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Russia’s Economy Little Harmed by West’s Sanctions

Putin has been succeeding despite what the US aristocracy (and its allied aristocracies in Europe and Arabia) have been throwing to weaken Russia.

Eric Zuesse

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Originally posted at strategic-culture.org:


Despite Barack Obama’s economic sanctions against Russia, and the plunge in oil prices that King Saud agreed to with Obama’s Secretary of State John Kerry on 11 September 2014, the economic damages that the US and Saudis have aimed against a particular oil-and-gas giant, Russia, have hit mostly elsewhere — at least till now.

This has been happening while simultaneously Obama’s violent February 2014 coup overthrowing Ukraine’s democratically elected pro-Russian President Viktor Yanukovych (and the head of the ‘private CIA’ firm Stratfor calls it “the most blatant coup in history”) has caused Ukraine’s economy to plunge even further than Russia’s, and corruption in Ukraine to soar even higher than it was before America’s overthrow of that country’s final freely elected nationwide government, so that Ukraine’s economy has actually been harmed far more than Russia’s was by Obama’s coup in Ukraine and Obama’s subsequent economic sanctions against Russia (sanctions that are based on clear and demonstrable Obama lies but that continue and even get worse under Trump).

Bloomberg News headlined on February 4th of 2016, “These Are the World’s Most Miserable Economies” and reported the “misery index” rankings of 63 national economies as projected in 2016 and 60 as actual in 2015 — a standard ranking-system that calculates “misery” as being the sum of the unemployment-rate and the inflation-rate. They also compared the 2016 projected rankings to the 2015 actual rankings.

Top rank, #1 both years — the most miserable economy in the world during 2015 and 2016 — was Venezuela, because of that country’s 95% dependence upon oil-export earnings (which crashed when oil-prices plunged). The US-Saudi agreement to flood the global oil market destroyed Venezuela’s economy.

#2 most-miserable in 2015 was Ukraine, at 57.8. But Ukraine started bouncing back so that as projected in 2016 it ranked #5, at 26.3. Russia in 2015 was #7 most-miserable in 2015, at 21.1, but bounced back so that as projected in 2016 it became #14 at 14.5.

Bloomberg hadn’t reported misery-index rankings for 2014 showing economic performances during 2013, but economist Steve H. Hanke of Johns Hopkins University did, in his “Measuring Misery Around the World, May 2014,” in the May 2014 GlobeAsia, ranking 90 countries; and, during 2013 (Yanukovych’s final year as Ukraine’s President before his being forced out by Obama’s coup), Ukraine’s rank was #23 and its misery-index was 24.4. Russia’s was #36 and its misery index was 19.9. So: those can be considered to be the baseline-figures, from which any subsequent economic progress or decline (after Obama’s 2014 Ukrainian coup) may reasonably be calculated. Hanke’s figures during the following year, 2014, were reported by him at Huffington Post, “The World Misery Index: 108 Countries”, and by UAE’s Khaleej Times, “List of Most Miserable Countries” (the latter falsely attributing that ranking to Cato Institute, which had merely republished Hanke’s article). In 2014, Ukraine’s misery-index, as calculated by Hanke, was #4, at 51.8. That year had 8 countries above 40 in Hanke’s ranking. Russia was #42 at 21.42. So: Russia’s rank had improved, but, because of the globally bad economy, Russia’s absolute number was slightly worse (higher) than it had been before Obama’s coup in Ukraine and subsequent sanctions against Russia. By contrast, Ukraine’s rank had suddenly gotten far worse, #4 at 51.80 in 2014, after having been #23 at 24.4 in 2013.

The figures in Bloomberg for Russia were: during 2015, #7 with a misery-index of 21.1; and projected during 2016, #14 with a misery-index of 14.5; so, Bloomberg too showed a 2015-2016 improvement for Russia, and not only for Ukraine (where in the 2016 projection it ranked #5, at 26.3, a sharp improvement after the horrendous 2015 actual numbers).

“Hanke’s Annual Misery Index — 2017” in Forbes, showed 98 countries, and Venezuela was still #1, the worst; Ukraine was now #9 at 36.9; and Russia was #36 at 18.1.

Thus: whereas Russia was economically sunningly stable at #36 from start to finish throughout the entire five-year period 2013-2017, starting with a misery-index of 19.9 in 2013 and ending with 18.1 in 2017, Ukraine went from a misery-index of 24.4 in 2013 to 36.9 in 2017 — and worsening its rank from #23 to #9. During that five-year period Ukraine’s figure peaked in the year of Obama’s coup at 57.8. So, at least Ukraine’s misery seems to be heading back downward in the coup’s aftermath, though it’s still considerably worse than before the coup. But, meanwhile, Russia went from 19.9 to 18.1 — and had no year that was as bad as Ukraine’s best year was during that period of time. And, yet: that coup and the economic sanctions and the US-Saudi oil-agreement were targeted against Russia — not against Ukraine.

If the US were trying to punish the people of Ukraine, then the US coup in Ukraine would have been a raving success; but actually Obama didn’t care at all about Ukrainians. He cared about the owners of America’s weapons-making firms and of America’s extractive firms. Trump likewise.

During that same period (also using Hanke’s numbers) the United States went from #71 at 11.0 in 2013, to #69 at 8.2 in 2017. US was stable.

Saudi Arabia started with #40 18.9 during 2013, to #30 at 20.2 in 2017. That’s improvement, because the Kingdom outperformed the global economy.

During the interim, and even in the years leading up to 2014, Russia had been (and still is) refocusing its economy away from Russia’s natural resources and toward a broad sector of high technology: military R&D and production.

On 15 December 2014, the Stockholm International Peace Research Institute headlined, “Sales by Largest Arms Companies Fell Again in 2013, but Russian Firms’ Sales Continued Rising,” and reported, “Sales by companies headquartered in the United States and Canada have continued to moderately decrease, while sales by Russian-based companies increased by 20 per cent in 2013.”

The following year, SIPRI bannered, on 14 December 2015, “Global Arms Industry: West Still Dominant Despite Decline,” and reported that, “Despite difficult national economic conditions, the Russian arms industry’s sales continued to rise in 2014. … ‘Russian companies are riding the wave of increasing national military spending and exports. There are now 11 Russian companies in the Top 100 and their combined revenue growth over 2013–14 was 48.4 per cent,’ says SIPRI Senior Researcher Siemon Wezeman. In contrast, arms sales of Ukrainian companies have substantially declined. … US companies’ arms sales decreased by 4.1 per cent between 2013 and 2014, which is similar to the rate of decline seen in 2012–13. … Western European companies’ arms sales decreased by 7.4 per cent in 2014.”

This is a redirection of the Russian economy that Vladimir Putin was preparing even prior to Obama’s war against Russia. Perhaps it was because of the entire thrust of the US aristocracy’s post-Soviet determination to conquer Russia whenever the time would be right for NATO to strike and grab it. Obama’s public ambivalence about Russia never persuaded Putin that the US would finally put the Cold War behind it and end its NATO alliance as Russia had ended its Warsaw Pact back in 1991. Instead, Obama continued to endorse expanding NATO, right up to Russia’s borders (now even into Ukraine) — an extremely hostile act.

By building the world’s most cost-effective designers and producers of weaponry, Russia wouldn’t only be responding to America’s ongoing hostility — or at least responding to the determination of America’s aristocracy to take over Russia, which is the world’s largest trove of natural resources — but would also expand Russia’s export-earnings and international influence by selling to other countries weaponry that’s less-burdened with the costs of sheer corruption than are the armaments that are being produced in what is perhaps the world’s most corrupt military-industrial complex: America’s. Whereas Putin has tolerated corruption in other areas of Russia’s economic production (figuring that those areas are less crucial for Russia’s future), he has rigorously excluded it in the R&D and production and sales of weaponry. Ever since he first came into office in 2000, he has transformed post-Soviet Russia from being an unlimitedly corrupt satellite of the United States under Boris Yeltsin, to becoming truly an independent nation; and this infuriates America’s aristocrats (who gushed over Yeltsin).

The Russian government-monopoly marketing company for Russia’s weapons-manufacturers, Rosoboronexport, presents itself to nations around the world by saying: “Today, armaments and military equipment bearing the Made in Russia label protect independence, sovereignty and territorial integrity of dozens of countries. Owing to their efficiency and reliability, Russian defense products enjoy strong demand on the global market and maintain our nation’s leading positions among the world’s arms exporters. For the past several years, Russia has consistently ranked second behind the United States as regards arms exports.” That’s second-and-rising, as opposed to America’s first-and-falling.

The American aristocracy’s ever-growing war against Russia posed and poses to Putin two simultaneous challenges: both to reorient away from Russia’s natural resources, which the global aristocracy wants to grab, and also to reorient toward the area of hi-tech in which the Soviets had built a basis from which Russia could become truly cost-effective in international commerce, so as to, simultaneously, increase Russia’s defensive capability against an expanding NATO, while also replacing some of Russia’s dependence upon the natural resources that the West’s aristocrats want to steal.

In other words: Putin designed a plan to meet two challenges simultaneously — military and economic. His primary aim is to protect Russia from being grabbed by the American and Saudi aristocrats, via America’s NATO and the Sauds’ Gulf Cooperation Council and other alliances (which are trying to take over Russia’s ally Syria — Syria being a crucial location for pipelining Arab royals’ oil-and-gas into Europe, the world’s largest energy-market).

In addition, the hit to Russia’s economic growth-rate from the dual-onslaught of Obama’s sanctions and the plunging oil prices hasn’t been too bad. The World Bank’s April 2015 “Russia Economic Report” predicted: “Growth prospects for 2015-2016 are negative. It is likely that when the full effects of the two shocks become evident in 2015, they will push the Russian economy into recession. The World Bank baseline scenario sees a contraction of 3.8 percent in 2015 and a modest decline of 0.3 percent in 2016. The growth spectrum presented has two alternative scenarios that largely reflect differences in how oil prices are expected to affect the main macro variables.”

The current (as of 15 February 2016) “Russia GDP Annual Growth Rate” at Trading Economics says: “The Russian economy shrank 3.8 percent year-on-year in the fourth quarter of 2015, following a 4.1 percent contraction in the previous period, according to preliminary estimates from the Economic Development Minister Alexey Ulyukayev. It is the worst performance since 2009 [George W. Bush’s global economic crash], as Western sanctions and lower oil prices hurt external trade and public revenues.” The current percentage as of today, 17 September 2018, is 1.9%, after having plunged down from 2.2% in late 2017, to 0.9% in late 2017; so, it is rebounding.

The World Bank’s April 2015 “Russia Economic Report” went on to describe “The Government Anti-Crisis Plan”:

On January 27, 2014, the government adopted an anti-crisis plan with the goal to ensure sustainable economic development and social stability in an unfavorable global economic and political environment.

It announced that in 2015–2016 it will take steps to advance structural changes in the Russian economy, provide support to systemic entities and the labor market, lower inflation, and help vulnerable households adjust to price increases. To achieve the objectives of positive growth and sustainable medium-term macroeconomic development the following measures are planned:

• Provide support for import substitution and non-mineral exports;

• Support small and medium enterprises by lowering financing and administrative costs;

• Create opportunities for raising financial resources at reasonable cost in key economic sectors;

• Compensate vulnerable households (e.g., pensioners) for the costs of inflation;

• Cushion the impact on the labor market (e.g. provide training and increase public works);

• Optimize budget expenditures; and

• Enhance banking sector stability and create a mechanism for reorganizing systemic companies.

So: Russia’s anti-crisis plan was drawn up and announced on 27 January 2014, already before Yanukovych was overthrown, even before Obama’s agent Victoria Nuland on 4 February 2014 instructed the US Ambassador in Ukraine whom to have appointed to run the government when the coup would be completed (“Yats,” who did get appointed). Perhaps, in drawing up this plan, Putin was responding to scenes from Ukraine like this. He could see that what was happening in Ukraine was an operation financed by the US CIA. He could recognize what Obama had in mind for Russia.

The “Russia Economic Report, May 2018: Modest Growth Ahead” says:

Global growth continued its 2017 momentum in early 2018. Global growth reached a stronger than- expected 3 percent in 2017 — a notable recovery from a post-crisis low of 2.4 percent in 2016. It is currently expected to peak at 3.1 percent in 2018. Recoveries in investment, manufacturing, and trade continue as commodity-exporting developing economies benefit from firming commodity prices (Figure 1a). The improvement reflects a broad-based recovery in advanced economies, robust growth in commodity-importing Emerging Markets and Developing Economies (EMDEs), and an ongoing rebound in commodity exporters. Growth in China – and important trading partner for Russia – is expected to continue its gradual slowdown in 2018 following a stronger than-expected 6.9 percent in 2017.

Putin’s economic plan has softened the economic blow upon the masses, even while it has re-oriented the economy toward what would be the future growth-areas.

The country that Putin in 2000 had taken over and inherited from the drunkard Yeltsin (so beloved by Western aristocrats because he permitted them to skim off so much from it) was a wreck even worse than it had been when the Soviet Union ended. Putin immediately set to work to turn it around, in a way that could meet those two demands.

Apparently, Putin has been succeeding — now even despite what the US aristocracy (and its allied aristocracies in Europe and Arabia) have been throwing to weaken Russia. And the Russian people know it.

PS: The present reporter is an American, and used to be a Democrat, not inclined to condemn Democratic politicians, but Obama’s grab for Russia was not merely exceedingly dangerous for the entire world, it is profoundly unjust, it is also based on his (and most Republicans’) neoconservative lies, and so I don’t support it, and I no longer support Obama or his and the Clintons’ Democratic Party, at all. But this certainly doesn’t mean that I support the Republican Party, which is typically even worse on this (and other matters) than Democratic politicians are. On almost all issues, I support Bernie Sanders, but I am not a part of anyone’s political campaign, in any way

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Sally Snyder

As shown in this article, there is a little-discussed unintended consequence of the anti-Russia sanctions that could significantly impact some U.S. consumers:

https://viableopposition.blogspot.com/2018/08/another-unintended-consequence-of.html

As is typical in Washington, there are a wide range of unanticipated consequences directly connected to its geopolitical maneuvering.

John Nolan
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What the hell has that EX-president got to do with anything, or is it still pulling strings behind Amazia’s plunge into economic, moral, Spiritual chaos?
Why is osama’s warped, twisted opinon being sought by any Amazian politician, media tycoon,religious nut case, when his short term as Amazia’s president has done more damage to Amazia’s global position than any other politician in Amazia’s history.
How many pretend presidents to the Yanks really need?

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https://s3.amazonaws.com/public-inspection.federalregister.gov/2018-20954.pdf

Tomorrow more sanctions against The Russia, at last!

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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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