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Whose Money Stoked Religious Strife in Ukraine – and Who Tried to Steal It?

Was $25 million in American tax dollars allocated for a payoff to stir up religious turmoil and violence in Ukraine?

Jim Jatras

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Authored by James George Jatras via Strategic Culture:


Was $25 million in American tax dollars allocated for a payoff to stir up religious turmoil and violence in Ukraine? Did Ukrainian President Petro Poroshenko (unsuccessfully) attempt to divert most of it into his own pocket?

Last month the worldwide Orthodox Christian communion was plunged into crisis by the decision of Ecumenical Patriarch Bartholomew I in Constantinople to recognize as legitimate schismatic pseudo-bishops anathematized by the canonical Ukrainian Orthodox Church, which is an autonomous part of the Russian Orthodox Church. In so doing not only has Patriarch Bartholomew besmirched the global witness of Orthodoxy’s two-millennia old Apostolic faith, he has set the stage for religious strife in Ukraine and fratricidal violence – which has already begun.

Starting in July, when few were paying attention, this analyst warned about the impending dispute and how it facilitated the anti-Christian moral agenda of certain marginal “Orthodox” voices like “Orthodoxy in Dialogue,” Fordham University’s “Orthodox Christian Studies Center,” and The Wheel. These “self-professed teachers presume to challenge the moral teachings of the faith” (in the words of Fr. John Parker) and “prowl around, wolves in sheep’s clothing, forming and shaping false ideas about the reality of our life in Christ.” Unsurprisingly such groups have embraced Constantinople’s neopapal self-aggrandizement and support for the Ukrainian schismatics.

No one – and certainly not this analyst – would accuse Patriarch Bartholomew, most Ukrainian politicians, or even the Ukrainian schismatics of sympathizing with advocacy of such anti-Orthodox values. And yet these advocates know they cannot advance their goals if the conciliar and traditional structure of Orthodoxy remains intact. Thus they welcome efforts by Constantinople to centralize power while throwing the Church into discord, especially the Russian Church, which is vilified in some Western circles precisely because it is a global beacon of traditional Christian moral witness.

This aspect points to another reason for Western governments to support Ukrainian autocephaly as a spiritual offensive against Russia and Orthodoxy. The post-Maidan leadership harp on the “European choice” the people of Ukraine supposedly made in 2014, but they soft-pedal the accompanying moral baggage the West demands, symbolized by “gay” marches organized over Christian objections in Orthodox cities like AthensBelgradeBucharestKievOdessaPodgoricaSofia, and Tbilisi. Even under the Trump administration, the US is in lockstep with our European Union friends in pressuring countries liberated from communism to adopt such nihilistic “democratic, European values.”

Perhaps even more important to its initiators, the row over Ukraine aims to break what they see as the “soft power” of the Russian Federation, of which the Orthodox Church is the spiritual heart and soul. As explained by Valeria Z. Nollan, professor emerita of Russian Studies at Rhodes College:

‘The real goal of the quest for autocephaly [i.e., complete self-governing status independent of the Moscow Patriarchate] of the Ukrainian Orthodox Church is a de facto coup: a political coup already took place in 2014, poisoning the relations between western Ukraine and Russia, and thus another type of coup – a religious one – similarly seeks to undermine the canonical relationship between the Ukrainian Orthodox Church and Moscow.’

In furthering these twin objectives (morally, the degrading of Orthodox Christianity; politically, undermining the Russian state as Orthodoxy’s powerful traditional protector) it is increasingly clear that the United States government – and specifically the Department of State – has become a hands-on fomenter of conflict. After a short period of appropriately declaring that “any decision on autocephaly is an internal [Orthodox] church matter,” the Department within days reversed its position and issued a formal statement (in the name of Department spokesperson Heather Nauert, but clearly drafted by the European bureau) that skirted a direct call for autocephaly but gave the unmistakable impression of such backing. This is exactly how it was reported in the media, for example, “US backs Ukrainian Church bid for autocephaly.” Finally, Secretary of State Mike Pompeo weighed in personally with his own endorsement as did the US Reichskommissar for UkraineKurt Volker.

The Threat…

There soon became reason to believe that the State Department’s involvement was not limited to exhortations. As reported by this analyst in October, according to an unconfirmed report originating with the members of the Russian Orthodox Church Outside of Russia (an autonomous New York-based jurisdiction of the Moscow Patriarchate), in July of this year State Department officials (possibly including Secretary Pompeo personally) warned the Greek Orthodox Archdiocese of America (also based in New York but part of the Ecumenical Patriarchate) that the US government was aware of the misappropriation of a large amount of money, about $10 million, from estimated $37 million raised from believers for the construction of the St. Nicholas Greek Orthodox Church and National Shrine in New York. The State Department warning also reportedly noted that federal prosecutors have documentary evidence confirming the withdrawal of these funds abroad on the orders of Ecumenical Patriarch Bartholomew. It was suggested that Secretary Pompeo would “close his eyes” to this theft in exchange for movement by the Patriarchate of Constantinople in favor of Ukrainian autocephaly, which helped set Patriarch Bartholomew on his current course.

[Further details on the St. Nicholas scandal are available here, but in summary: Only one place of worship of any faith was destroyed in the September 11, 2001, attack in New York and only one building not part of the World Trade Center complex was completely destroyed. That was St. Nicholas Greek Orthodox Church, a small urban parish church established at the end of World War I and dedicated to St. Nicholas the Wonderworker, who is very popular with Greeks as the patron of sailors. In the aftermath of the 9/11 attack, and following a lengthy legal battle with the Port Authority, which opposed rebuilding the church, in 2011 the Greek Archdiocese launched an extensive campaign to raise funds for a brilliant innovative design by the renowned Spanish architect Santiago Calatrava based on traditional Byzantine forms. Wealthy donors and those of modest means alike enthusiastically contributed millions to the effort. Then – poof! In December 2017, suddenly all construction was halted for lack of funds and remains stalled to this day. Resumption would require having an estimated $2 million on hand. Despite the Archdiocese’s calling in a major accounting firm to conduct an audit, there’s been no clear answer to what happened to the money. Both the US Attorney and New York state authorities are investigating.]

This is where things get back to Ukraine. If the State Department wanted to find the right button to push to spur Patriarch Bartholomew to move on the question of autocephaly, the Greek Archdiocese in the US is it. Let’s keep in mind that in his home country, Turkey, Patriarch Bartholomew has virtually no local flock – only a few hundred mostly elderly Greeks left huddled in Istanbul’s Phanar district. (Sometimes the Patriarchate is referred to simply as “the Phanar,” much as “the Vatican” is shorthand for the Roman Catholic papacy.) Whatever funds the Patriarchate derives from other sources (the Greek government, the Roman Catholic Church, the World Council of Churches), the Phanar’s financial lifeline is the ethnic Greek community (including this analyst) in what is still quaintly called the “Diaspora” in places like America, Australia, and New Zealand. And of these, the biggest cash cow is the Greek-Americans.

That’s why, when Patriarch Bartholomew issued a call in 2016 for what was billed as an Orthodox “Eighth Ecumenical Council” (the first one since the year 787!), the funds largely came from America, to the tune of up to $8 million according to the same confidential source as will be noted below. Intended by some as a modernizing Orthodox “Vatican II,” the event was doomed to failure by a boycott organized by Moscow over what the latter saw as Patriarch Bartholomew’s adopting papal or even imperial prerogatives – now sadly coming to bear in Ukraine.

…and the Payoff

On top of the foregoing, it now appears that the State Department’s direct hand in this sordid business may not have consisted solely of wielding the “stick” of legal threat: there’s reason to believe there was a “carrot” too. It very recently came to the attention of this analyst, via an unsolicited, confidential source in the Greek Archdiocese in New York, that a payment of $25 million in US government money was made to Constantinople to encourage Patriarch Bartholomew to move forward on Ukraine.

The source for this confidential report was unaware of earlier media reports that the same figure – $25 million – was paid by Ukrainian President Petro Poroshenko to the Phanar as an incentive for Patriarch Bartholomew to move forward on creating an independent Ukrainian church. Moreover, Poroshenko evidently tried to shortchange the payment:

‘Peter [Petro] Poroshenko — the president of Ukraine — was obligated to return $15 million US dollars to the Patriarch of Constantinople, which he had appropriated for himself.

‘As reported by Izvestia, this occurred after the story about Bartholomew’s bribe and a “vanishing” large sum designated for the creation of a Unified Local Orthodox Church in Ukraine surfaced in the mass media.

‘As reported, on the eve of Poroshenko’s visit in Istanbul, a few wealthy people of Ukraine “chipped in” in order to hasten the process of creating a Unified Local Orthodox Church. About $25 million was collected. They were supposed to go to the award ceremony for Patriarch Bartholomew of Constantinople for the issuing of a tomos of autocephaly. [A tomos is a small book containing a formal announcement.] However, in the words of people close to the backer, during the visit on April 9, Poroshenko handed over only $10 million.

‘As a result, having learned of the deal, Bartholomew cancelled the participation of the delegation of the Phanar – the residence of the Patriarch of Constantinople, in the celebration of the 1030th anniversary of the Baptism of Russia on July 27 in Kiev.

‘”Such a decision from Bartholomew’s side was nothing other than a strong ultimatum to Poroshenko to return the stolen money. Of course, in order to not lose his face in light of the stark revelations of the creation of the tomos of autocephaly for the Ukrainian Orthodox Church, Peter Alexeevich [Poroshenko] had to just return those $15 million for the needs of Constantinople,” a trusted source explained to reporters.

‘For preliminary information, only after receiving the remaining sum, did Bartholomew finally give his consent to sending a delegation of the Phanar to Kiev … ‘

Now, it’s possible that the two identical figures of $25 million refer to two different pots of money (a cool $50 million!) but that seems unlikely. It’s more probable the reports refer to the same sum as viewed from the sending side (the State Department, the Greek Archdiocese) and the delivery side (Poroshenko, Constantinople).

Lending credibility to the confidential information from New York and pointing to the probability that it refers to the same payment that Poroshenko reportedly sought to raid for himself are the following observations:

  • When Poroshenko generously offered Patriarch Bartholomew $10 million, the latter was aware that the full amount was $25 million and demanded the $15 million Poroshenko had held back. How did the Patriarch know that, unless he was informed via New York of the full sum?
  • If the earlier-reported $25 million was really collected from “a few wealthy people of Ukraine” who “chipped in,” given the cutthroat nature of disputes among Ukrainian oligarchs would Poroshenko (an oligarch in his own right) have risked trying to shortchange the payment? Why has not even one such Ukrainian donor been identified?
  • Without going into all the details, the Phanar and the Greek Archdiocese have a long relationship with US administrations of both parties going back at least to the Truman administration, encompassing some decidedly unattractive episodes. In such a history, a mere bribe for a geopolitical shot against Moscow would hardly be a first instance or the worst.

As one of this analyst’s Greek-American connections puts it: “It’s easy to comprehend the Patriarchate bowing to the pressure of State Dept. blackmail… not overly savory, but understandable. However, it’s another thing altogether if Kiev truly “purchased” their autocephalous status from an all too willing Patriarchate … which would relegate the Patriarch to ‘salesman’ status and leave the faithful wondering what else might be offered to the highest bidder the next time it became convenient to hold a Patriarchal ‘fire sale’ at the Phanar?!”

To add insult to injury, you’d think Constantinople at least could pay back some of the $7-8 million wasted on the Crete 2016 debacle to restart the St. Nicholas project in New York. Evidently the Phanar has better things to spend it on, like the demonstrative environmentalism of “the Green Patriarch” and, together with Pope Francis, welcoming Muslim migrants to Europe through Greece. Of course maybe there’s no need to worry, as the Ukraine “sale” was consistent with Constantinople’s papal ambitions, an uncanonical claim to “universal” status, and misuse of incarnational language and adoption of a breathtakingly arrogant tone that would cause even the most ultramontane proponent of the Rome’s supremacy to blush.

Finally, it seems that, for the time being at least, Constantinople doesn’t intend to create an independent Ukrainian church but rather an autonomous church under its own authority. It’s unclear whether or not Poroshenko or the State Department, in such event, would believe they had gotten their money’s worth. Perhaps they would. After all, the issue here is less what is appropriate for Ukraine than what strikes at Russia and injures the worldwide Christian witness of the Orthodox Church. To that end, it doesn’t matter whether the new illegal body is Constantinopolitan or Kievan, just so long as it isn’t a “Moskal church” linked to Russia.

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am hantsShaun RameweRaymond ComeauWalter Dublanica Recent comment authors
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Walter Dublanica
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Bart the fart has no place in the Slavic Orthodox world. He is from Istanbul, a Islamic city. Russian Orthodoxy is in Moscow Russia. A Christian country.

Raymond Comeau
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Raymond Comeau

The USA is using their puppet Poroschenko to agitate Russia. And, the USA and Poroshenko are exactly alike. They would both steal the pennies from the eyes of a dead Poroshenko’s mother’s eyes. The USA and it’s either willing or threatened puppets are going to help start WW111!

Shaun Ramewe
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Shaun Ramewe

Pig-brained pieces of s!cksh!t.

Shaun Ramewe
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Shaun Ramewe

Anyone surprised??!!!!

AM Hants
Member
AM Hants

I enjoyed reading the informative article, which made me chuckle, in a nice way. It also reminded me of another couple of articles, one might randomly tie in, with the above, whilst the other article raises a few questions. Who will be benefitting, from the purchase of Poroshenko’s assets. Ironic, if that would have included his share of the religious bribe? TRUE LIES: POROSHENKO SELLS HIS BUSINESS TO DMITRY FIRTASH, THE “PARTY OF REGIONS”, AND VICE PRESIDENTS OF THE UNITED STATES… http://www.stalkerzone.org/true-lies-poroshenko-sells-his-business-to-dmitry-firtash-the-party-of-regions-and-vice-presidents-of-the-united-states/ Then you have the article: Three Corporations run the world: City of London, Washington DC and Vatican City… Read more »

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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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