Sunday, March 8, 2015

Franz Hörmann’s Infomoney, Part II


(Part I here)
(Part III here)
(Part IV here


Money can only ever be a reflection of wealth, not wealth itself, even though we have come to think of money as wealth. The simple thought exercise of imagining being on the Moon with all Earth’s money but none of its life-sustaining ecosystems makes this simple fact very clear, as does the famous story of King Midas.

The question this begs is whether money accurately reflects wealth.

Currently, all money is created as interest-bearing debt. One consequence of this is that the economy must grow to keep the money system  functional, a point I repeat here ad nauseum, a clear sign of how critical I believe it to be. When economic growth falters, the money system stutters and stumbles, then economic activity falters some more, and so on: a positive feedback loop. In other words, a debt-based money system is appropriate enough for an economy that can grow and grow and grow, but becomes destructive when the economy has matured to a steady-state situation.

In steady-state growth, money-as-debt no longer accurately reflects wealth, even remotely, whereupon economic instability and precariousness ensue.

Currently, we are witnessing the 1% desperately trying to protect their money-wealth and power – as enshrined in the money system – while real wealth rots. The signs are everywhere. Watch the news and read the papers with the above angle on money in mind, and you should be able to see what I mean.

Greece is a vibrant focal point in that battle, the battle of how society defines money, wealth and value (and also work and productivity). How the Greek situation develops over the next few months will determine the immediate fate of the euro, and with it that of the dollar. More broadly, the entire economic system is on life support. The mainstream is slowly drawing people’s attention to the problem: I just watched a programme (German) in which economic expert after economic expert each argued that the debt-money system only works with economic growth to back it up, as the German government itself admitted a few years ago. Sadly, as is common for economists, not one expert mentioned that it is impossible for an economy to grow forever on a finite planet. The obvious need for a radically different money system went unmentioned.

It is thus up to non-experts to ponder what might replace it. To this end, this is part two of my translation of Professor Hörmann's Infomoney proposal, in which the accounting expert details how bank money is currently created. Next week we will look more closely at Infomoney itself.


Bank-money creation


When a (private commercial) bank issues credit, it never lends money (in the sense of legal tender, a.k.a. notes and coins). It issues credit by means of an accounting entry:

Claim (debtor) on a liability (debtor): credit amount

The bank records a claim on the debtor on one side (it wants the amount "back again", plus interest of course), on the other it records its own liability of the same amount to the same debtor. This is the debtor's checking account credit, from which s/he can withdraw (in cash) or transfer (electronically) that amount.

The bank claims an amount "back" from the debtor, an amount the bank has not in fact delivered (a liability), a fact openly recorded in the accounting entries: the bank itself is still "indebted".

This is set out in detail in: Broschüre für Schulen der Deutschen Bundesbank (Kapitel 3.5) ("Brochure for Schools from the German Bundesbank (Chapter 3.4)"). So when credit is issued – should this not be in cash (notes and coins) – no legal tender changes hands, only bank debt does. If Ms Jones is issued €10,000 of credit (into her checking account), she does not receive any money. All bank customer checking accounts are recorded by banks on the liabilities side of the balance sheet, and are thus bank debts. The bank thus remains indebted to its customer Ms Jones by this credit amount. If Ms Jones then electronically transfers this amount to Mr Smith's account, the bank is subsequently indebted by this amount to Mr Smith and not Ms Jones.

Credit issuance is in fact, legally speaking, the loaning of one's own funds. The bank, the issuer of bank money, does not part with its own funds when it issues credit. All credit issued is recorded to the liabilities side, and is thus a liability. Furthermore, the amount is not loaned, it is, more accurately speaking, newly created through this process of "credit issuance" (as interest-bearing debt). Legally speaking, then, banks are not in fact in the credit business. But if banks choose to insist they do in fact lend out their savers' money, then they should prove it. Has any bank saver ever seen their savings account reduced because the bank has lent a portion of it to another of their customers? If banks further claim "refinancing costs" are incurred when issuing credit, then they should prove this too: how much does it cost to record an accounting entry?

When we transfer electronic money from our checking account, we are not transferring money as legal tender, but bank debt. This money in account or bank money makes up 97% of Europe's entire money supply. In this system of credit issuance, security is only ever provided by the debtor, never by the bank.

By far the greatest proportion of the money supply (approx. 97% in Europe) comes neither from the central bank (ECB) nor from governments. This money is newly created by private, profit-seeking banks when they issue credit and make payments. The simple fact that this power is granted to banks alone and not to businesses of the real economy (not-banks) is an unconstitutional inequality.

This information and its meaning should be made plain to the public and to legal practitioners. As ever, the legal system turns a blind eye to these facts, and this leads to erroneous judgements (Video: "Justiz entlarvt - Geldschöpfung unbekannt" - 37 min. ("Justice exposed – Money Creation unknown").

However, banks practice this procedure (booking to the accounts of payment recipients, in other words recording their own debt as "payment") even when they make purchases. When banks purchase land, buildings, computers or securities; when they "pay" their employees, award bonuses to the members of their board and pay dividends to their shareholders, they always book (and thereby create) their own debt to the checking accounts of the payment recipients (in accountancy terms). These activities (including accounting entries) are very clearly explained in this book (German).

This is the real reason why all banks everywhere are mired in debt: bank money, as used today, allows banks to appropriate assets from not-banks without providing any consideration. "Bank debt" is thus the sum of these absences of consideration on the part of the banking sector. This type of money creation (via the creation of bank liabilities) should be ended as soon as possible and replaced with a more effective and fairer system.

"Money" created in this way (as accounting entries and bank debt) is, obviously, not backed and entirely worthless (fiat money, from "Fiat Lux": "Let there be light", "Fiat money": "Let there be money", money "from thin air" minus any valuable backing).


Another disadvantage of this type of money creation is that the (bank) money needed to pay the interest demanded by the banks is never created when credit is issued. The accounting entry for the interest on the credit is recorded by the bank like this:

Claim on interest earnings

The interest earnings do not represent a bank liability, so (bank) money to pay the interest cannot ever be created. This means that participants in the real economy are required to extract interest payments from the existing money supply. This forces competition for this necessarily scarce good. Competition in the economy is therefore primarily a result of the systemic fact that (bank) money is demanded as payment for bank interest, (bank) money that does not actually exist. If it were the case that no interest payments were demanded, a cooperative economic system would be entirely possible.

The counterargument often put forward here is that interest is indeed payable through the increasing velocity of money. Sadly, this argument is logically untenable. For this to work, the banks would have to return, immediately, all monies received as interest payments to their debtors. Only then would their debtors have access to sufficient liquidity for paying the next round of interest due. But this does not occur in practice. In the meantime, we really can't say how it might be that debtors would suddenly receive exactly those funds needed to pay the next round of interest due as a direct consequence of the velocity of money having increased.

This battle to secure payment for bank interest from the existing money supply is called "healthy competition" in this heartless system. Non-business institutions (i.e. that have no customers to whom they sell things, particularly private and public households) have no other option in this system than to take on more and more new debt just to pay off existing debt and its interest. Household debt must, therefore, always grow, a systemic necessity that need not imply waste, incompetence or greed. Private and public households are systemically incapable of paying off their debts in today's interest-bearing, debt-money system. It is for this reason that we speak of a systemic crisis in these pages (a crisis of the entire system), and not of a simple "business cycle". 

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