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How did Republicans pick the elephant, and Democrats the donkey, to represent their parties?

They didn't pick these labels – they got stuck with them! Their origin as symbols for the parties is attributed to a political cartoonist, Thomas Nast, who used the donkey

"Third Term Panic" by Thomas Nast, Harper's Weekly, 1874.
and the elephant in cartoons drawn for Harper's Weekly in the 1870's. Why Nast chose the donkey and the elephant is a pretty complicated story.

One version traces it to the "Central Park Menagerie Scare of 1874," a hoax foisted on its readers by the New York Herald newspaper. The Herald ran a deliberately false story about animals breaking out of the zoo and foraging for food throughout Central Park. Around the same time, the Herald was running a series of editorials against a 3rd term for President Ulysses S. Grant, calling the possibility "Caesarism."

Nast combined these two elements together for the first time in an 1874 cartoon for Harper's Weekly. He had a donkey disguised as a lion trying to scare away the animals in a forest. The donkey was a symbol for the New York Herald; the lion-skin costume was a symbol for a scare tactic [the paper crying wolf with "Caesarism"], and the animals in the forest were the symbol for the newspaper's hoax about zoo animals in Central Park.

One of the animals frightened by the donkey's roar of Caesarism was an elephant – a symbol for Republican voters, who were abandoning President Grant, and in Nast's view, about to fall into the Democrats' trap. Other cartoonists of the time picked up the idea of the timid elephant representing Republicans, and that symbol for the party became widely recognized and accepted by the general public.

Although Nast's original interpretation used the donkey to stand in for a Democrat-leaning newspaper scaring away Republican voters, his cartoon showing a duplicitous donkey attacking a weak-minded elephant, became a handy symbol for other cartoonists wanting to represent Democrats attacking Republicans. Popular recognition of the image overrode the party's own wishes – the Democratic party has never officially adopted the donkey as its emblem, but came to accept the reality that the symbol had stuck.

Another explanation for the donkey as political symbol stems from the 1828 presidential campaign -- during which Andrew Jackson was labeled a "jackass," for his populist views. Jackson proudly seized the label and began using donkeys on his campaign posters. During his presidency, cartoonists sometimes used the donkey to illustrate President Jackson's stubbornness on certain issues. After Jackson, the donkey symbol largely faded, to be revived again by Thomas Nast in his 1870's cartoons.

Over time, Republicans came to view the elephant emblem as a sign of strength and intelligence, while their opponents portrayed it as a timid and clumsy behemoth. Democrats seized the "jackass" label, and transformed it into a clever and courageous donkey.

As is still true today, it's all in the spin

Information taken from http://www.c-span.org/questions/week174.htm