What are Pet Banks? Definition, Overview, 7 Facts

Pet banks is a disparaging phrase for the state banks chosen by the United States Department of the Treasury in 1833 to receive excess Treasury cash. Wildcat banks are occasionally mistaken with pet banks.

Although the two are separate sorts of businesses that emerged simultaneously, some pet banks have been known to participate in wildcat banking tactics. Continue reading to learn all you need to know.

What are Pet Banks?

“Pet banks” is a word most usually used to describe the economic activities of the United States throughout the 19th century. This word may also be applied in any country where particular financial institutions have favored status. In the modern financial sector, finance professionals rarely refer to certain banks as “pet banks.”

What are Pet Banks?

Origin Of Pet banks

The first pet banks were sometimes referred to as “wildcat banks.” Andrew Jackson, the president at the time, vetoed the Second Bank of the United States as part of his banking strategy. Between 1816 and 1837, pet banks were granted special status and permitted to collect surplus cash from the U.S. Department of the Treasury.

Understanding Pet Banks

It is vital to remember that the pet banks rarely worked, and their final purpose was to swamp the country with paper cash. The need for hard cash to acquire real estate in the United States precipitated the Panic of 1837, which necessitated an adjustment in economic policy.

According to the perspective of some financial experts, the crisis revealed some of the broader flaws with favoring banking institutions and with issuing massive sums of “fiat money” that is not backed by tangible assets.

The legacy of pet banks contains concepts that are intriguing to modern financial specialists. Some opponents of contemporary economic policies may draw parallels to the Federal Reserve, the largest private bank in the United States. The concept of producing extra paper currency may also be related to the Federal Reserve’s present operations.

What are Pet Banks?

Critics of economic policies in any nation may use the phrase “pet banks” to refer to private entities that receive unfair treatment from the government, in addition to the United States.

For instance, if a federal government blatantly cedes control over policymaking to banking representatives, allows banks to use federal currency in improper ways, or engages in backroom deals with banks, political dissidents can expose this type of activity in formal protests against state governments.

The concept of pet banks is strongly related to the difficulties of running a government in a fair and transparent manner that serves the nation’s best interests. Examining this type of banking gives insight into how to balance economic policies to avoid financial crises.

As governments cope with large economic problems and how they affect their respective general populations, both of these topics are at the forefront of many government critiques throughout the globe.

Why Pet Banks Were Created

To comprehend pet banks, we must examine why they were established and what they replaced. Therefore, we must examine the Bank of the United States, or BUS. The BUS was granted a twenty-year charter in 1817 with the mandate to stable the currency, collect tax revenues, and oversee the actions of the nation’s numerous smaller state and regional banks.

What are Pet Banks?

The BUS was nonetheless contentious. Many believed it to be illegal and that Congress lacked the authority to establish a central bank. In McCulloch v. Maryland, the Supreme Court maintained the BUS’s constitutionality, although many continued to dispute it.

As a privately owned vehicle, the BUS was likewise viewed with suspicion. The bank had twenty-five directors, but the government selected just five of them.

Setting the Stage for Pet Banks

Andrew Jackson was among those who lacked confidence in the BUS. In 1828, Jackson was elected president after running as a man of the people. According to him, the BUS represented elitism and had excessive control over America and Americans.

In fact, he distrusted all banks and paper currency, preferring gold and silver. In what would be known as the Bank War, he launched a mission to eliminate the BUS.

Although the bank’s charter was not set to expire until 1836, a measure to renew it four years early was brought to Congress in 1832, which was also an election year.

Jackson vetoed the measure, and when he was reelected, he interpreted it as a vote of confidence in his veto and mission to destroy the BUS, so he took dramatic action.

What are Pet Banks?

Pet Banks and Jackson’s Policy

The BUS may have existed for another four years, but Jackson took swift measures to eliminate it. In September 1833, he issued an executive order to the Secretary of the Treasury instructing him to remove all federal monies from the BUS and deposit them in twenty-three state banks favorable to his government.

These were known as pet banks. They gained the nickname “pet” because they were managed by Jackson’s political cronies. They were not selected based on their financial security.

The initial twenty-three pet banks were incapable of handling all of the federal cash, so more banks were founded.

Banks popped up everywhere seeking for charters and Jackson’s favor. Some of these pet bank institutions were financially stable, while others were not. No longer did they have a central bank to oversee their actions.

During this time, the Jackson administration desired to make it simpler and less expensive for individuals to purchase property, thus many banks began to adopt this approach.

Effects of the Pet Banks

Out West, many more banks popped up. These frontier wildcat banks were not pets, and they engaged in dangerous land speculation.

What are Pet Banks?

The pet banks were unable to regulate the wildcat banks, which created as much money as possible and issued loans indiscriminately. In addition to dangerous investments, pet banks were unable to stabilize the dollar’s value.

Conclusion

The phrase “pet banks” acquired popularity because the majority of banks were selected based on the spoils system, which rewarded friends and political supporters of Andrew Jackson with jobs in government.

Due in part to the inability of the 23 pet banks to handle all of the public’s funds, the majority of pet banks ultimately lost money and failed as investment vehicles. The nation was saturated with paper currency by pet banks and smaller “wildcat” institutions.

5/5 - (1 vote)
Pat Moriarty
Follow me

Leave a Comment