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Putin’s Syrian withdrawal announcement: neither a full Russian withdrawal nor victory in Syria

Putin’s withdrawal announcement does not spell the end of Russian involvement in Syria or signal the end of the war in Syria

Alexander Mercouris

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President Putin’s brief stop-over visit to Russia’s Khmeimim air base in Syria is in danger of being over-analysed.

At a time when President Putin is undertaking a tour of the Middle East it would have been politically speaking extremely unwise for him not to have made a stop-over to meet the Russian troops at the Khmeimim air base whom Putin himself sent to Syria.

A failure to do so might have conveyed the impression that Putin takes these troops for granted, an impression which Putin is far too good a politician to want to give.

No Soviet leader – not Brezhnev or Gorbachev – ever visited the Soviet troops sent by the USSR to Afghanistan in the 1980s.

That however was at a time when the USSR did not have competitive elections.  With Russia due to hold Presidential elections in March Putin cannot afford to appear as indifferent to the Russian troops in Syria as the Soviet leaders were towards the Soviet troops they had sent to Afghanistan.

Doing so would make a very bad impression, not just amongst the troops themselves but also across the whole Russian military and with the troops’ families.

With Russia’s military – including Russia’s military families – constituting one of Putin’s strongest electoral constituencies, needlessly annoying them is not a mistake Putin is going to make just three months before he stands for re-election as Russia’s President.

That this was the reason for Putin’s visit to Khmeimim air base and for his making his withdrawal announcement is shown by what he said to the troops when he was there.

In order to show this I will reproduce these comments here in full as the Kremlin’s website reports them

The most important thing for a military person – and we are very much aware of this – is the defence of our Fatherland, our people. This is not just the purpose of military service, but also the purpose of life for those who have devoted themselves to serving their people.

At the same time, a soldier is truly tested for loyalty to the Fatherland in a military operation fraught with huge risks to life and health. Here, in Syria, far from home, you are doing exactly that – you are protecting our country.

By helping the people of Syria to maintain their statehood, to fight off attacks by terrorists, you have inflicted a devastating blow to those who have directly, brazenly and openly threatened our country.

We will never forget the sacrifices and losses incurred in the struggle against terrorism both here in Syria and in Russia. However, it will not make us fold our hands and retreat. This is not in our peoples’ nature.

On the contrary, this memory will continue to motivate us to eradicate this absolute evil – terrorism – whatever face it hides behind.

Yes, the threat of terrorism around the world is still very high. However, the task of combating the armed groups here in Syria, the goal that needed to be addressed with the help of the large-scale use of the armed forces, has been largely resolved – and brilliantly resolved. Congratulations!

Our Armed Forces and our defence contractors have shown the growing power of the Russian Army and Navy, and the high combat capability of the various military units.

Pilots, sailors, members of special forces, reconnaissance, troop-control and logistic support units, military police, medical personnel, field engineers and advisers working in the battle units of the Syrian Army have displayed the best qualities of Russian soldiers, such as courage, heroism, combat cohesion, determination, as well as excellent training and professionalism.

The Homeland is proud of you. I am convinced that you will always faithfully serve the Fatherland, defend and uphold our national interests, our country and its people.

Syria has been preserved as a sovereign and independent state. Refugees are returning to their homes. Favourable conditions have been created for a political settlement under the UN. The Russian Centre for the reconciliation of opposing sides in Syria continues to operate in line with international agreements.

The two bases, in Tartous and Khmeimim, will continue to operate on a permanent basis. If the terrorists raise their heads again, we will deal unprecedented strikes unlike anything they have seen.

In just over two years, the Russian Armed Forces and the Syrian Army have defeated the most combat-ready group of international terrorists. In this connection, I have decided to redeploy most of the Russian military contingent from the Syrian Arab Republic to Russia.

You are returning victorious to your homes, your families, parents, wives, children and friends.

I hereby order the Defence Minister and the General Chief of Staff to start redeploying units of the Russian army group to their permanent bases.

The Homeland is waiting for you, friends. Godspeed! Thank you for your service.

The key point is that Russia’s deployment to Syria was a controversial step in Russia, including amongst Russia’s military.

As The Saker for one has repeatedly and correctly pointed out the Russian military unlike the US military is not structured to intervene constantly abroad but is overwhelmingly focused on a single mission, which is the defence of the Russian homeland ie. of Russia itself.

The Saker summed it up perfectly with these words written in an article which can be found here

The legal purpose of the Russian Armed Forces.

The Federal Law N61-F3 “On Defense”, Section IV, Article 10, Para 2 clearly states that the mission of the Russian Armed Forces is to

repel aggression against the Russian Federation, the armed defence of the integrity and inviolability of the territory of the Russian Federation, and to carry out tasks in accordance with international treaties of the Russian Federation“. 

That’s it.  Defend the territory of Russia or to carry out tasks in accordance to ratified treaties.  These are the sole functions of the Russian Armed Forces.

The Russian Constitution, Chapter IV, Article 80, Para 2 clearly states that

The President of the Russian Federation shall be guarantor of the Constitution of the Russian Federation, of the rights and freedoms of man and citizen. According to the rules fixed by the Constitution of the Russian Federation, he shall adopt measures to protect the sovereignty of the Russian Federation, its independence and state integrity, ensure coordinated functioning and interaction of all the bodies of state power“.

Now, for an American used to having, on average, about one new war every year, this might seem mind boggling, but the Russian Federation has absolutely no desire to become an “anti-USA” and get involved in constant military operations abroad.  Not only that, but the laws of the Russian Federation specifically forbid this.

Russia is not the world’s policeman, she does not have a network of 700-1000 bases worldwide (depending on your definition of ‘base’) but an army specifically designed to operate within 1000km or less from the Russian border and the President does not have the legal mandate to use the Russian armed forces to solve foreign crises.

Deployment of Russian troops relatively far from the Russian homeland to a place like Syria is for the Russian military a considerable departure from its normal role, and is something which has to be explained carefully if it is to attract support.

Putin has succeeded in doing this because he has explained carefully to the Russian military and to the Russian people that this deployment is actually in defence of Russia itself, since the Jihadist terrorist groups Russia is fighting in Syria are a threat to Russia.

The Russians have had to fight a bitter war against Jihadism on their own territory in the northern Caucasus during the 1990s and the 2000s, and have also suffered sustained Jihadi terrorist attacks on their main cities on a scale that no Western country – not even the US – has experienced.

No Russian wants to go through that again, so it was not difficult to persuade most Russians that preventing the establishment of a Jihadi enclave in Syria which might become a springboard for a Jihadist terrorist offensive against Russia was for Russia an urgent security interest.

Maybe the intervention in Syria also serves other purposes, though I personally doubt it.  However it is important to stress that this was the reason Putin gave to justify the intervention to the Russian military and to the Russian people, and why they agreed to support it.

However though most Russians – including critically the great majority of Russians serving in the military – have understood and accepted the need for the Syrian intervention and have supported it, it most definitely is not a war which the Russian people have enthusiastically embraced, and which they wish to see perpetuated indefinitely.

A comparison of Russian attitudes towards the conflicts in Ukraine and Syria illustrates the point.

Whilst there is no shortage of men in Russia who are willing to go and fight as volunteers to protect the Russian speaking people of the Donbass – regarded by all Russians as their kith and kin – there has been no similar flood of volunteers signing up to fight the Jihadis in Syria.

On the contrary most Russians – including those who serve in the military – want to see the war in Syria ended as soon as possible, and the troops once their mission is successfully accomplished quickly brought home.

Putin understands this completely, and this explains many of the things he said in his address to the troops at Khmeimim air base.

Thus the address begins with an acknowledgement that for Russian soldiers

…..the most important thing….is the defence of our fatherland, our people.

(bold italics added)

Compare those words with The Saker’s words quoted above.

The address then went on to repeat that this is a war carried out in defence of Russia

By helping the people of Syria to maintain their statehood, to fight off attacks by terrorists, you have inflicted a devastating blow to those who have directly, brazenly and openly threatened our country.

(bold italics added)

Note that flowery language of the sort beloved by US or Western leaders about defending things such as ‘values’ and ‘freedom’ and ‘democracy’ appear nowhere in Putin’s address.  Not only does Putin have no time for such language but the Russian troops he was addressing have no time for it either.

Having then congratulated the troops on their victory Putin then went on to fulfil what the troops and their families consider to be the explicit promise which was made to them when they were sent to Syria: that at the earliest possible opportunity they would be brought home

You are returning victorious to your homes, your families, parents, wives, children and friends.

I hereby order the Defence Minister and the General Chief of Staff to start redeploying units of the Russian army group to their permanent bases.

The Homeland is waiting for you, friends. Godspeed! Thank you for your service.

(bold italics added)

Given that the war in Syria is now visibly winding down, politically speaking it would have been risky for Putin on the eve of an election to have done otherwise.

If all this explains the reasons for Putin’s visit to Khmeimim air base and his withdrawal announcement, it is nonetheless in no sense the end of the affair.

The war in Syria is not over and it is not won.  Though ISIS’s back has been broken, it is still a force under arms in rural Deir Ezzor where it has recently taken the offensive against the US’s Kurdish allies.

In addition hundreds of ISIS fighters are still roaming free in the desert regions of central Syria even if they no longer control any important towns there.  These bands of fighters still pose a significant security threat, and will continue to do so for some time.

Further west Syria’s Idlib province remains under Jihadi control.

Worse still, there is now growing evidence that ISIS is trying to redeploy as many of its fighters as it can from central and eastern Syria to Idlib province.

With the Syrian military as always heavily over-stretched and still not in full control of much of the countryside it seems that this apparently planned redeployment of ISIS fighters from central and eastern Syria to Idlib province is not only taking place, but that it is actually meeting with some success.

Recently there have been reports of bitter fighting in Idlib province between Al-Qaeda – previously in undisputed control of the province – and the ISIS fighters who are being redeployed there from central and eastern Syria.  Moreover it seems that with Al-Qaeda severely weakened because of the massive losses it suffered last year in the Great Battle of Aleppo, it is ISIS which is gaining the upper hand in this fighting.

Whilst it is probably still alarmist to say that ISIS’s caliphate which has been driven out of Raqqa, central Syria and Deir Ezzor is now in the process of reconstituting itself in Idlib, the possibility that something like that might happen is certainly there, and the Russians cannot be unaware of it.

Elsewhere there are still significant pockets of Jihadi resistance in south western Syria, especially in the Golan Heights and near Damascus, whilst the Syrian government still faces a serious problem with the US-backed Kurds who currently control around a fifth of Syria’s territory in the north.

Last but not least there are still thousands of US troops in Syria, uninvited and potentially dangerous, with no one outside the Pentagon and CENTCOM knowing exactly how many of them there are.

Though victory in Syria is therefore now in sight, it is premature to declare it, as Putin did in his comments to the troops in Khmeimim air base.

As it happens Putin’s comments show that he knows this perfectly well.  How else to explain comments like this?

We will never forget the sacrifices and losses incurred in the struggle against terrorism both here in Syria and in Russia. However, it will not make us fold our hands and retreat. This is not in our peoples’ nature.

On the contrary, this memory will continue to motivate us to eradicate this absolute evil – terrorism – whatever face it hides behind…..

The two bases, in Tartous and Khmeimim, will continue to operate on a permanent basis. If the terrorists raise their heads again, we will deal unprecedented strikes unlike anything they have seen.

(bold italics added

Those familiar with the history of the Syrian war know that we have been here before.

In March 2016, shortly after the Russians negotiated a cessation of hostilities agreement in Syria with the US, Putin announced a very similar draw down of Russian troops from Syria.

In the event within weeks it had become clear that the cessation of hostilities agreement with the US was a dead letter.  After a short break Jihadi attacks on Syrian military positions resumed, and the Russians were obliged to reverse their drawn down and escalate again their air campaign.  The Great Battle of Aleppo and the struggle against ISIS in Palmyra, central Syria and Deir Ezzor followed.

With both Al-Qaeda and ISIS routed conditions for a drawn down are more favourable this time.  However Putin’s comments show that the Russians stand ready to reverse the drawn down if the need arises, just as they did before.

As for peace in Syria, that will only be achieved when fighting in Syria finally stops, with all the Jihadis there having been either killed or forced to lay down their arms, and with all of Syria’s territory which was previously under Jihadi or Kurdish control once more returned to the control of the Syrian government in Damascus.

Only then will it be possible to declare victory in Syria.

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Macron pisses off Merkel as he tries to sabotage Nord Stream 2 pipeline (Video)

The Duran – News in Review – Episode 177.

Alex Christoforou

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The Duran’s Alex Christoforou and Editor-in-Chief Alexander Mercouris discuss an EU compromise for Nord Stream 2 where EU member states, the EU Parliament, and its Commission will give the bloc more oversight on gas pipelines, with one caveat…the Nord Stream 2 project with Russia will not be threatened by the new regulations in the agreement.

Macron pushed hard to have the new regulations include (and derail) Nord Stream 2, an action which annoyed Angela Merkel, who eventually got her way and delivered another blow to Macron’s failing French presidency.

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Via The Express UK

Angela Merkel hit back at Emmanuel Macron over Russia and Germany’s pipeline project, declaring it would “not be a one-sided dependency”. The German Chancellor explained that Germany will expand its gas terminals with “liquified gas”. Speaking at a press conference, Ms Merkel declared: “Do we become dependent on Russia because of this second gas pipeline? I say no, if we diversify. Germany will expand its gas terminals with liquefied gas.

“This means that we do not want to depend only on Russia, but Russia was a source of gas in the Cold War and will remain one.

“But it would not be one-sided dependency.”

Via DW

The EU parliament and its Council are set to adopt new regulations on gas pipelines connecting the bloc members with non-EU countries, the EU Commission announced early on Wednesday.

The upcoming directive is based on a compromise between EU member states and EU officials in Brussels. The bloc leaders agreed to tighten Brussels’ oversight of gas delivery and expand its rules to all pipelines plugging into the EU’s gas distribution network.

“The new rules ensure that… everyone interested in selling gas to Europe must respect European energy law,” EU Energy Commissioner Miguel Arias Canete said in a statement.

For example, owners of pipelines linking EU and non-EU countries would also be required to allow access for their competitors. Brussels would also have more power regarding transparency and tariff regulations.

Russian ambassador slams US

Brussels has repeatedly expressed concern over the controversial Nord Stream 2 project which would deliver Russian gas directly to Germany through a pipeline under the Baltic Sea. Many EU states oppose the mammoth project, and the US claims it would allow Moscow to tighten its grip on the EU’s energy policy.

Berlin has insisted that the pipeline is a “purely economic” issue.

Speaking to Neue Osnabrücker Zeitung daily, Russian ambassador to Berlin, Sergey Nechayev, slammed the US’ opposition as an attempt to “push its competition aside” and clear the way for American suppliers of liquefied gas.

“It’s hard to believe that a country that is destroying the rules of free and fair trade, that is imposing import tariffs on its competition, that is flying slogans like ‘America First’ on its flags and often threatens biggest European concerns with illegal sanctions, is now really concerned about European interests,” the Russian envoy said in remarks published in German on Wednesday.

Last week, France unexpectedly rebelled against the project, but Berlin and Paris soon reached a compromise. Thanks to their agreement, the latest deal is not expected to impede the ongoing construction of Nord Stream 2.

Citing sources from negotiators’ circles, German public broadcaster ARD reported that the deal left room for Germany to approve exceptions from the EU-wide rules.

According to the EU Commission, however, exceptions are “only possible under strict procedures in which the Commission plays a decisive role.”

The Gazprom-backed pipeline is set to be completed by the end of the year.

 

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UK Defence Secretary looking for a fight with both China and Russia (Video)

The Duran Quick Take: Episode 87.

Alex Christoforou

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The Duran’s Alex Christoforou and Editor-in-Chief Alexander Mercouris discuss UK Defence Secretary Gavin Williamson’s idea to deploy hard power against China and Russia, starting with plans to send Britain’s new aircraft carrier to the tense sea routes in the South China Sea.

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“Britain’s Gavin Williamson places Russia & China on notice, I’m not joking,” authored by John Wight, via RT

UK Defence Secretary Gavin Williamson is itching for conflict with Russia and China. He’s not mad. Not even slightly. But he is stupid. Very.

Unlike former fireplace salesman Gavin Williamson, I am no military expert. But then you do not need to be one to understand that while Britain going to war with Russia and China might work as a video game, the real thing would be an exceedingly bad idea.

So why then in a speech delivered to the Royal United Services Institute in London, did Mr Williamson’s argument on the feasibility of the real thing elicit applause rather than the shrieks of horror and demands he be sacked forthwith it should have? This is a serious question, by the way. It is one that cuts through British establishment verbiage to reveal a country ruled not by the sober and doughty political heavyweights of years gone by, but by foaming fanatics in expensive suits

Placing to one side for a moment the insanity of the very concept of Britain deploying hard power against Russia and/or China, the prospect of fighting a war against two designated enemies at the same time is a recipe for disaster. Not satisfied with that, though, Mr Williamson is actually contemplating a conflict with three different enemies at the same time – i.e. against Russia, China, and the millions of people in Britain his government is currently waging war against under the rubric of austerity.

“Today, Russia is resurgent,” Mr Williamson said, “rebuilding its military arsenal and seeking to bring the independent countries of the former Soviet Union, like Georgia and Ukraine, back into its orbit.”

For Mr Williamson and his ilk a resurgent Russia is a bad thing. Much better in their eyes if Russia, after the Soviet era in the 1990s, had remained on its knees as a free market desert; its state institutions in a state of near collapse and tens of millions of its citizens in the grip of immiseration. Yes, because in that scenario Western ideologues like him would have had free rein to rampage around the world as they saw fit, setting fire to country after country on the perverse grounds of ‘saving them’ for democracy.

As it is, he and his still managed to squeeze in a considerable amount of carnage and chaos in the years it did take Russia to recover. The indictment reads as follows: Yugoslavia destroyed; Afghanistan turned upside down; Iraq pushed into the abyss; Libya sent to hell.

By the time they turned their attention to Syria, intent on exploiting an Arab Spring that NATO in Libya transformed into an Arab Winter, Russia had recovered and was able to intervene. It did so in concert with the Syrian Arab Army, Iran and Hezbollah to save the day – much to the evident chagrin of those who, like Gavin Williamson, prefer to see countries in ashes rather than independent of Western hegemony.

As to the facile nonsense about Russia trying to bring Georgia and Ukraine back into its orbit, both countries happen to share a border with Russia and both countries, in recent years, have been used by the UK and its allies as cat’s paws with the eastward expansion of NATO in mind.

It gets worse though: “The Alliance must develop its ability to handle the kind of provocations that Russia is throwing at us. Such action from Russia must come at a cost.”

“Provocations,” the man said. Since British troops have been taking part in exercises on Russia’s doorstep, not the other way round, one wonders if Gavin Williamson wrote this speech while inebriated.

It is Russia that has been on the receiving end of repeated provocations from NATO member states such as the UK in recent times, and it is Russia that has been forced to respond to protect its own security and that of its people where necessary. Furthermore, not only in Russia but everywhere, including the UK, people understand that when you have political leaders intoxicated by their own national myths and propaganda to such an extent as Britain’s Defence Secretary, danger ensues.

The most enduring of those national myths where London is concerned is that the British Empire was a force for good rather than a vast criminal enterprise, that Britain and America won the Second World War together alone, that Iraq had WMDs, and that international law and international brigandage really are one and the same thing.

Perhaps the most preposterous section of the speech came when Mr Williamson tried to fashion a connection between Brexit and Britain’s military strength: “Brexit has brought us to a moment. A great moment in our history. A moment when we must strengthen our global presence, enhance our lethality, and increase our mass.”

Reading this, you can almost hear Churchill turning in his grave. Britain’s wartime prime minister had such as Gavin Williamson in mind when he famously said, “He has all the virtues I dislike, and none of the vices I admire.”

Mr Williamson obviously misread the memo talking up not the opportunity for increased conflict with China after Brexit but trade.

This was not a speech it was a linguistic car crash, one that will forever command an honoured place in compendiums of the worst political speeches ever made. As for Gavin Williamson, just as no responsible parent would ever dream of putting an 10-year old behind the wheel of car to drive unsupervised, no responsible British government would ever appoint a man like him as its Defence Secretary.

In years past, he would have struggled to find employment polishing the brass plate outside the building.

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The Birth Of A Monster

The banking establishment welcomed the Fed with open arms. What gives?

The Duran

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Authored by David Howden via The Mises Institute:


The Federal Reserve’s doors have been open for “business” for one hundred years. In explaining the creation of this money-making machine (pun intended – the Fed remits nearly $100 bn. in profits each year to Congress) most people fall into one of two camps.

Those inclined to view the Fed as a helpful institution, fostering financial stability in a world of error-prone capitalists, explain the creation of the Fed as a natural and healthy outgrowth of the troubled National Banking System. How helpful the Fed has been is questionable at best, and in a recent book edited by Joe Salerno and me — The Fed at One Hundred — various contributors outline many (though by no means all) of the Fed’s shortcomings over the past century.

Others, mostly those with a skeptical view of the Fed, treat its creation as an exercise in secretive government meddling (as in G. Edward Griffin’s The Creature from Jekyll Island) or crony capitalism run amok (as in Murray Rothbard’s The Case Against the Fed).

In my own chapter in The Fed at One Hundred I find sympathies with both groups (you can download the chapter pdf here). The actual creation of the Fed is a tragically beautiful case study in closed-door Congressional deals and big banking’s ultimate victory over the American public. Neither of these facts emerged from nowhere, however. The fateful events that transpired in 1910 on Jekyll Island were the evolutionary outcome of over fifty years of government meddling in money. As such, the Fed is a natural (though terribly unfortunate) outgrowth of an ever more flawed and repressive monetary system.

Before the Fed

Allow me to give a brief reverse biographical sketch of the events leading up to the creation of a monster in 1914.

Unlike many controversial laws and policies of the American government — such as the Affordable Care Act, the Troubled Asset Relief Program, or the War on Terror — the Federal Reserve Act passed with very little public outcry. Also strange for an industry effectively cartelized, the banking establishment welcomed the Fed with open arms. What gives?

By the early twentieth century, America’s banking system was in a shambles. Fractional-reserve banks faced with “runs” (which didn’t have to be runs with the pandemonium that usually accompanies them, but rather just banks having insufficient cash to meet daily withdrawal requests) frequently suspended cash redemptions or issued claims to “clearinghouse certificates.” These certificates were a money substitute making use of the whole banking system’s reserves held by large clearinghouses.

Both of these “solutions” to the common bank run were illegal as they allowed a bank to redefine the terms of the original deposit contract. This fact notwithstanding, the US government turned a blind eye as the alternative (widespread bank failures) was perceived to be far worse.

The creation of the Fed, the ensuing centralization of reserves, and the creation of a more elastic money supply was welcomed by the government as a way to eliminate those pesky and illegal (yet permitted) banking activities of redemption suspensions and the issuance of clearinghouse certificates. The Fed returned legitimacy to the laws of the land. That is, it addressed the government’s fear that non-enforcement of a law would raise broader questions about the general rule of law.

The Fed provided a quick fix to depositors by reducing cases of suspensions of their accounts. And the banking industry saw the Fed as a way to serve clients better without incurring a cost (fewer bank runs) and at the same time coordinate their activities to expand credit in unison and maximize their own profits.

In short, the Federal Reserve Act had a solution for everyone.

Taking a central role in this story are the private clearinghouses which provided for many of the Fed’s roles before 1914. Indeed, America’s private clearinghouses were viewed as having as many powers as European central banks of the day, and the creation of the Fed was really just an effort to make the illegal practices of the clearinghouses legal by government institutionalization.

Why Did Clearinghouses Have So Much Power?

Throughout the late nineteenth century, clearinghouses used each new banking crisis to introduce a new type of policy, bringing them ever closer in appearance to a central bank. I wouldn’t go so far as to say these are examples of power grabs by the clearinghouses, but rather rational responses to fundamental problems in a troubled American banking system.

When bank runs occurred, the clearinghouse certificate came into use, first in 1857, but confined to the interbank market to economize on reserves. Transactions could be cleared in specie, but lacking sufficient reserves, a troubled bank could make use of the certificates. These certificates were jointly guaranteed by all banks in the clearinghouse system through their pooled reserves. This joint guarantee was welcomed by unstable banks with poor reserve positions, and imposed a cost on more prudently managed banks (as is the case today with deposit insurance). A prudent bank could complain, but if it wanted to use a clearinghouse’s services and reap the cost advantages it had to comply with the reserve-pooling policy.

As the magnitude of the banking crisis intensified, clearinghouses started permitting banks to issue the certificates directly to the public (starting with the Panic of 1873) to further stymie reserve drains. (These issues to the general public amounted to illegal money substitutes, though they were tolerated, as noted above.)

Fractional-Reserve Free Banking and Bust

The year 1857 is a somewhat strange one for these clearinghouse certificates to make their first appearance. It was, after all, a full twenty years into America’s experiment with fractional-reserve free banking. This banking system was able to function stably, especially compared to more regulated periods or central banking regimes. However, the dislocation between deposit and lending activities set in motion a credit-fueled boom that culminated in the Panic of 1857.

This boom and panic has all the makings of an Austrian business cycle. Banks overextended themselves to finance the booming industries during America’s westward advance, primarily the railways. Land speculation was rampant. As realized profits came in under expectations, investors got skittish and withdrew money from banks. Troubled banks turned to the recently established New York Clearing House to promote stability. Certain rights were voluntarily abrogated in return for a guarantee on their solvency.

The original sin of the free-banking period was its fractional-reserve foundation. Without the ability to fund lending activity with their deposit base, banks never would have financed the boom to the extent that it became a destabilizing factor. Westward expansion and investment would still have occurred, though it would have occurred in a sustainable way funded through equity investments and loans. (These types of financing were used, though as is the case today, this occurred less than would be the case given the fractional-reserve banking system’s essentially cost-free funding source: the deposit base.)

In conclusion, the Fed was not birthed from nothing in 1913. The monster was the natural outgrowth of an increasingly troubled banking system. In searching for the original problem that set in motion the events culminating in the creation of the Fed, one must draw attention to the Panic of 1857 as the spark that set in motion ever more destabilizing policies. The Panic itself is a textbook example of an Austrian business cycle, caused by the lending activities of fractional-reserve banks. This original sin of the banking system concluded with the birth of a monster in 1914: The Federal Reserve.

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