I welcome the Internet debate on the question whether the Mint should be opened to gold and silver. The latest contribution by Hugo Salinas Price, entitled Free Coinage of Gold and Silver – Then and Now ( , 9 June 2011), expresses doubts that such a measure, at least insofar as silver is concerned, would work today. One of the arguments he offers is that silver, like all non-monetary metals (but unlike the monetary metal par excellence , gold) has a declining marginal utility. This, he suggests, is an historical change as prior to the 1870’s the marginal utility of silver, like that of gold, was constant (or nearly so). In this brief rejoinder I cannot go through all the arguments of his long article, but would like to add my penny of wisdom, such as it is and for whatever it may be worth.

Does silver have a declining marginal utility? I wish I knew! There is but one way to find out: one of the governments must bite the bullet and open its Mint to silver. This would allow all comers to bring forth their bullion and convert it into standard silver coins free of seigniorage charges. If the response were so overwhelming that the Mint would be inundated and forced to close its doors to silver again, it would go a long way to establish evidence for declining marginal utility. It would indicate a panic among owners of silver bullion, prompting them to get rid of their holdings while riddance was good.

If, however, the flow of silver to the Mint was controlled, if the premium on freshly minted silver coins did not precipitously collapse but only showed moderate decline, this would be a strong evidence that the marginal utility of silver, though not constant, showed a record slow decline, second only to that of gold.

To be sure, ultimately, the premium on silver coins would go to zero. But the process would take time, possibly years. The new silver coinage would reach its saturation point where demand for souvenirs and for piggy-bank fillers was satisfied. This, however, would not stop the flow of silver to the Mint. Coins would continue to be minted even after the premium vanished. The new silver coins would go into circulation. People would become confident and start spending their silver coins once they got used to the idea that they could always tap coin circulation for replacement. They could get any number of silver coins on exactly the same terms as they could spend them, that is, without having to pay or sacrifice a premium.

But why would people want to have more silver coined once the hoarding demand for silver coins dried up? Well, that’s just the interesting part. People would want to make their purchases of goods and services on the best terms possible . Silver coins would give them the best terms of trade − certainly far better than terms that holders of Federal Reserve notes have. For example, people could negotiate long term contracts for delivery of grains or crude oil at stable prices if they pay with silver coins, while such contracts were no longer offered to holders of dollar balances.

Gresham’s Law has nothing to do with it. People won’t stop eating, nor will they want to stop keeping themselves warm in winter just to uphold a badly misunderstood and misquoted economic law attributed to the financial advisor of Queen Elizabeth I. To the extent people will want to eat and keep themselves warm in winter, paper dollars will not drive silver dollars out of circulation. By the way, Gresham’s Law, correctly quoted and understood says that worn silver coins will drive full-bodied silver coins out of circulation provided that the government makes worn coins legal tender and forces people to accept them at face value. Absent legal tender provision, people would simply pay for their purchases in silver coins by weight, rather than by tale.

There can be no question that silver coins will start to circulate as soon as the premium on freshly minted coins is reduced to zero , assuming that the Mint is kept open come rain or shine. Already there is pressure on governments to open their Mint to silver. If they haven’t done it yet, it’s because they know that their banks are insolvent and could not withstand the shock of removal of the prop of legal tender protection for paper money. They hope against hope that their insolvent banks, given time, will be able to heel themselves.

The Chinese government is holding back for one additional reason. It wants to convert as much of its dollar balances into silver as possible before opening its Mint to silver. The Chinese hope to make up for inevitable losses on their dollar account by gains on their silver account. They have to go gingerly about their silver purchases though, not to upset the apple-cart. In waiting, the Chinese take a calculated risk while watching like a hawk what other governments are doing. They certainly don’t want to be pre-empted by the Indian or Mexican governments. Early bird gets the worm .

Last year I was in China and I met several officials in influential positions. I came away with the impression that American-trained people in the banking establishment suffer from an overdose of America worship. While studying at U.S. universities they fell for Keynesianism hook, line and sinker and can’t get it out their system. These people laughed me out of the lecture room when I was trying to tell them about the benefit of a metallic monetary system. But I also met others who were totally immune to America-worship. If they were Communist, it certainly didn’t stop them from promulgating a new policy letting Chinese peasants acquire as much silver as they would. This policy makes sense only if China has long-term plans to open its Mint to silver. Naturally the plan, if it is to be effective, must be kept secret for the time being.

When you ask them if they are not afraid that America may beat them to opening the Mint to silver before China does, they would answer with an enigmatic smile. They would mutter something to the effect that sometimes you have to take a chance in assuming that thieves who plot to rob you, while they are sharp at stealing, may in fact be dull at poker.

Think about it. The U.S. may have already lost the silver game against China. Perhaps the Chinese kept the Communist façade for one reason only: they wanted to lull the Americans into a false sense of security that they would never ever open the Mint to silver and gold as they have meekly acquiesced in carrying the yoke of the irredeemable paper dollar forever. Japan’s example as an American fiefdom does not appeal to the Chinese, but they are not yet ready to bolt from the dollar-feedlot.

The Americans messed it up so badly that it is hard to find words to talk about it. They should have played copycat at the silver chessboard. When the Chinese built up their silver refining capacity, Americans should have done likewise. They did nothing. When the Chinese started encouraging silver imports and made noises about putting embargo on silver exports, Americans should have followed suit. They did nothing. When the Chinese prompted their banks to extend their silver and gold market activities into their rural heartland, Americans should have imitated them. They did nothing. When the Chinese actively started making their silver and gold mining industry competitive, Americans should have removed the fetters from theirs. Again, they did nothing.

The writing is on the wall: Mene tekel upharsin – the dollar has been put on the scale and found wanting. The Chinese will open their Mint to silver in their own good time. It is their destiny . If they don’t talk about it, that’s because they want to give a chance and a little extra time even to the poorest Chinese peasant to buy a silver coin or two before it’s too late.

China has been on a silver standard since time immemorial. F. D. Roosevelt’s silver purchasing policy after 1933 forced them off silver. It was one of his hare-brained monetary schemes to foster inflation in the United States. He was completely oblivious of the fact that he was fostering deflation in China, fatally weakening it and making it an easy prey to Japanese imperialism.

There are simply no reliable estimates how much silver has been coined during the long history of Chinese civilization. Most of those coins are still around in mattresses and cookie-jars. Multiply the number of mattresses and cookie-jars by hundreds of millions. You got the idea.

Chinese peasants are suspicious people. They are still afraid that their nominally Communist government has designs to confiscate their well-hidden silver coins that have escaped Mao’s Long March as well as his Great Cultural Revolution. Watch for the day when this enormous silver treasure, the accumulation of millennia, will be released. The Chinese government is in no hurry to give the world an object lesson on what the marginal utility of silver is. The best experts on silver in the world are Chinese but they keep their cards close to their chest. They know that in playing poker it is not a good hand you need but a good brain. One that is not contaminated with Keynesian bunk.

Come to Munich, the capital of Bavaria, for the next ten-day course of the New Austrian School of Economics, from August 20-29, 2011, where I shall answer any questions you may have on the opening the Mint to silver. Also on hand will be Sandeep Jaitly to tell you about the marginal utility of silver, as well as about the gold mine of the silver basis, and about the last contango in Washington. For details, consult:

nasoe@kt-solutions.de

See also my website:

The watershed year was 1971. What made that year outstanding was not just the first-ever introduction of the world-wide floating exchange rate system, but also the disappearance of the most potent and reliable financial instrument that has ever existed. It was little noticed at the time. If ever mentioned, it was being treated as a non-event. Yet the world can only dismiss its significance at its own peril. Academia that is supposed to study problems created by monetary experimentation, rather than alerting the public to the most serious consequences of the omission, has been guilty of ignoring it.

The most potent financial instrument, the disappearance of which we are referring to, is the gold bond .

This observation would immediately be objected to by the detractors of gold in the monetary system. They would say that the gold bond had disappeared from world finance much earlier: in the years 1931-35. Its disappearance gave no occasion for any major catastrophe in its wake. Rather, the word economy has gone on from one triumph to another without gold bonds ever since ⎯ proving the inconsequential nature of their being phased out. However, this objection is not valid.

The truth of the matter is that the gold bond had survived the collapse of the gold standard in the early 1930’s and has played a most important albeit largely unrecognized role in world finance afterwards. Consider the fact that since January, 1934, the dollar has had a fixed value in terms of gold, based on the Treasury price of $35 per ounce of fine gold, and the U.S. government has continued to honor its international dollar obligations in gold at that rate. Moreover, this obligation was solemnly enshrined in several international treaties and confirmed by four sitting presidents. As a result, there is no gainsaying of the fact that U.S. Treasury paper in the hands of foreign governments and central banks directly, and in the hands of banks, financial institutions, and even ordinary citizens not under the jurisdiction of the U.S. indirectly, have continued to exist as gold bonds (or gold bills, as the case may be) after 1934.

The most important role the gold bond has played up until 1971 was this: it was the standard of credit whereby all other debt instruments were gaged. Through disintermediation substandard debt was eliminated, and the rise of the Debt Behemoth prevented.

Ignoring this fact is a major error that Academia has been and still is making. To continue to deny this fact leads to further grievous errors. There used to be a saying on Lombard Street, long since forgotten, that “there is only one thing that is safer and arguably more desirable to hold than gold, namely, the promise of a government to pay gold ”. In that spirit gold bonds were considered an “ultimate form of debt”, enforcing quality standards. Moreover, the U.S. Treasury bill in the hands of foreigners was, along with gold, the ultimate extinguisher of debt . This instrument was destroyed on August 15, 1971. On that day gold was exiled from the international monetary system. Since that day the world has lacked an ultimate extinguisher of debt.

Any other means of payment, including Federal Reserve credit, however useful in international trade or otherwise, could not extinguish debt. It could only shift debt from one debtor to another (ultimately, to the U.S. government). As long as there were gold bonds in existence, a Debt Behemoth could not rise to threaten world finance with destruction. Whenever total debt in the world approached the danger level, safety-conscious governments and banks quietly started converting their holdings of debt into gold bonds, thus squeezing marginal debt out of existence. This also explains the absence of a derivative tower and other unsafe financial constructions, instruments and practices, such as mortgage-based bonds, or bank-loan-backed bonds, prior to 1971.

World trade was financed and regulated by gold to the extent that the great trading houses abroad kept a portfolio of gold bonds in their balance sheet. In effect they were doing arbitrage between the gold bond market and the market for internationally traded merchandise. If the gold rate of interest (the yield of U.S. Treasury bonds) rose, they sold out marginal merchandise from warehouses without reordering them, and invested the proceeds in gold bonds. If subsequently the gold rate of interest rates fell back, then they would sell the gold bond at a profit, and invest the proceeds in marginal merchandise, the trading of which out of the warehouse yielded better profit than that available from holding the gold bond. This arbitrage was real, continuous, and it kept international trade on an even keel. Academia has missed this important arbitrage responsible for regulating world trade after World War II. It has also been guilty of failing to point out that, without gold bonds, world trade is clueless, subject to deterioration and open to manipulation.

In 1971, by a stroke of the pen, gold bonds were stamped out of existence. World trade lost its guiding star. The floodgates of exorbitant debt creation were opened. The fast debt-breeder was turned on. Debt of dubious quality flooded the word, the soundness of which could no longer be gaged in the absence of gold bonds. There was no sink to absorb excess and waste. This explains the origin of the debt tower, and the steady deterioration of the quality of its component parts. This process is still continuing. Worst of all, the series of financial crises in the world also continues. Every one of them will be more devastating than the preceding one — unless something is done about it, and soon . In the absence of remedial measures now the momentum of the approaching avalanche will become overwhelming.

Having made the correct diagnosis, the remedy readily presents itself. The gold bond should be brought back . There is presently a great latent demand for gold bonds in the world, as indicated by the high marketability U.S. Treasury bonds are still enjoying — something that cannot be justified on purely economic grounds in view of the net debt of the U.S. government and the tenaciousness of the American trade and budget deficits. Make no mistake about it: the high marketability of the U.S. Treasury bonds is justified solely by the fact that there is still a residual hope that the U.S. government will, in its own self-interest as well as in the interest of the world economy, make them payable in gold at maturity, and will pay interest on them in gold in the meantime.

Most significantly, there is a convincing precedent in U.S. history for this. During the Civil War and its aftermath, the U.S. government continued to honor its debt, both as to principal and interest, paying them in the gold coin of the realm. To be able to do it, the government continued to levy import duties and excise taxes in gold - to the exclusion of paper. The exchange rate between the gold dollar and the paper dollar (endearingly called the ‘greenback’ by their protagonists) was fluctuating. The government need not embrace a gold standard in order to enjoy the benefits offered by the gold bond.

There is no reason why the U.S. could not emulate the Civil War practice in the present crisis. Admittedly, it would take extensive research to work out the details. For example, the question arises how gold bonds can survive in a fiat paper money system (or how a fiat paper money system can prosper in an environment where gold bonds exist and enjoy the highest prestige). At any rate, the intellectual resources to conduct such research are all at hand. If not residing in Academia, then, at least, they are scattered around in small discussion groups and can be accessed through the Internet. There ought to be such a thing as “shadow research” offering sorely missed competition to mainstream economics on the gold question.

The first obstacle that confronts the present effort by the U.S. government and the Fed to put the great financial crisis behind them is that it runs head on into Triffin’s Dilemma. Already in the early 1960’s Robert Triffin observed that the stated aims of increasing ‘world liquidity’ and those of eliminating the U.S. budget deficit are contradictory. They cannot be simultaneously accomplished.

Likewise, the present effort to rein in the U.S. government deficit and reduce the outstanding government debt, while simultaneously increasing the stock of money through direct sales of government bonds by the Treasury to the Fed (euphemistically called QE 1 & 2) are contradictory. It is like trying to have one’s cake and eat it. On the one hand the Fed wants to inject more Federal Reserve credit into the payments system - while the “other hand”, the government, pretends to choke off the supply of the necessary collateral through eliminating the budget deficit. Politicians, mainstream economists and financial journalists sing the praise of this scheme without realizing that it cannot be done. The two aims are contradictory, and the market will not be fooled by the prestidigitation.

Most mainstream economists have a vested interest in maintaining their anti-gold stance. Their prestige is committed to Keynes’ dictum that the gold standard (and, by implication, gold) is nothing but a ‘barbarous relic’. However, if they really believe in a goldless monetary system, then they should have nothing to fear in exposing their fiat paper scheme to competition with the gold bond. Hand-to-hand money will still be irredeemable under the suggested remedial action. The fact that this will cause the managers of fiat money to make their instrument deliver stellar performance so that people shall have no desire to dump paper in favor of gold is an added benefit. The remedial action proposed here ought not to be seen as an attempt to return to the gold standard through the back door. The proposal is to allow the gold bond to discharge its natural function, to wit: weeding out bad debt - something irredeemable debt cannot do.

A great failing of monetary scholarship is the one-sided appraisal of the origin and subsequent evolution of the Federal Reserve System that came about as a result of six years of thorough study and public debate in the wake of the 1907 financial panic. It was not even remotely considered during the debate that the Fed coming off the drawing board ought to be an engine monetizing government debt. Just the opposite is true: the Fed was supposed to be a commercial paper system whereby self-liquidating bills of exchange would acquire ephemeral monetary privileges, facilitating the movement of semi-finished merchandise from the producer to the ultimate consumer. This was not considered inflationary: pari passu with the sale of merchandise to the ultimate consumer the expiring bills diminish the money supply dollar for dollar.

Nor was it thought possible during the debate that the monetary unit of the United States could be anything but the Constitutional double eagle gold coin. There was nothing sinister about the study and the debate. There was no conspiracy. It was all in the open. All questions could be openly asked and would be honestly answered.

The outcome, the Federal Reserve Act of 1913 was far from being a perfect document. It had many weak points, errors of commission as well as errors of omission. It had a lot of room for improvement. But it was acceptable for the purpose of putting credit, such as existed within the confines of the United States, on a sound and enduring financial basis.

Mischief occurred after the Federal Reserve banks opened their door for business in 1914, about the same time when the war in Europe got started. Without much thinking, and in an obvious violation of the law and the neutrality of the country, the Administration of president Wilson committed the new Federal Reserve banks to the task of financing of the allied war effort in Europe. The idea of self-liquidating credit was discarded; credit was created expressly to finance destruction. You could not get further away from the ideal of self-liquidating credit than putting credit in the service of destroying life and property.

This takes us to the second remedy: restoration of self-liquidating credit . The idea that the central bank can calibrate the rate of debasement of the currency by adjusting the speed of the printing press is absurd. It is only surpassed by the absurdity of the notion that the Federal Open Market Committee can divine, pick, and set the optimal interest rate that will make the GDP grow, payrolls swell, prices stabilize, and prosperity endure.

Historically, commercial banks came into existence not to ‘create’ credit but to ‘liquefy’ it. Commercial credit takes its origin in the handshake of two businessmen while one saying to the other: “I’ll pay you for this shipment in 90 days”. The handshake later took the form of a real bill. It had the advantage that it could be endorsed and passed on to a third party in payment for other merchandise.

Thus the formula to solve the present crisis of instability, and to fend off the threatening credit collapse is: Go back to gold bonds and real bills. Adopt the best agents of credit there obtain, in place of intrinsically worthless promises. Substitute the real source of credit, the handshake of two businessmen, for the stroke of the banker’s pen.

The hour is late. At stake is the survival of the U.S. and the world economy as we know it. Failure to act now would lead to a disaster comparable only to the collapse of the Roman Empire in the fifth century A.D. that was accompanied with a total breakdown of law and order while, significantly enough, gold was going into hiding.

* The title of this essay is borrowed from a list of research topics proposed by the Institute for New Economic Thinking . The author submitted this essay for consideration, but the Institute declined to entertain it.

in Munich, Bavaria, Germany

Aug. 20 - 29, 2011

Also discussing:

Guest Lecturer: Sandeep Jaitly (United Kingdom)

The school is meant for all students (including beginners) interested in the thought of Carl Menger (1840-1921) and, more generally, in the Austrian theory of money, credit and banking in the spirit of Menger. The school’s program plans to cover the whole spectrum of Austrian economics. It is recommended especially for those who have read the papers of Prof. Fekete about the instability of the present monetary system and the danger of a world-wide credit collapse, available on the Internet, see the website .

The complete program consists of four courses (10 days, 20 lectures in all). Completion of each of the four courses will earn one credit. Students with 4 credits will earn a diploma, signed by Professor Fekete. The four courses are as follows:

Course I: Disorder and Coordination in Economics — Has the world reached the ultimate economic and monetary disorder?

Course II: Adam Smith’s Real Bills Doctrine and Social Circulating Capital

Course III: The Austrian Theory of Interest and Discount

Course IV: The Austrian Theory of Money, Credit and Banking

Courses I and II have been given in Hungary in 2010 and earlier this year. There are plans to repeat them in Munich next year.

For further information contact: or phone: +49-170-380-3948 (please take time-zone difference into account)

On April 6 last I sent an open letter Congressmen Ron Paul of Texas accusing the Chairman of the Board of Governors of the Federal Reserve, Dr. Ben Bernanke, that

(1) his program of Quantitative Easing (QE) whereby the Federal Reserve banks purchase U.S. Treasury paper directly from

the U.S. Treasury is not authorized by the Federal Reserve Act and is therefore unlawful;

(2) even if for the sake of argument we disregard where the Fed buys its paper, the sum appears to be higher than all

available Federal Reserve credit outstanding and, moreover, the F.R. banks do not have unencumbered collateral to

post in order to create more to conclude these purchases.

I have received an unusually large feedback in my e-mail. People want to know how I can substantiate these accusations against Dr. Bernanke. Of course I cannot say that I have caught Dr. Bernanke red-handed. All I can do is to present circumstantial evidence.

I start with a statement that I am fully aware of the seriousness of my accusations, and my responsibility in making them. I do not make them frivolously. I have been contemplating to do it for decades. My reasons for postponing have to do with calculating for maximum impact. I am but an isolated individual trying to take on the incumbent of one of the most powerful offices ever created on this earth. Wrong timing may be suicidal.

I first came to suspect that in injecting F.R. credit in the domestic and world economy the Fed was in violation of the law when former Chairman Alan Greenspan inundated the money markets shortly after taking office following the stock market crash in 1989. My suspicion was that he got away with it by simply reversing the two-step creation of F.R. credit, namely, FIRST STEP: posting collateral; SECOND STEP: issuing F.R. notes and creating F.R. deposits.

Reversing the process would have meant that Greenspan had FIRST issued the notes and created deposits and, SECOND: with them he had purchased Treasury paper pledging them for the purpose of creating credit ex post facto (retroactively).

To the uninitiated this simple reversal may look innocuous enough and, indeed, Greenspan could have argued that nothing more than a simple house-keeping change was put into effect that fell well within his authority. On closer scrutiny, however, it appeared that it was not a housekeeping change at all. It was, if indeed it happened the way I have assumed it did, an instance of usurpation of power that Congress alone has: to amend the Federal Reserve Act. No abundance of words would change the fact that, if Greenspan had done that, then he had created F.R. credit in blatant violation of the law. The difference made by the reversal was the difference between issuing F.R. credit lawfully, or issuing it unlawfully.

To see this just imagine that you are applying for a loan at the bank. The manager lets you sign the note and credits your account with an equivalent deposit. In escorting you to the door he pats you on the back and, when you are on the street, gives you a parting shout: “Don’t forget to drop back with the collateral at your convenience!”

If my allegations came anywhere close to the truth, then it would mean that the pregnant Trojan horse has been dragged up the hill and is now firmly implanted inside of the inner sanctum of the citadel. The Greek soldiers hiding inside the wooden horse were just waiting for the signal to get out of its belly, to fall upon the inhabitants of Troy and murder them in their sleep, women, children and all.

Translate that ancient story of Homer to our present situation and see that pirates have taken over our government’s finances, and are getting ready to help themselves to the public purse. These pirates apparently believe that members of the Legislative Branch, congressmen and senators, are simpletons. They can be easily persuaded that no more than a mere technical housekeeping change is involved. After all it is inconsequential, is it not, whether the cleaning people wash the windows first and scrub the floor afterwards, or whether they do them in the opposite order. The same is true, for the stronger reason, for the experts at the Fed.

Should anyone try to tip off legislators about the prestidigitation, he could always be dismissed as a ‘foggy bottom belly-acher’. Only a heartless economic royalist would deny relief money to the unemployed, the breadwinner with a foreclosed home, and their starving families. Also, remember, Treasury paper was bought by the Fed directly from the Treasury to keep the rate of interest fixed during World War II. Now we are at war once more combating terrorism. Can we do any less than we did then, to achieve victory?

I have known Congressman Ron Paul for close to forty years. I respect him and I think I can confidently say that he also respects me. He knows I am a careful scholar. I thought of briefing him on my suspicion. On second thought, however, I rejected the idea. It would be unfair to him on account of the scanty evidence I could offer. It would only embarrass him. He would have to fight an army of Fed attorneys, Fed accountants, and Fed economists single handedly. They would easily discredit him. It would be a lonely fight, against the odds, on a slanting field, adjudicated by an umpire bribed with our own money.

A better plan would be to wait until the pirates make a mistake, as they were likely to do after their initial successes. Given enough rope, they might just hang themselves.

I think this is exactly what has happened with QE, the rope the pirates asked for and got. QE I was an enormous over-reach. Yet, incredibly, no one at home or abroad has even questioned its legality. Pirates in the belly of the Trojan horse thought that their hour has struck. They were ready for the massacre.

The combined F.R. credit creation of QE I and II exceeds one trillion dollars. There is no way underneath the Sun to come up with unencumbered collateral of that magnitude to make this miraculous money proliferation legal.

It is time to blow the whistle. It is time for the sacred geese of Juno Moneta to honk, sounding the wake-up call for the sleepers to start defending themselves against mortal danger: that of being sold into slavery.

French boys and girls, if you asked them where the French equivalent of the word ‘money’ has come from, would answer: “Why, it means ‘silver’, doesn’t it?” By contrast, most native English speakers don’t know the origin of the English word ‘money’. That’s a pity because the explanation is fascinating. It is wrapped in a fairy-tale like story. Well, schools do not teach fairy tales any more, even if they have a moral on which your life may one day depend.

Many years after the rape of Troy by the Greeks, Rome was similarly threatened by its enemy, the barbarian tribe of the Gauls that invaded the peninsula and put Rome under siege. Inhabitants took refuge in the Capitolium.

The patroness of Rome was the supreme goddess Juno, wife of Jupiter, the father of the Olympian gods and goddesses. The Romans built a magnificent temple for her honor inside Capitolium, the citadel at the top of the hill which doubled up as the Mint where the gold, silver and copper coins of Rome were struck. In the garden around the temple the sacred geese of Juno dwelt.

In the back of the temple the hill was steep and full of cliffs with no roads. The Romans expected the assault to come from the opposite side that was less steep and where the roads were. Accordingly, the Romans left the back of the hill undefended. The invaders decided to take advantage of that. They approached the hill from that side and wanted to surprise the inhabitants under the cover of the night and murder them in their sleep.

They climbed the cliffs. Their plan would have probably succeeded but for the sacred geese of Juno that started honking loud when they noticed the invaders. That in turn woke up the defenders who drove off the enemy and defeated them decisively in the battle that followed next day. Unlike the story of Troy, this one had a happy ending.

The Romans gave thanks to their patroness Juno and thereafter called her Juno Moneta (Juno the warner, or Juno the admonitor). And Rome went on to great things. Her coins carried her fame, glory and riches to the far corners of the known world. And because they were minted in the temple of Juno Moneta, people lovingly called them ‘money’.

Let this be the wake-up call for America. Terrorism is a red herring. The real enemy is already inside of the citadel. The pirates have taken over the Fed. The sacred geese of Juno are honking loudly.

May Juno Moneta once more save our civilization.

A. E. Fekete, Impeach Bernanke! www.professorfekete.com, April 6, 2011

April 12, 2011.

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

<Section xml:space=”preserve” HasTrailingParagraphBreakOnPaste=”False” xmlns=”http://schemas.microsoft.com/winfx/2006/xaml/presentation”><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=”The opium wars do not belong to the glorious episodes of Western history. Rather, they were instances of shameful behavior the West still has not lived down. Mercantilist governments resented the perpetual drain of silver from West to East in payment for Oriental goods (tea, silk, porcelain) that were in high demand in the Occident, facing low demand in the Orient for Occidental goods. From the mid-17th century more than 9 billion Troy ounces or 290 thousand metric tons of silver was absorbed by China from European countries in exchange for Chinese goods. ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=”The British introduced opium along with tobacco as an export item to China in order to reduce their trade deficit. Under the disguise of free trade, the British, the Spanish and the French with the tacit approval of the Americans continued sending their contraband to China through legitimate as well as illegitimate trade channels even after the Chinese dynasty put an embargo on opium imports. Because of its strong appeal to the Chinese masses, and because of its highly addictive nature, opium appeared to be the ideal solution to the West’s trade problem. And, indeed, the flow of silver was first stopped, and then reversed. China was forced to pay silver for her addiction to opium smoking that was artificially induced by the pusher: the British. ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=”Thus silver was replaced by opium as the mainstay of Western exports. In 1729 China, recognizing the growing problem of addiction and the debilitating and mind-corrupting nature of the drug, prohibited the sale and smoking of opium; allowing only a small quota of imports for medicinal purposes. The British defied the embargo and ban on opium trade, and encouraged smuggling. As a result, British exports of opium to China grew from an estimated 15 tons to 75 by 1773. This increased further to 900 tons by 1820; and to 1400 tons annually by 1838 — an almost 100-fold increase in 100 years.” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=”Something had to be done. The Chinese government introduced death penalty for drug trafficking, and put British processing and distributing facilities on Chinese soil under siege. Chinese troops boarded British ships in international waters carrying opium to Chinese ports and destroyed their cargo, in addition to the destruction of opium found on Chinese territory. The British accused the Chinese of destroying British property, and sent a large British- Indian army to China in order to exact punishment. British military superiority was clearly evident in the armed conflict. British warships wreaked havoc on coastal towns. After taking Canton the British sailed up the Yangtze River. They grabbed the tax barges, inflicting a devastating blow on the Chinese as imperial revenues were impossible to collect. In 1842 China sued for peace that was concluded in Nanking and ratified the following year. In the treaty China was forced to pay an indemnity to Britain, open four port cities where British subjects were given extraterritorial privileges, and cede Hong Kong to Britain. In 1844 the United States and France signed similar treaties with China. ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=”These humiliating treaties were criticized in the House of Commons by William E. Gladstone, who later served as Prime Minister. He was wondering “whether there had ever been a war more unjust in its origin, a war more calculated to cover Britain with permanent disgrace.” The Foreign Secretary, Lord Palmerston replied that nobody believed that the Chinese government’s motive was “the promotion of good moral habits”, or that the war was fought to stem China’s balance of trade deficit. The American president John Quincy Adams chimed in during the debate by suggesting that opium was a “mere incident”. According to him “the cause of the war was the arrogant and insupportable pretensions of China that she would hold commercial intercourse with the rest of mankind not upon terms of equal reciprocity, but upon the insulting and degrading forms of the relations between lord and vassal.” These words are echoed, 160 years later, by president Obama’s recent disdainful pronouncements to the effect that China’s exchange-rate policy is unacceptable to the rest of mankind as it pretends that China’s currency is that of the lord, and everybody else’s is that of the vassal. ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=”The peace of Nanking did not last. The Chinese searched a suspicious ship, and the British answered by putting the port city of Canton under siege in 1856, occupying it in 1857. The French also entered the fray. British troops were approaching Beijing and set on to destroy the Summer Palace. China again was forced to sue for peace. In the peace treaty of Tianjin China yielded to the demand to create ten new port cities, and granted foreigners free passage throughout the country. It also agreed to pay an indemnity of five million ounces of silver: three million to Britain and two million to France. ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=”This deliberate humiliation of China by the Western powers contributed greatly to the loosening and ultimate snapping of the internal coherence of the Qing Dynasty, leading to the Taiping Rebellion (1850-1864), the Boxer Uprising (1899-1901) and, ultimately, to the downfall of the Qing Dynasty in 1912. ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=” The present trade dispute between the U.S. and China is reminiscent of the background to the two Opium Wars. Once more, the issue is the humiliation and plunder of China as a “thank you” for China’s favor of having provided consumer goods for which the West was unable to pay in terms of Western goods suitable for Chinese consumption. The only difference is the absence of opium in the dispute. ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=” Oops, I take it back. The role of ” /><Run FontStyle=”Italic” Text=”opium ” /><Run Text=”in the current dispute is played by ” /><Run FontStyle=”Italic” Text=”paper. ” /><Run Text=”Paper dollars, to be precise. In 1971 an atrocity was made that I call the ” /><Run FontStyle=”Italic” Text=”Nixon-Friedman conspiracy” /><Run Text=”. To cover up the shame and disgrace of the default of the U.S. on its international gold obligations, Milton Friedman (following an earlier failed attempt of John M. Keynes) concocted a spurious and idiotic theory of floating exchange rates. It suggests that falling foreign exchange value of the domestic currency makes it ” /><Run FontStyle=”Italic” Text=”stronger ” /><Run Text=”when in actual fact the opposite is true: it is made ” /><Run FontStyle=”Italic” Text=”weaker ” /><Run Text=”as the terms of trade of the devaluing country deteriorates and that of its trading partners improves. Nixon was quick to embrace the false theory of Friedman. No public debate of the plan was permitted then, or ever after. Under the new dispensation the irredeemable dollar was to play the role of the ultimate extinguisher of debt, a preposterous idea. The scheme was imposed on the world under duress as part of the “new millennium”, shaking off the “tyranny of gold”, that “barbarous relic”, the last remnant of superstition, the only remaining “anachronism of the Modern Age”. The ploy was played up and celebrated as a great scientific breakthrough, making it possible for man to shape his own destiny rationally, free of superstition, for the first time ever. Yet all it was a cheap trick to elevate the dishonored paper of an insolvent banker (the U.S.) from scum to the holy of holies: international currency. The fact that fiat paper money has a history of 100 percent mortality was neatly side-stepped. Any questioning of the wisdom of experimenting with is in spite of logic and historical evidence was declared foggy-bottom reactionary thinking. ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=” The amazing thing about this episode of the history of human folly was the ease with which it could be pushed down the throat of the rest of the world, including those nations that were directly hurt by it, such as the ones running a trade surplus with the U.S. Their savings went up in smoke. The explanation for this self-destructing behavior is the addictive, debilitating and mind-corrosive nature of paper money, in direct analogy with that of opium. The high caused by administering the opium pipe to the patient (read: administering QE) had to be repeated when the effect faded by a fresh administration of more opium (read: more QE2). ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=”If the patient resists, like China did in 1840, then a holy opium war must be declared on it in the name of the right of others to free trade. 170 years later a New China once more demurred against the paper-torture treatment it was subjected to by the American debt-mongers and opium pushers. ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=” But beware: if the West starts another Opium War, this time it is not China that will be on the losing side. ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=” ” /><Run FontWeight=”Bold” Text=”Reference ” /><Run Text=” ” /><Run FontStyle=”Italic” Text=”Opium Wars” /><Run Text=”, Wikipedia, June 29, 2010. ” /><Run FontWeight=”Bold” Text=”ANNOUNCEMENT New Austrian School of Economics ” /><Run Text=”Course Two at the Martineum Academy in Szombathely, Hungary, from March 5 through 13, 2011. ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=”Title of the course: ” /><Run FontWeight=”Bold” Text=”ADAM SMITH’S REAL BILLS DOCTRINE AND SOCIAL CIRCULATING CAPITAL ” /><Run Text=”What makes this course especially topical today is the fact that more and more hints are being dropped about the possible rehabilitation and restoration of the gold standard — following the ignominious collapse of the irredeemable dollar. However, ” /><Run FontStyle=”Italic” Text=”a gold standard without its clearing house, the bill market, ” /><Run FontWeight=”Bold” FontStyle=”Italic” Text=”is not viable” /><Run Text=” and itself is liable to collapse in short order — as it did in the early 1930’s. The level of public ignorance about the necessity of a clearing house is appalling. It is made that much worse by a tottering banking system. We have an urgent message: only gold standard cum real bills can restore prosperity to the world, in view of the fact that ” /><Run FontStyle=”Italic” Text=”we have to write off the world’s banking system as a total loss” /><Run Text=”. ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=” This is the second in a four-course series on Austrian Economics, a branch of economic science based on the work of Carl Menger (1840-1921). It is meant for those, including beginners, who are interested in the theory of money, credit, and banking, with ” /><Run FontStyle=”Italic” Text=”special emphasis on the current financial and economic crisis” /><Run Text=”. The complete program consists of four courses (10 days, 20 lectures each). Completion of each course will earn one credit. Participants who have accumulated four credits get a diploma signed by Professor Fekete. Course One that was given in 2010″ /><Run FontStyle=”Italic” Text=” is not a prerequisite” /><Run Text=”. It is available on DVD for purchase. For further information please contact Dr. Judith Szepesvari, e-mail: szepesvari17@gmail.com ” /><Run FontWeight=”Bold” Text=”NEW! EXTRA! SEMINAR Basis, Co-basis, Permanent Backwardation of Gold and Silver and What It Means ” /><Run Text=” March 14, Monday ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=” ” /><Run FontStyle=”Italic” Text=”The New Austrian School of Economics is the only place in the world where you can learn about the gold and silver basis, co-basis, permanent backwardation, and their importance.” /><Run Text=” In 2008 we offered a successful Seminar on the basis in Canberra, Australia, that was followed by a second Seminar in 2009. This will be the third in the series, where the latest results of the ongoing research on the gold and silver basis and co-basis will be discussed by our star research fellow, Sandeep Jaitly, followed by an open-ended discussion. ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=”No prerequisites are needed: we start with an introductory lecture on the basis and co-basis, with reference to permanent backwardation, by Professor Fekete. ” /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run /></Paragraph><Paragraph FontSize=”20″ FontFamily=”Georgia” Foreground=”#FFFFFFFF” FontWeight=”Normal” FontStyle=”Normal” FontStretch=”Normal” TextAlignment=”Left”><Run Text=”For more details, contact Dr. Judit Szepesvari: szepesvari17@gmail.com ” /></Paragraph></Section>