many historians to have played a significant role in the subsequent Panic of 1837. Understanding What Are Pet Banks is crucial to grasping the complexities of Jacksonian America and its lasting impact on the U.S. financial system.

Defining Pet Banks in the Jacksonian Era

So, what are pet banks? The term “pet banks” refers to state banks that were selected by the U.S. Department of Treasury to receive surplus federal funds beginning in 1833, during Andrew Jackson’s presidency. This selection process occurred after Jackson decided to cripple the Second Bank of the United States by removing government deposits. These banks were labeled “pet banks” because critics argued they were chosen not based on merit but due to their political connections and loyalty to Jackson’s administration and the Democratic Party. The term itself carries a negative connotation, suggesting favoritism and cronyism in the handling of public funds.

Prior to the rise of pet banks, the Second Bank of the United States served as the depository for federal government revenue. Established in 1816, the national bank was intended to stabilize the nation’s currency and manage government finances effectively. However, President Jackson, along with a significant portion of the American public, harbored deep distrust towards centralized banking institutions, viewing them as tools of the elite and potentially corrupt.

The Bank War and the Rise of Pet Banks

Jackson’s animosity towards the Second Bank was well-documented and fueled by a broader philosophical opposition to banks and paper money. He believed in hard currency – gold and silver – and saw banks, particularly a powerful national bank, as instruments of a “monied aristocracy” that threatened the liberty of ordinary citizens. This perspective was rooted in Jeffersonian ideals of limited government and agrarianism, as well as personal experiences with financial difficulties early in his life.

Jackson’s “Bank War” began to escalate when the Second Bank, under President Nicholas Biddle, sought an early recharter in 1832, four years before its original charter was set to expire. Henry Clay, a political opponent of Jackson and a proponent of the Bank, advised Biddle to pursue recharter, believing that Jackson would be politically cornered into signing the bill or face public backlash. Clay and Biddle miscalculated Jackson’s resolve and the public sentiment.

In July 1832, Congress passed the recharter bill, but Jackson promptly vetoed it. His veto message was a powerful populist statement against the bank, arguing it was unconstitutional, monopolistic, and detrimental to the common man. Jackson successfully framed the bank as a symbol of privilege and corruption, contrasting it with his image as a defender of the people.

The bank recharter veto became a central issue in the 1832 presidential election, where Jackson decisively defeated Clay. Jackson interpreted his victory as a mandate to destroy the Bank. Having won the political battle, Jackson turned to undermining the Bank’s financial power. In 1833, he made the controversial decision to remove federal government deposits from the Second Bank.

The law stipulated that the Secretary of the Treasury was responsible for government deposits, providing some degree of autonomy from presidential directives. However, Jackson was determined to execute his plan. He initially faced resistance from Treasury Secretaries Louis McLane and William J. Duane, both of whom were hesitant to remove the deposits. McLane was moved to Secretary of State, and Duane was eventually dismissed for refusing to comply with Jackson’s orders.

Finally, in September 1833, Roger B. Taney, who was appointed as the new Treasury Secretary and shared Jackson’s anti-bank views, issued the order to cease depositing federal funds into the Second Bank and to begin withdrawing existing deposits as needed for government expenditures. The withdrawn funds, and all future federal revenues, were to be deposited in selected state banks – these became known as “pet banks.”

Operation and Characteristics of Pet Banks

These “pet banks” were essentially state-chartered banks chosen by the Treasury Department to hold federal deposits. The criteria for selection were purportedly based on the financial soundness and stability of these state institutions. In practice, however, political considerations often played a significant role. Banks with Democratic leanings and connections to the Jackson administration were favored, reinforcing the “pet” designation and criticism of political favoritism.

The Jackson administration argued that these state banks were more responsive to local needs and less prone to the abuses of power associated with a large national bank. They also promoted the idea that a decentralized banking system, relying on state-level institutions, was more in line with republican principles and states’ rights.

However, the pet bank system had several inherent weaknesses. Unlike the Second Bank of the United States, which had a national charter and some degree of federal oversight, pet banks were regulated by state laws, which varied significantly in stringency and effectiveness. This lack of uniform regulation created a fragmented and potentially unstable banking environment.

Furthermore, the influx of federal deposits into pet banks encouraged them to expand their lending practices. With increased reserves, these banks issued more loans and banknotes, fueling speculative booms, particularly in land. This expansion of credit and paper money contributed to inflationary pressures in the economy. Critics argued that pet banks, lacking the regulatory oversight and centralizing influence of a national bank, were prone to excessive risk-taking and contributed to financial instability.

Pet Banks and the Panic of 1837

The consequences of the pet bank system became starkly evident with the Panic of 1837, a severe economic recession that gripped the United States. While the Panic had multiple contributing factors, including international economic conditions and speculative excesses, the role of pet banks and Jackson’s banking policies is widely debated and often cited as a significant factor.

The removal of deposits from the Second Bank and their redistribution to pet banks weakened the central bank’s ability to regulate credit and maintain financial stability. The Second Bank had previously acted as a quasi-central bank, restraining the lending practices of state banks by regularly demanding specie (gold and silver) in exchange for their banknotes, thus limiting excessive note issuance. With its power diminished and federal deposits transferred, this regulatory mechanism weakened.

The Specie Circular of 1836, issued by the Jackson administration, further exacerbated the situation. This executive order required payment for public lands to be made in gold or silver, aiming to curb land speculation and promote hard currency. However, it had the unintended consequence of draining specie from Eastern banks and concentrating it in the West, further straining bank reserves.

When a downturn in international trade and a contraction of credit from Britain occurred in 1837, the fragile U.S. banking system, already weakened by the pet bank system and the Specie Circular, was unable to withstand the pressure. Banks, including many pet banks, lacked sufficient specie reserves to meet demands for redemption of banknotes. In May 1837, banks across the nation, starting in New York City, began to suspend specie payments, meaning they refused to convert banknotes into gold or silver. This suspension triggered a widespread financial panic, bank failures, business bankruptcies, and a prolonged economic depression.

Legacy and Criticism of Pet Banks

The pet bank experiment is generally considered a failure, contributing to financial instability and ultimately leading to a severe economic crisis. Critics argue that the system was inherently flawed due to its political motivations, lack of effective regulation, and contribution to speculative excesses. The absence of a strong central bank to oversee and regulate the banking system was keenly felt during the Panic of 1837, highlighting the potential dangers of a decentralized and politically influenced banking structure.

While Jackson and his supporters believed they were championing democracy and curbing the power of a corrupt financial elite, the pet bank system inadvertently created new problems and arguably worsened the financial landscape of the United States. The Panic of 1837 underscored the need for a more robust and regulated banking system, although debates about the role of a national bank continued for decades to come.

The term “pet bank” remains a historical marker of a contentious period in American financial history, serving as a cautionary tale about the potential pitfalls of politically motivated financial policies and the importance of sound banking regulation. Understanding what are pet banks offers valuable insights into the economic and political battles of the Jacksonian era and their enduring lessons for modern financial systems.

For Further Reference:

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19. Merrill D. Peterson, The Great Triumvirate: Webster, Clay and Calhoun, p. 206.
20. John Steele Gordon, An Empire of Wealth: The Epic History of American Economic Power, pp. 126-127.
21. Paul Finkelman and Donald R. Kennon, editors, Congress and the Emergence of Sectionalism from the Missouri Compromise to the Age of Jackson, p. 193 (Jenny B. Wahl, “He Broke the Bank, but Did Andrew Jackson also Father the Fed?”).
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44. (Letter from Henry Clay to Nicholas Biddle, September 11, 1830).
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66. (Letter from Nicholas Biddle to Henry Clay, August 1, 1832).
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74. (Andrew Jackson, Bank Veto Message, July 10, 1832).
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