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The Trump – Putin call: summary and analysis

“Businesslike and substantive call” between the leaders of the US and Russia

Alexander Mercouris

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Donald Trump and Vladimir Putin – blocked by the US bureaucracy from having a proper meeting with each other at the APEC summit in Vietnam – have instead had the detailed discussion they wanted with each other by telephone.

That is the conclusion one must draw from the unusually detailed summary of this conversation which has been provided by the Kremlin’s website

As agreed in advance, Vladimir Putin had a telephone conversation with President of the United States of America Donald Trump.

Current Syrian issues, in view of the military operation to destroy terrorists in Syria which is winding down, were thoroughly discussed. Vladimir Putin stressed Russia’s willingness to actively facilitate a durable political settlement in that country on the basis of UN Security Council Resolution 2254 and in keeping with the agreements reached as part of the Astana meetings and the provisions of the Joint Statement approved by the presidents of Russia and the United States on November 11 at the APEC Economic Leaders’ Meeting in Vietnam. It was noted, in particular, that this statement met with a positive reaction in the Middle East.

There was discussion of the need to preserve the sovereignty, independence and territorial integrity of Syria, and to achieve a political settlement on the basis of principles that must be worked out as a result of the broadest possible intra-Syrian negotiation process. This is precisely the aim of Russia’s initiative to hold the National Dialogue Conference in Sochi soon.

Vladimir Putin informed Donald Trump about the main outcomes of the November 20 meeting with Bashar al-Assad, where the Syrian leader reaffirmed his commitment to the political process, constitutional reform, and presidential and parliamentary elections. In addition, emphasis was placed on the upcoming trilateral talks in Sochi on November 22 with the participation of the presidents of Russia, Iran and Turkey, during which steps to further normalise the situation in Syria and various aspects of the political settlement process are to be coordinated.

More broadly, the President of Russia once again spoke in favour of joint antiterrorist efforts with the United States, noting the practical importance of coordinating efforts between the special services of both countries. The US President was supportive of this idea.

Vladimir Putin and Donald Trump also exchanged views on the current state of affairs on the Korean Peninsula, emphasising that it would be advisable to find a negotiated solution to the problem by diplomatic means.

Regarding the crisis in southeast Ukraine, the President of Russia pointed to the lack of a real alternative to unconditional compliance with the Minsk agreements of February 12, 2015.

The two leaders touched on the situation in Afghanistan, which is of concern due to the growing terrorist and drug trafficking threats.

The situation surrounding the Iranian nuclear programme was also discussed. Russia’s commitment to full implementation of the Joint Comprehensive Plan of Action was noted, as it is an essential factor in ensuring regional stability and overcoming the challenge of non-proliferation of weapons of mass destruction.

Both sides expressed satisfaction with the businesslike and substantive conversation.

The Kremlin says the conversation was “agreed in advance”.  One would like to know when and by whom?

My guess is that Trump and Putin agreed it during one of their short encounters at the APEC summit, when they realised that a proper summit between them was being blocked.  If so then the conversation is the fruit of their encounters at the APEC summit.

The conversation covered an unusually wide range of issues:

Syria

This was unquestionably the most important topic discussed, and the one which would have taken up the most time.

The Russians are very much at the forefront of the Syrian negotiations, having together with the Iranians effectively won the war in Syria for President Assad.

That has put the Russians in a position of great strength, which they could in theory use to dictate the terms of the settlement at the forthcoming negotiations whilst seeking to exclude the US.

Had positions been reversed, and had the US found itself in such a position of advantage, it is a certainty that it would be not be involving the Russians in the negotiations.  The US after all did not involve the Russians in the negotiations which followed the US “victories” in the 2003 Iraqi war and the 2011 Libyan war.

The Russian approach is the diametric opposite.  Instead of seeking to exclude the US from the negotiations Putin briefed Trump fully on his discussions with President Assad – someone who remains persona non grata for the US and for Donald Trump himself – and set out for Trump the Russian approach to the negotiations.

In doing so Putin followed the classic Russian approach of carefully setting out for Trump the list of international agreements the Russians have negotiated and which they are using as the building blocks of the negotiations.

UN Security Council Resolution 2254 and in keeping with the agreements reached as part of the Astana meetings and the provisions of the Joint Statement approved by the presidents of Russia and the United States on November 11 at the APEC Economic Leaders’ Meeting in Vietnam.

Of these the most important for Trump is the Joint Statement he made with Putin at the APEC summit in Vietnam.

Trump was not involved in the earlier agreements, but will feel that he has ownership of the Joint Statement, and by agreeing to it at the APEC summit and by referring to it in his telephone conversation with Trump, Putin is giving Trump a reason to feel that he is an actual participant in the negotiations and is not just a bystander.

In reality the most important of the agreements Putin referred to during the conversation is UN Security Council Resolution 2254, which was passed unanimously by the UN Security Council on 18th December 2015 following lengthy negotiations between Russian Foreign Minister Lavrov and US Secretary of State Kerry.

The full text of UN Security Council Resolution 2254 can be found here.

Why is it so important to Putin and the Russians to involve Trump in the negotiations?  The clue to that can be found in the topics which were discussed.  For example Putin used the conversation to reaffirm to Trump

the need to preserve the sovereignty, independence and territorial integrity of Syria

(bold italics added)

This language is taken directly from the preamble of UN Security Council Resolution 2254, which reads as follow

Reaffirming  [the UN Security Council’s] strong commitment to the sovereignty, independence, unity and territorial integrity of the Syrian Arab Republic

(bold italics added)

What lies behind this is Russian concern about what I recently called the US’s Plan C: the attempt by some in the US to maintain US influence in Syria by carving out a quasi independent Kurdish statelet in northern Syria.

Plan C is already in serious trouble as a result of the defeat of the Kurds in Kirkuk by the Iraqi army. However Putin used the telephone conversation to remind Trump that Plan C – because it threatens Syria’s territorial integrity – is incompatible with the commitments the US previously took on itself when it negotiated and voted for UN Security Council Resolution 2254.

Putin also used the conversation with Trump to remind Trump of his longstanding proposal – made most famously in his September 2015 UN General Assembly Speech – for a joint struggle by the US and Russia against Jihadi terrorism.

Trump has been consistently receptive to this idea – the Kremlin’s summary says he was “supportive of this idea” – but it has been consistently blocked by the US bureaucracy including especially the Pentagon.

For Putin the attraction of this proposal is not just that such a joint struggle will facilitate the global struggle against terrorism – something Putin cares about as much as Trump does – but because such a joint struggle might provide a tie between the US and Russia which might reverse the downward spiral in US-Russian relations.

Whilst Trump is “supportive of the idea” it remains to be seen whether the resistance to in Washington can be overcome.

In summary, Putin is keeping Trump informed of Russia’s Syrian diplomacy in order to limit as far as possible the danger of the US acting as a spoiler.  The idea is to get Trump to think that the US has some ownership over the eventual outcome, so that it does not act to wreck it.

At the same time Putin hopes to use this as a bridge towards improving relations.

Whether given the pathological hostility to Russia in the US these efforts can be successful is another matter.  However Putin doubtless feels that by trying he is doing his job.

Korea

The Kremlin’s summary tells us little about the discussion on the Korean issue, which suggests that this part of the conversation may have been brief.

It is quite likely that it was Trump who initiated this part of the conversation since he has made achieving a settlement of the North Korean issue the central focus of his foreign policy.

Putin will no doubt have sought an explanation from Trump of Trump’s recent decision to put North Korea back on the list of states sponsoring terrorism, and he will also have sought reassurances from Trump that the recent US fleet and troop movements near North Korea are not intended to set the scene for US military action.

Putin will also have briefed Trump about Russia’s recent negotiations with the North Korean diplomat Choe Son Hui, and he will no doubt have reminded Trump of the Chinese-Russian proposal for a double-freeze.

Trump for his part will no doubt have sought – and received – reassurances from Putin that Russia will enforce the sanctions the UN Security Council has recently imposed on North Korea following that country’s intercontinental ballistic missile and hydrogen bomb tests.

Ukraine

Donald Trump hinted during the 2016 election campaign that for him the conflict in Ukraine came close to the bottom of his list of foreign policy priorities.  However he has encountered fierce resistance from his bureaucracy, which continues to be committed to Ukraine, and which continues to use the conflict there to mobilise opposition to Russia in Europe.

Recently hardliners in the US have been floating proposals to send weapons – notably Javelin anti-tank missiles – to Ukraine, whilst an article in the Wall Street Journal suggested that some US officials were trying to pressure the Russians into agreeing to a force of 20,000 “peacekeepers” to restore the Donbass to Ukrainian control.

Needless to say the Russians have emphatically rejected both proposals, and Putin followed this up by taking the unprecedented step of telephoning Zakharchenko and Plotnitsky – the leaders of the Donetsk and Lugansk People’s Republics – and having details of this call posted on the Kremlin’s website in what was clearly intended as a show of support.

The proposals to flood the Donbass with ‘peacekeepers’ and to send arms to Ukraine are actually inconsistent with the February 2015 Minsk Agreement as the Russians never tire of pointing out, and the Kremlin’s summary of Putin’s conversation with Trump shows that Putin used the opportunity provided by the call to point this out to him

Regarding the crisis in southeast Ukraine, the President of Russia pointed to the lack of a real alternative to unconditional compliance with the Minsk agreements of February 12, 2015.

My impression is that Trump is not interested in the conflict in Ukraine, in which he rightly sees no national or security interest for the US.  Left to himself he would probably gladly walk away from it, as would many of those who supported him in the 2016 election.

With the Russiagate affair still ongoing, that is politically impossible.

What that means in practical terms is that Trump will have listened to what Putin had to say and will have taken note of it, but this will have no immediate effect on US policy.

If Trump is one day able to put Russiagate behind him and consolidate his position in Washington that may change.  However that is not the situation now.

Afghanistan

The last few months have witnessed a drumbeat of accusations in the US that the Russians are covertly assisting the Taliban by sending arms and economic aid to them.  The Russians categorically deny these accusations, though they admit to holding talks with the Taliban who they are gradually coming to see as a bulwark against the spread of ISIS to Afghanistan.

The Kremlin’s summary suggests that the part of the telephone conversation between Trump and Putin which touched on Afghanistan was brief, and that these accusations were not discussed in any detail if they were discussed at all

The two leaders touched on the situation in Afghanistan, which is of concern due to the growing terrorist and drug trafficking threats.

The reference to “drug trafficking threats” possibly refers to the longstanding Russian complaint that the US is not doing enough to suppress heroin production and trafficking in Afghanistan.  A large part of this heroin is transported across Russia to Europe, causing a serious heroin problem in Russia, and the Russians have been placing the blame for this on the blind eye that they say that the US has been turning to heroin production in Afghanistan.

It is quite likely that Putin raised this issue with Trump whilst repeating Russia’s concern that ISIS, as it is being driven out of Syria and Iraq, is now starting to gain a foothold in Afghanistan.

Though these are concerns Trump is known to share, the terse part of the Kremlin’s summary of this section of their conversation makes it impossible to say what his reaction was.

It is not impossible that the reason this part of the summary is so terse is because there were disagreements, which the Kremlin does not want to publicise.

Iran

On the subject of Iran, Trump and Putin have diametrically opposite views.

Trump sees Iran as a hotbed of terrorism; Putin sees Iran as Russia’s strategic partner and ally in the struggle against terrorism.

Trump considers the Joint Comprehensive Plan of Action (“JCPOA”) which placed limits on Iran’s nuclear programme a “bad deal”, and has recently decertified Iran because of its supposed breaches of it.

Putin unequivocally supports the JCPOA and denies that Iran has committed any breaches of it.

The Kremlin’s summary makes no effort to hide the disagreement

Russia’s commitment to full implementation of the Joint Comprehensive Plan of Action was noted, as it is an essential factor in ensuring regional stability and overcoming the challenge of non-proliferation of weapons of mass destruction.

No word is said here of what opinions Trump expressed, though it is a certainty they were the opposite of the ones held by Putin and Russia.  Doubtless Trump and Putin had a forthright exchange of opinions on this issue.

General

Unusually, the Kremlin website tells us something of the atmosphere of the call.

Both sides expressed satisfaction with the businesslike and substantive conversation.

It is a commonplace in the US and Europe that Donald Trump is terrible at diplomacy.

In reality his interactions with world leaders during his recent Asia tour and his conversations with Vladimir Putin and Xi Jinping tell a different story.

Though Trump is extremely inexperienced and many of his ideas about foreign policy are frankly amateur, he nonetheless comes across as warm and approachable in a way that his cold and aloof predecessor Barack Obama never did.

The result is that other world leaders – especially those outside Europe – like him in a way that they never liked Barack Obama, and are prepared to cut him slack, even when they disagree with him.

That suggests that if the US bureaucracy was prepared to work with Trump and not against him, and instead of seeking to undermine him at every turn sought to help him gain the experience and understanding of world affairs he needs to do his job, then he could in time become an extremely effective foreign policy President.

Trump’s interactions with Xi Jinping and Putin are cases in point.  As the leaders of the two other Great Powers they are the two most important individuals in the world with whom the US and its President must deal.

Trump seems to understand this, and despite a catalogue of misunderstandings he seems to be gradually edging towards a better understanding of the Chinese leader.  As for Putin, Trump’s few interactions with him at a personal level have always gone well.  The “businesslike and substantive” telephone conversation he has just had with Putin is a case in point.

As for Putin, his conversation with Trump was just part of a day’s work.  That day was extremely busy.  As well as the conversation with Trump, Putin had meetings with President Assad of Syria and President Zeman of the Czech Republic, and also had telephone conversations with President Sisi of Egypt, King Salman of Saudi Arabia and Prime Minister Netanyahu of Israel.  Today (22nd November 2017) he will be meeting President Erdogan of Turkey and President Rouhani of Iran.

It will take many years of hard learning and hard work before Donald Trump can conduct diplomacy at that sort of pace.

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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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