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CONFIRMED: US backs down as Russia targets US aircraft in Syria

As Russia targets US aircraft west of the Euphrates US redeploys aircraft elsewhere allowing Syrian army to capture strategic town of Rusafa.

Alexander Mercouris

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Back in April, in the immediate aftermath of the US cruise missile attack on Syria’s Al-Shayrat air base, Russia retaliated by switching off the ‘de-confliction’ hotline between the US and Russian militaries in Syria, which enables these militaries to avoid accidental clashes with each other.

The immediate response to this Russian switching off of the ‘de-confliction’ hotline was a dramatic reduction in US air operations in Syria, as the US air force was forced to scale down its air operations rather than risk a confrontation with the powerful air defence system the Russians have established in Syria.

That this was the case was confirmed by an article in The New York Times dated 8th April 2017, which said the following

The American-led task force that is battling the Islamic State has sharply reduced airstrikes against the militants in Syria as commanders assess whether Syrian government forces or their Russian allies plan to respond to the United States’ cruise missile strike on a Syrian airfield this past week, American officials said.

The precautionary move, revealed in statistics made public by the command on Saturday, was taken as Russian officials have threatened to suspend the communication line the American and Russian militaries use to notify each other about air operations in Syria.

So far, the Russian military does not appear to have taken any threatening actions, such as directing its battlefield radar or air defense systems to confront the Americans, or carrying out aggressive actions in the skies, United States officials said.

But officials who spoke on the condition of anonymity to discuss internal planning said the commanders needed time to determine whether the Syrian president, Bashar al-Assad, and the Russian military would treat the American cruise missile strike as a one-time operation that they would not respond to militarily. As a precaution, the Pentagon is flying patrols in Syrian skies with F-22 jets, the Air Force’s most advanced air-to-air fighter……

Some American and other Western counterterrorism officials have said the missile strike could………make the fight against the Islamic State in Syria more difficult.

“It seems clear that the strikes will complicate our efforts to pursue our counter-ISIS campaign in Syria,” said Matthew Olsen, a former director of the National Counterterrorism Center. “In particular, the ability to carry out U.S. airstrikes in Syria in support of the coalition against ISIS requires some degree of cooperation with Russia, which is now in serious jeopardy.”

Other security experts said that much depended on the Trump administration’s next steps, and how the Assad government and its Russian patrons responded.

“U.S. aircraft operating over Al-Tabqah are already ostensibly in range of the Russian S-400 system at the Humaymin Air Base, and we might see Russia deploy more air defense assets to Syria,” Jeremy Binnie, the Middle East editor of Jane’s Defense Weekly, said in an email. “But if the U.S. makes no moves to threaten Assad’s position, then they may well accept the punishment and move on.”

William McCants, a senior fellow at the Brookings Institution and the author of “The ISIS Apocalypse,” offered a similar assessment.

(bold italics added)

The words I have highlighted in this article from 8th April 2017 make clear the difference with the situation today.

After weeks of frantic diplomatic activity the US finally managed to persuade the Russians a few weeks ago to switch the ‘de-confliction’ hotline back on.  In response to yesterday’s US shooting down of the SU-22 the Russians have however now once again switched it off.

However this time the Russians have not only once more switched off the ‘de-confliction’ hotline.  They have also done what they did not do in April by saying that this time they will take “threatening action by directing their battlefield radar or air defense systems to confront the Americans”.

That this is so is explicitly confirmed in the statement made public yesterday by the Russian Defence Ministry

As of June 19 this year, the Defense Ministry of the Russian Federation has ended its interaction with the US side under a memorandum for preventing incidents and providing for safe flights during operations in Syria and demands that the US command carry out a careful investigation and report about its results and the measures taken.

The shooting down of a Syrian Air Force jet in Syria’s airspace is a cynical violation of Syria’s sovereignty. The US’ repeated combat operations under the guise of ‘combating terrorism’ against the legitimate armed forces of a UN member-state are a flagrant violation of international law, in addition to being actual military aggression against the Syrian Arab Republic,” the ministry said.

Russia will regard any flights within the area of its air force group’s operation in Syria as legitimate targets, the ministry stressed.

Any aircraft, including planes and drones of the international coalition, detected in the operation areas west of the Euphrates River by the Russian air forces will be followed by Russian ground-based air defense and air defense aircraft as air targets.

…….the coalition command did not use the existing communication line between the air commands of Al Udeid Air Base (Qatar) and Khmeimim Air Base to prevent incidents in Syria’s airspace.  We consider the actions of the US command as a deliberate default on their obligations under the memorandum on on preventing incidents and providing for safe flights during operations in Syria signed on October 20, 2015.

(bold italics added)

In other words, the Russian response to the shooting down of the Syrian SU-22 fighter near Taqbah has been much stronger than was the Russian response to the US cruise missile attack on Syria’s Al-Shayrat air base.

This is so even though the attack on Al-Shayrat air base attracted massive international media attention, whilst the US shooting down of the SU-22 has attracted very little.

This time however the Russians have announced that they will do precisely the thing which they did not do in April following the US attack on Al-Shayrat air base – and which the New York Times says is very threatening – which is track US aircraft, treating them as targets if they fly west of the Euphrates.

Why have the Russians taken this extraordinary step?

The US claims yesterday justifying the shooting down of the SU-22 aircraft have unravelled.  Even the strongly anti-Assad British based Syrian Observatory of Human Rights has confirmed that the SU-22 was not bombing Kurdish forces as the US claims but was bombing ISIS fighters as the Syrians say.

A regime warplane was targeted and dropped in the skies of the al-Resafa area […] the warplane was shot down over Al-Resafa area of which the regime forces have reached to its frontiers today, and sources suggested to the Syrian Observatory for Human Rights that warplanes of the International Coalition targeted it during its flight in close proximity to the airspace of the International Coalition’s warplanes, which caused its debris to fall over Resafa city amid an unknown fate of its pilot, the sources confirmed that the warplane did not target the Syria Democratic Forces in their controlled areas located at the contact line with regime forces’ controlled areas in the western countryside of Al-Tabaqa to the road of Al-Raqqah – Resafa.

(bold italics added)

Another thing that may have provoked the Russians is that the US has tried to pass off the downing of the SU-22 as caused by Syrian encroachment of an agreed ‘de-confliction area’.

Ja’Din sits approximately two kilometers north of an established East-West SDF-Syrian Regime de-confliction area.

This uses a term – ‘de-confliction area’ – used to describe certain regions of Syria covered by an international agreement reached by Russia, Iran and Turkey in May.

The area where the SU-22 was shot down is not within any of these regions.  Al-Jazeera has provided details of where these four ‘de-confliction areas’, and none of them is close to the territory where the SU-22 was shot down

Zone 1 : Idlib province, as well as northeastern areas of Latakia province, western areas of Aleppo province and northern areas of Hama province. There are more than one million civilians in this zone and its rebel factions are dominated by an al-Qaeda -linked alliance.

Zone 2: The Rastan and Talbiseh enclave in northern Homs province. There are approximately 180,000 civilians in this zone and its network of rebel groups includes al-Qaeda-linked fighters.

Zone 3 : Eastern Ghouta in the northern Damascus countryside. Controlled by Jaish al-Islam, a powerful rebel faction that is participating in the Astana talks. It is home to about 690,000 civilians. This zone does not include the adjacent, government-besieged area of Qaboun.

Zone 4 : The rebel-controlled south along the border with Jordan that includes parts of Deraa and Quneitra provinces. Up to 800,000 civilians live there.Wh

Whilst it is possible that the term “established East-West SDF-Syrian Regime de-confliction area” refers to a term used in some informal agreement between the US and Russia, it seems more likely that the US is trying to establish unilaterally ‘no-go’ areas for the Syrian army, and is using the term ‘de-escalation areas’ to conceal the fact.

If so the Russians will want to put a stop to this practice and this may partly explain the strength of the Russian reaction.

However the single most important reason for the strong Russian reaction is what caused the US to shoot down the SU-22 down in the first place.

As the report from the Syrian Observatory of Human Rights shows, the real reason the SU-22 was shot down was because it was supporting a Syrian army offensive to capture the strategically important town of Rusafa from ISIS.

Rusafa lies south east of Tabqah – the main base of the US backed Kurdish militia in this area – and within striking distance of the main highway between Raqqa and Deir Ezzor, the eastern desert city currently besieged by ISIS.

By capturing Rusafa the Syrian army is now in a position to intercept columns of ISIS fighters who might try to flee Raqqa for Deir Ezzor.

The Syrians and the Russians have in recent weeks complained that the US and the Kurds have been doing nothing to prevent ISIS fighters fleeing Raqqa for Deir Ezzor, and in recent days there have even been reports of movements by Kurdish militia to try to block the Syrian army’s offensive to relieve Deir Ezzor.

The shooting down of the Syrian SU-22 fighter appears to have been intended as a warning to stop the Syrian army from capturing Rusafa, so as to block the Syrian army’s attempt to relieve the pressure on Deir Ezzor.

The Russian warning to the US looks in turn to have been intended to make clear to the US that this sort of interference in the Syrian army’s operations to relieve Deir Ezzor is unacceptable and will not be tolerated.

The US has heeded the Russian warning.  The various statements made by the US and by various US officials today, though full of the usual bluster about the US defending itself and its allies anywhere and everywhere, in fact clearly signal that the US is backing off.

The key words – as my colleague Adam Garrie has said – are those of Colonel Ryan Dillon, chief U.S. military spokesman in Baghdad.

As a result of recent encounters involving pro-Syrian regime and Russian forces, we have taken prudent measures to reposition aircraft over Syria so as to continue targeting ISIS forces while ensuring the safety of our aircrews given known threats in the battle space.

(bold italics added)

“Prudent measures to reposition aircraft over Syria to ensure the safety of aircrews given known threats in the battle space” is code for withdrawal of aircraft from air space where they are at risk of being shot down.

That is what is taking place.  Note that Colonel Dillon is careful not to say where the “known threats in the battle space” that are forcing the redeployment of the aircraft are coming from.

The US has no choice.  If the Russian decision to switch off the ‘de-confliction’ hotline in April was enough to force the US to reduce sharply its air activity in Syria, the Russian decision to switch off the ‘de-confliction’ hotline and to threaten to treat as aerial targets US aircraft flying west of the Euphrates is a threat the US cannot afford to disregard.

Not surprisingly, shortly before the Russian warning was made public, but probably after it was communicated to the US, the Syrian army captured Rusafa with no further hindrance from the US.  Latest reports speak of Syrian army reinforcements flooding into the area,

In the meantime the US is frantically signalling to the Russians its urgent wish to de-escalate the situation.  Note for example the markedly conciliatory language of White House spokesman Sean Spicer, and how he repeatedly passed up opportunities to utter words of defiance against Russia or to threaten the Russians with counter-measures during the latest White House press briefing

Q    Thanks, Sean.  How are you responding to this Russian threat to shoot down American planes over Syria?

MR. SPICER:  Well, obviously, we’re going to do what we can to protect our interests.  And this is something that we’re going to continue to work with — keep the lines of communication open.   And ISIS represents a threat to all nations, and so we’ve got to do what we can to work with partners.  And we’re going to continue to keep an open mind of communication with the Russians.

Q    So will the U.S. change its flight patterns or behavior in Syria?

MR. SPICER:  I’m going to refer — I mean, I think this is a question more for DOD to answer.  But I think, obviously, it’s important and crucial that we keep lines of communication open to de-conflict potential issues.

Zeke.

Q    Thanks, Sean.  Following up on that — and a second one for you, as well — what would the U.S. government’s response be?  Is the White House going to issue a warning to the Russian government if they were to follow through on this threat?  It seems that your statement — would that be a provocation or something worse, potentially?

MR. SPICER:  I mean, I think that the escalation of hostilities among the many factions that are operating in this region doesn’t help anybody.  And the Syrian regime and others in the regime need to understand that we will retain the right of self-defense, of coalition forces aligned against ISIS.

Ultimately the situation in Syria is the same as it has been since the US-Russian confrontation in October.

The fact that the Russians have installed a powerful air defence system in Syria incorporating advanced S-400 and S-300VM Antey 2500 missiles means that the US is unable to confront the Russians directly unless it is prepared to risk possibly very serious casualties.

That is an option neither the US military nor the civilian officials of the Obama and Trump administrations are prepared to face.  This is because they know the extraordinary dangers such a clash with the armed forces of a nuclear superpower would risk.  They also know US public opinion is strongly opposed to the US becoming drawn into such a clash.

What that means is that though the Russians must act carefully so as not to provoke the US into an unnecessary confrontation which would serve no-one’s interests, ultimately it is the Russians who in Syria have the whip hand.

The chess game in Syria is far from over.  The game of move and counter-move continues.  With the capture of Rusafa the Syrians and the Russians have however just won another important piece.  In the meantime Russia’s warning limits the range of US moves across the Syrian chessboard.

The net result of all these recent moves is that end of the Syrian war may have drawn a little closer.

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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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