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What are Pet Banks?

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  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 21 September 2016
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“Pet banks” is a term most commonly used in reference to the economic operations of the United States in the 19th century. This term may also be used in any government where certain banks have a favorite status. In general, finance professionals don’t often refer to specific banks as pet banks in today’s financial world.

The original pet banks were also called wildcat banks. They resulted from a banking policy that involved a veto of the Second Bank of the United States by then president Andrew Jackson. Between 1816 and 1837, pet banks were given special status, and allowed to receive government surplus funds from the U.S. Department of the Treasury.

It’s important to note that the pet banks rarely succeeded, and that their end result was to flood the country with paper currency. The requirement of hard currency in the United States to purchase property resulted in an event that historians call the Panic of 1837, after which economic policy had to be adjusted. In the opinions of some financial experts, the crisis illuminated some of the general problems with favoring banking institutions, and with generating large amounts of “fiat money” not based on hard collateral.

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Some of the ideas involved in the legacy of pet banks are interesting to today’s financial experts. Some critics of current economic policy might make a correlation to today’s main private bank in the U.S., the Federal Reserve. The idea of printing excessive paper currency also has a potential connection to the current operations of the Federal Reserve.

In addition to United States policy, critics of economic policies in any nation might use the term pet banks to talk about private institutions that receive unequal treatment by a government. For example, if a federal government blatantly hands over policy-making control to banking representatives, allows banks to use federal currency in improper ways, or makes backroom deals with banks, political dissidents can reveal this kind of activity in formal protest of state governments.

The idea of pet banks relates closely to the issues of running a government in a fair and transparent manner that represents the best interests of the entire country. A look at this kind of banking also provides suggestions on how to balance economic policy to prevent financial crisis. Both of these issues are at the forefront of many government critiques all around the world, as nations deal with significant economic crises and how they affect the respective general populations.

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SkyWhisperer
Post 5

@NathanG - I don’t think the Federal Reserve prevents economic crisis. The Feds have a reputation of acting too little, too late, or doing too much. They’ve never been very good at accurately interpreting economic signals in my opinion.

I don’t say that we abolish it necessarily. But I think that we should seriously consider more deregulation so that private banks can lend without government intrusion.

Let’s not forget that it was government pressure on the private banks that caused them to overextend loans to mortgage applicants who were not qualified to receive those loans.

NathanG
Post 4

@everetra - Congress used to have power to coin and print money; that is if you want to bother following the Constitution.

If we really got back to what our founders intended that’s what we would be doing again, so in part I agree with you. The problem is that we abandoned the gold standard a long time ago.

So what is it that backs our paper currency? It’s nothing more than government decree. I say it’s time to restore banking powers to the legislative branch and get back to the gold standard.

everetra
Post 3

Count me in as one of those people who view the Federal Reserve system as fitting into today’s pet bank definition. The Federal Reserve has unparalleled authority to be able to print money out of thin air, virtual fiat power, and yet this institution has never been audited in its entire history.

The Federal Reserve is viewed as an entity unto itself, almost accountable to no one, although from time to time the Federal Reserve chairman is asked to speak before Congress.

While I won’t go so far as saying that we should abolish the Federal Reserve, I do think it’s time to rein it in, beginning with a full audit and a change to the way it operates.

It should not be allowed to make monetary policy on its own. Instead, it should be required to work in concert with the legislative branch to do so.

truman12
Post 2

@whiteplane - Interesting points and I think you draw a lot of fair parallels. But what I think this all points to is how often we repeat our mistakes in the economy. The constant boom and bust cycle that we have been in for most of this nations history is not because of some requirement that the economy break down. Rather it is the result of the fact that we do the same stupid things over and over again. We had pet banks then, we have pet banks now, we will have pet banks again.

whiteplane
Post 1

I was not familiar with the term pet banks until just now but it seems they have a pretty modern equivalent. We are living in the age of "too big to fail" and we have seen the lengths that the feds will go to to protect the banks that it believes are absolutely central to a functioning economy. Whether they are right is of course up for debate but it doesn't seem like the trend will change any time soon.

I was also really interested about the detail that pet banks flooded the markets with hard currency. This seems a lot like the banks of today flooding the market with securities that it knew were toxic and worthless.

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