IMPEACH BERNANKE! An open letter to Congressman Ron Paul of Texas

Antal E. Fekete

April 6, 2011

Dear Dr. Paul:

There are serious questions about the legality of Quantitative Easing. You are

among the few who are well-qualified and well-placed to get to the bottom of it.

Most people believe, and the media confirm them in that belief, that the Fed

can legally create dollars ‘out of the thin air’ in any quantity, and can do with

them as it pleases. This may well be the pipe dream of Dr. Bernanke who is

quoted as saying that the U.S. government has given the Fed a tool, the printing

press, to stop deflation — but it hardly corresponds to the truth. The Fed can

create new dollars only if some stringent legal conditions are satisfied, and then,

it can only dispose of them in certain ways prescribed by law. 

Contrary to a statement of Dr. Bernanke, made before he became the

Chairman of the Board of Governors of the Fed, he could not drop freshly

printed dollars from a helicopter, no matter how many reasons for such an action

he may be able to cite. Another thing the Fed is not allowed to do legally is to

purchase Treasury paper from the U.S. Treasury directly. It must be purchased

indirectly through open market operations. If you don’t put the Treasury paper

through the test of the open market before the Fed is allowed to buy it, the

presumption is that the market would reject it as worthless, or would take it only

at a deep discount. The law does not allow the F.R. banks to purchase Treasury

paper directly from the Treasury because that would make money creation

through the F.R. banks a charade, reserve requirements a farce, and the dollar a

sham.

If that were the only problem with Quantitative Easing, it would be bad enough.

But there is something else that is even more ominous. The fact is that the

Federal Reserve banks can purchase Treasury paper only if they pay with

F.R. credit that has been legally created.

F.R. credit (F.R. notes and F.R. deposits) is legally created if it has been issued

in accordance with the law. The law says that F.R. credit must be backed by

collateral security at the time of issuance, usually in the form of an

equivalent amount of U.S. Treasury paper. The procedure is as follows.

The F.R. bank seeking to expand credit takes its Treasury paper, owned outright

and free from encumbrances, and posts it as collateral with the Federal Reserve

agent who will then authorize the issuing of credit. In other words, if the F.R.

banks do not have the unencumbered Treasury paper in their possession, then

they cannot create additional credit legally.

There is some evidence that the F.R. banks do not have F.R. credit available to

make the kind of purchases Dr. Bernanke is talking about as part of his

Quantitative Easing. Nor do they have unencumbered Treasury paper in

sufficient quantity that they could post with the F.R. agent for authorizing the

issue of additional F.R. credit.

The point is that the process of posting collateral first, and augmenting F.R.

credit afterwards must under no circumstances be reversed. What the F.R. banks

cannot legally do is to buy the Treasury paper first with unauthorized F.R.

credit, post the paper as collateral, and justify the illegal issuance of credit

retroactively. Nor can they borrow the bond from the Treasury, post it as

collateral, and pay for the bond retroactively.

This is an important limitation separating the regime of market-based

irredeemable currency from the regime of fiat money involving outright

monetization of government debt — the graveyard where the Continental dollar,

the assignat, the mandat, the Reichsmark, and the Zimbabwe dollar (among

countless others) rest. 

At any rate, retroactive authorization of F.R. credit, if that’s what the Fed is up

to, would be a violation of both the letter and spirit of the F.R. Act. It would

mean converting the dollar into outright fiat money through the back door,

bypassing Congress. It would show absolute bad faith on the part of the

Chairman of the Federal Reserve Board of Governors, Dr. Ben Bernanke, who

certainly knows what the law is. Such a blatant violation of the law would make

him totally unfit for the powerful office he occupies. It would call for his

immediate and dishonorable discharge by the President, pending Congressional

investigation of the matter.

The various violations of the law of which the Fed is accused point to a

concerted effort to remove the shackles the law has put on the money spigots

lest crooks help themselves to the public purse. These violations are not isolated

incidents. They are aiming at the corruption of the monetary order of the nation

and the world. Moreover, they would ultimately figure prominently among the

causes of the financial instability the world has been suffering from since 1971

and, more recently, since 2008.

Without understanding this fundamental truth, all talk about stabilizing the

monetary system and reining in the runaway budget deficit is an exercise in

futility.

Yours very sincerely,

Antal E. Fekete

Professor (retired)

Memorial University of Newfoundland

Tel./Fax: +36-1-325-7996

Note: an identical letter has been sent to Congressman Mike Pence of Indiana.

Reference: marketwatch.com/story/fed-dictator-bernanke-needs-to-be-toppled-2011-02-15