Pet Banks: Definition & Summary

Instructor: Erin Carroll

Erin has taught English and History. She has a bachelor's degree in History, and a master's degree in International Relations

In this lesson, you will learn about pet banks and why they were created. The lesson will also discuss the effects of the pet banks on the American economy.

Pet Banks Defined

Have you ever looked at a $20 bill? You'll see President Andrew Jackson on the bill, but if Jackson were alive, he probably wouldn't be too pleased about it. Jackson hated the central Bank of the United States, and in 1833 he killed it.

Andrew Jackson on the 20 Dollar Bill
Andrew Jackson on the 20 Dollar Bill

He took all of the money out of the central bank, and distributed it to many smaller state banks called pet banks. These pet banks failed to regulate the economy and contributed to a massive economic panic. This lesson will look closer at pet banks during Jackson's administration.

Why Pet Banks Were Created

In order to understand pet banks, we need to look at why they were created, and what they were replacing. That's why we need to look at the Bank of the United States, or BUS. Chartered in 1817, the BUS was given a twenty-year charter and the mission to stabilize the currency, collect tax revenues, and regulate practices of the many smaller state and regional banks around the country.

However, the BUS was controversial. Many felt it was unconstitutional, and that congress had no authority to create a central bank. The Supreme Court decision in McCulloch v. Maryland upheld the constitutionality of the BUS, but many continued to question it. The BUS was also distrusted because it was privately owned. The bank had twenty-five directors, but only five of those were chosen by the government.

Setting the Stage for Pet Banks

One such person who distrusted the BUS was Andrew Jackson. Jackson, running as a man of the common people, was elected President in 1828 . To him, the BUS symbolized elitism and had too much power over America and Americans. In fact, he distrusted all banks and paper money believing only in specie, or gold and silver. He began a quest to get rid of the BUS in what would be called the Bank War.

Although the bank's charter was not due to run out until 1836, a bill was sent to Congress to renew its charter four years early in 1832, which also happened to be an election year. Jackson vetoed that bill, and when he was reelected, he saw it as an endorsement of his veto and quest to kill the BUS, so he took decisive action.

Pet Banks and Jackson's Policy

The BUS could still exist for four more years, but Jackson took action to kill it off immediately. In September 1833, he issued an executive order to the Secretary of the Treasury to take all of the federal funds out of the BUS and deposit them into twenty-three state banks that were friendly to his administration. These banks were called pet banks. They earned the name 'pet' because Jackson's political allies ran them. They were not chosen based on financial stability.

These original twenty-three pet banks could not handle all of the federal funds, so more banks were chartered. Everywhere banks sprang up begging for charters and Jackson's favor. Some of these pet banks were financially sound, but others were not. And now they had no central bank to regulate their practices. Meanwhile, the Jackson administration wanted to make it easier and cheaper for people to buy land, so many banks began to follow this policy.

Effects of the Pet Banks

Out West, even more banks sprang up. These wildcat banks were not pets, and they were involved in risky land speculation on the frontier. The pet banks could not regulate the wildcat banks, which printed as much money as possible and gave out loans left and right. Pet banks were also making risky investments, and could not stabilize the dollar's value.

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