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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-basedirredeemable
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.
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