“Banks create money out of air”
By Daniela Rom 13. October 2010
Why the financial system is a model for fraud, what role balance sheets play and why the ultimate crash is impending: Vienna economics expert Franz Hörmann explains.
For Franz Hörmann, Professor at the Economics University in Vienna, the era of banks and money is over. A paradigm shift both in economics and in society as a whole is unavoidable. In an interview with Der Standard, he explains why we can cheerfully ignore banks, why the free markets are “bubble-producing machines for misuse by the elite” and why the entire system could collapse in the next three years.
der Standard.at: You are assuming that society and economics is going to completely change in the next few years. Has this system reached the end of its usefulness?
Franz Hörmann: Definitely and in every respect. This is because it is based on legal and economic models that go back to ancient Roman times. The system of interest dates back to the second millennium before Christ; double-entry booking to the 15th century. And there is no area in our societies or in the sciences where methods this old are still taken seriously. But they serve to keep our society’s elite powerful and rich and that’s why nothing changes.
der Standard.at: Will this crisis change the way we think?
Hörmann: I think so. The current crisis stems from the banks. The banks invent money as part of the credit creation process. But if you create money out of the air and then pass it on to others while adding interest to something that did not exist before and also make physical assets the collateral, then that is in reality a model for expropriation if the social model goes wrong. This is also the reason for bank secrecy rules. Banks are not in a position to reveal where the interest for savings books, property saving contracts and such like comes from and so show that it is all a complex pyramid scheme or ponzi game in reality.
This hidden expansion of the money supply began with double entry book keeping. If you buy a thing or object using money, then the money actually changes ownership. The seller has the money and the buyer has the thing or object. From that moment on, the thing or object can no longer be evaluated in money terms if you take a theoretical perspective. Nevertheless, we put these sums of money onto balance sheets.
der Standard.at: Is it then a mistake to trust the banks and the financial system?
Hörmann: Trust has been systematically abused by the banks in the last few years. There is a model of systematic fraud in an institution that has been given a monopoly power to create money through credit in our economic system. As long as people go with their own capital to banks for security and they create real money out of air that serves as a medium of exchange, we have a problem. Capital is not money: it is a unit of counting. The active side of a balance sheet is calculated according to some set of rules or other and then the debts are subtracted. If I have a piece of wood that is three metres in length and cut out a two metre long piece, then I do not have a one metre piece; I have a difference. If I want a one metre long piece of wood, then I have to saw the two metres piece. In economic terms that means I have to liquidate the assets to get my cash. But the companies in the world today are all too broke to get much value from a liquidation. In addition, a nation cannot really go into debt. Just to whom should a state when seen as the sum of all its total money flows be in debt too? A state should produce its own money and in a grass-roots and democratic way actually.
der Standard.at : What about the rescue packages as in the case of Greece?
Hörmann: The European countries have not necessarily saved Greece but their own banks, and primarily the German banks, who have given absurd amounts of credit in this case. The way things hang together are also completely absurd if you consider the following. The state goes into debt to banks to pay the interest on the debts that it has with banks or to save a bank that it owes money to. No one understands anymore who has debts with whom and what the debts actually are.
der Standard.at : Do you think the system relevance of banks and the “too big to fail” argument as well as the bank rescue packages are just pure self interest?
Hörmann: The Too Big to Fail is a business model. There is proof banks are trying on purpose to make themselves too big to fail by taking over other banks. There are huge numbers of links between the financial world and the politics. In fact, you can t take governments that consist of current or former employees of the financial system seriously. There has been one courageous act, and that was to nationalize the capital of the Austrian National Bank and so to make the National Bank independent of the banks that they are supposed to be controlling.
But the monetary policy is made by the European Central Bank and not the Austrian National Bank. The bank rescue packages are the most incredibly funny things of all. The banks are not going to be saved. There is just a plan for the future which people even today know is not going to work because the money has to come from the upcoming “austerity budgets” by means of taxes, and the ciritzens have to be milked of cash. The banks are broke all around the globe. That is why we can cheerfully act as if they don’t exist any more.
der Standard.at : But they are still there, no?
Hörmann: When it comes to credit, we can ignore them. In 1969 an American architect won a court case because he didn’t want to repay his mortgage. He argued the legal point that when a thing was created as part of a loan that did not exist beforehand, this thing does not need to be repaid. In view of the fact that money comes into existence only in the process of credit creation there is no need to repay the credit. In the USA there are already citizen’s movements that say to Americans that they should unite and not repay credit.
der Standard.at :Let’s get back to the balance sheets. The problem starts there already in your view?
Hörmann: The large sums used in balance sheets are not countable. If someone who buys a house for two million instead of one million because he negotiated poorly, does that person have more own capital? And if he finds someone who buys it for ten million is that then the market price? It is sick.
Fair Value [mark-to-market accounting which enables a company to book the value of an asset or a liability based on current market valuations or perceived changes in market valuations significantly from the historical cost method of asset valuation] is also a model for fraud because it can has been seen to be misused by the use of money given as a money and straw men. Fair Value should be abolished once and for all. It is nothing other than the so called “market or ordinary value” [Gemeine Wert] which was eliminated from the German commercial law books at the end of the 19th century because it resulted in massive numbers of fraud when it came to the establishment of corporations. It is a blanket fraud by incorporated companies and banks in our economic system. But the political class can’t admit that because they would need to turn to concepts that Marxists used to use in times goneby. And that would be too embarrassing. That said, it has, of course, to be noted that state socialism and the planned economy couldn’t funciton because they really were terror regimes.
der Standard.at Right now there are more and more voices saying for example that the euro is going to disappear. Do we still need money?
Hörmann: All currencies are going to disappear because they can’t technically function any more. In my opinion that could happen already in 2011. If we want to reach the safe shores of a society without money then we will need to have multidimensional money during the transition phase. We need several independent calculation circles in the form of specialised electronic coupons. In order to cover the basic needs of people such as a place to live, energy and food etc, conduct an inventory of all the resources available in a land and of the needs could be conducted. In that case, it would be necessary to divide the resources per person in such a way that the basic living standard for everyone is taken care of. The community has an obligation to support children, the elderly and the sick unconditionally and without expecting to get something back in return and everyone has to have access to the same basic living standard irrespective of their performance.
der Standard.at So we’re talking about an basic income with conditions.
Hörmann: Exactly. But not in money but in goods and services. When it comes to luxuries, society can then decide in a grass roots democratic way what prizes to give to individual or groups for achievements. For great ideas, for example, or for especially difficult and hard work. These incentives would then drive a system that motivates people and is performance-orientated. Everyone talks about the performance society but income from interest and shares is not due to a performance or to any achievement, but is a renumeration for capital. Money which is a social construct anyway doesn’t need to be orientated towards the dead matterial world, which was the practical manifestation of money in the centuries gone by. Money itself just has an information function.
der Standard.at We still take money very serious. Currency wars and currency crisis dominate the media.
Hörmann: The real scandal is that our whole money system is based on debts. That means that the creation of money occurs for up to 97% in commerical banks. That’s how nations take up credit. The central banks do this by extending their balance sheets. But adding more digits to balance sheets does not produce money. The Chinese state bank also invents money out of air but amusingly enough without state debts being created. That’s how we should do it. The Chinese economics expert Wu said at a lecture at an American university that he was often asked why so many new companies had been founded in China. The Chinese state bank gave credits for starting companies that did not carry interest and that didn’t have to be repaid. Of course, you can only do that as a central bank if you book on just one side and don’t at the same time create debts. And if you say: Heavens above, then what about inflation! The Chinese managed that by regulating prices and were the cleverer once more. No one wants to hear that because it goes against the dogma of the free market, which are the bubble producing machines for the elite to misuse.
der Standard.at Is China really a model to be followed?
Hörmann: The Chinese do it in the right way. They pick out the cherries of both political systems and are clearly flexible enough to say: we will keep whatever functioned well in our old system. And we will take over whatever looks good in the capitalist systems. It is a mixed form that is also constantly changing and undergoing an evolution. For the elite in China it is simple as long as they can control it. Whether it is just as simple for the whole population, especially the agricultural workers, is another question.
der Standard.at: How do you see our economic system in the future?
Hörmann: As long as owners produce something so that consumers can buy it in return for money we will be heading into a system where the government, the producers of money, will have to pay consumers to go and buy. Only in that case will owners still be able to make profits. This is because no one is going to be able to make their liivng in ever more rationalised and automised work processes. We know that ten per cent of the working population in the meantime can no longer live from their salary. In reality, we should be happy about this. At the start of industrialisation, the number of working hours saved was the measuring stick used for economics. And exactly that unit is the only meaningful economic one.
der Standard.at: Do you want a new world order?
Hörmann: Globalisation understood in the correct way means that there is no more politics based on location. There is only one location and that is our planet earth. And there is only one nation and that is humanity. That is, of course, diverse and people need to communicate in a loving and empathetic way with each other. We also have to pick up the representatives of the so-called Elite at that place where they are. We should not look for scapegoats. Because we have to take into account their fears about what they will lose and say: you will lose something but that is only money on paper or something for display. And if you cooperate, then we can create every imaginable kind of living standard and for a broad section of the people. That creates security because there will be no more jealousy.
der Standard.at: What timeframe are you thinking for this new social order?
Hörmann: Three years. The question is whether humanity manages to implement this concept in three years or whether it will exist at all. We have, of course, massive ecological and social problems. In many countries, we are just before a revolution.
der Standard.at: You are talking about the ultimate crash?
Hörmann: Right. Only society itself can decide how society is going to live in the future or wish to live and using the majority principle. That is happening in a democratic way through the creation of networks. Hierarchical structures cannot function from the point of view of the information theory because the people at the top of the pyramid don’t have the knowledge. They are lied to permanently by the layers underneath. The method of the ordinary man on the street tries to protect himself from surveillance and harrassment is well known: lie to those in power. That’s why numerous hierarchical systems, whether it is governments, states, school systems or companies are currently collapsing and humanity is connecting together on a new level over the internet, through the “global brain.” Completely new game rules apply following the principle of emergence.