The Fraudulent Money System – Is There Any Real Money At All?

1. The Fraudulent Money System – Is There Any Real Money At All? ao.Univ.Prof. Dr. Franz Hörmann University of Economics and Business Administration, Vienna http://www.franzhoermann.com http://www.antibilanz.info

2. Introduction Franz Hörmann franz.hoermann@wu-wien.ac.at Department for Accounting and Tax Management University of Economics and Business Administration, Vienna Fellow at University Linz Main Field of Research: Accounting Information Systems & Knowledge Management

3. Contents • The History of Money • How Money is Created in the Western World Today • The Financial Crisis – The End of a Fraudulent System? • What Can We Do?

4. The History of Money • In the beginning: Goods with an intrinsic value (sheep, cattle) • If someone borrowed a herd he had to give it back including the newly born calfs  natural interest!

5. The History of Money • The first coins: the shekel (a Sumerian bronce piece at about 3200 BC with mystical symbols of life‘s fertility – „She-kel“ = one bushel of wheat) • The word „money“ comes from Juno Moneta (Roman Goddess of pregnancy and fertility, whose temple basement housed the first mint

6. The History of Money • 900 AD: paper money was quite common in China (reported by Marco Polo, travels 1252-1292) • Europe: during the late Middle Ages goldsmiths checked the purity of gold coins (strongboxes, issued paper receipts for the gold coins  became tokens for the PROMISE TO PAY) • This was a shift from „money as a commodity“ towards „money based on credit“ – the type of money still in place today!

7. The History of Money • In the 13th century goldsmiths in Italy started to issue more paper receipts than there was gold in their strongboxes (10x)  the beginning of the „fractional reserve banking system“ still in place today! • Bank of England: founded 1694 (proposal of William Paterson) – a privately owned bank giving a loan to the King (William, 1688) for 8% interest

8. How Money is Created in the Western World Today • In the 17th century an arrangement was struck between emerging national governments and the private banking system: private banks could create money as „legal tender“ (through „fractional reserve banking“) and would provide whatever funds government needed (but as a loan bearing interest!) • Only 10% have to be placed on deposit (in „reserve“)  the rest can be loaned out  if it comes back into the deposit once again: only 10% become the „reserve“ and 90% can became another loan  from 100 Mio €  900 Mio € „new money“ (as debt!) can be created

9. How Money is Created in the Western World Today • This system only creates the capital of the loan and never the money for the interest  the main reason for our obligatory growht in our economies (to pay back interest to banks!) as well as for „competitive markets“ (competition for liquidity to pay interest to banks in a war each one against everyone – „bellum omnium contra omnes“!) • The US FED was created in 1913 as an exact copy of the Bank of England – privately owned and using the fractional reserve system!

10. How Money is Created in the Western World Today • The business model of modern banks: take low-risk assets (deposits) and invest them in higher-risk assets  „moral hazard“. The private owners reap the rewards and the public pays the losses (governmental insurance safety nets to „protect the depositors“) • Bank problems very quickly become everybody‘s problems!

11. How Money is Created in the Western World Today • Modern Central Banks: „emergency firemen“ (lender of last resort, „systemic risk management“), control inflation using the quantity of money as a lever • Bank of International Settlements (BIS): founded 1930 to deal with German war reparations. Today it is a private club (owned and controlled by 10+1 Central Banks – the „Central Bank of Central Banks“). Neither politicians nor ministers of finance are welcomed to participate  no political control!

12. How Money is Created in the Western World Today • International Monetary Fund (IMF): Auditor of the worlds central banks, about 200 member countries, lender of last resort for central banks  only conditional upon draconical economic austerity measures (dominant US-influence, located in Washington D.C., US veto power on all decisions)

13. How Money is Created in the Western World Today • Types of „money“: • Coins (only 1 per thousand of the money supply – the only „real money“, because when minted, there is no debt creation involved!) • Paper money (about 3% - each time it is printed, public debt increases because treasury bonds are sold and those bear an interest!) • Bank deposits (about 97% - they only exist in the bank‘s IT-systems, in databases and on computer screens – no real „money“ at all, created always, when a bank grants a loan!)

14. How Money is Created in the Western World Today

15. How Money is Created in the Western World Today • The „value of money“: It‘s scarcity! • Whenever we write a cheque, we‘re „printing“ our own money! • When we pay with credit cards, we‘re „printing“ our own money!

16. How Money is Created in the Western World Today 1) When the Federal Reserve Bank purchases government securities, bank reserves increase. This happens because the seller of the securities receives payment through a credit to a designated deposit account at a bank (Bank A) which the Federal Reserve effects by crediting the reserve account of Bank A.

17. How Money is Created in the Western World Today

18. How Money is Created in the Western World Today 2) Bank A now has 9.000 “excess reserves”, meaning it can give new loans of the amount of 9.000 (only 10% must be kept as “reserves”).

19. How Money is Created in the Western World Today

20. How Money is Created in the Western World Today 3) In the next round only 10% of 9.000 are kept as “reserves”, meaning the bank can give new loans of 8.100 etc. etc.

21. How Money is Created in the Western World Today

22. How Money is Created in the Western World Today 4) But: in all those cases interest has to be payd for the loan  using money, that has not been created in this process! This money has to be fought for in the “competitive market”!

23. The Financial Crisis – The End of a Fraudulent System? • Is modern Economics a legitimate science? • The utmost Goal of Economics: • The Optimal Use of Scarce Resources • „Optimal Use“  Mathematical Methods (Optimization) • „Scarce Resources“  Tangible Assets, Raw Materials etc.

24. The Financial Crisis – The End of a Fraudulent System? • Optimal Use • The „Optimal Use“ is already known beforehand, it can only be ONE use (the „optimal“), all future production methods, future demands, future possible uses etc. must already be known (otherwise: what would a „temporary optimality criterion“ be good for?).

25. The Financial Crisis – The End of a Fraudulent System? • Scarce Resources • They are „scarce by definition“ (finite quantities at hand but potential infinite demands for in the future): Natural Resources, Production Plants, Money, … •  Scarcity = Measure of Value (Manipulation!) • But: Limited Resources (Supply) & possibly unlimited Demand gives us a „Scientific Rationale for War“ (Warfare by „the Laws of Nature“) • Economics  Bunch of Zero-Sum Games (only by the magical power of words, some thoughtless definitions) • The „Limits of Growth“ apply!

26. The Financial Crisis – The End of a Fraudulent System? • Alternative View • The Goal of Economics: • To Promote Human Evolution (mental, social, …) by supporting individual development • EVOLUTIONARY ECONOMICS • Growth: in knowledge, skills, understanding, empathy, … in mental and spiritual areas unlimited growth is possible  no „scarcity of resources“, no „reasons“ for war!

27. The Financial Crisis – The End of a Fraudulent System? • Alternative View • How do we Measure Success (do we need some numbers)? • For meaningful measurement the final goal must already be known in advance (length, weight, temperature… we know, why we measure them, because some causality is implied). • But: what‘s the final goal of Human Evolution? •  only if we can answer this question, mathematical measurement makes sense!

28. The Financial Crisis – The End of a Fraudulent System? • Alternative View • We (Humans) are the Products of our own Evolution (we can only mistrust and restrain or trust and further, but never „measure“ it). • Evolution has given us all the necessary decision tools we need to succeed on our way: (pleasant and unpleasant) Feelings • Behavioral Finance, Behavioral Economics, … why so late?

29. The Financial Crisis – The End of a Fraudulent System? • Wall Street Crash of 1929 Dow Jones Industrial Average for 10/28/1929 and 10/29/1929

30. The Financial Crisis – The End of a Fraudulent System? • Milton Friedman's monumental A Monetary History of the United States, co-written with Anna Schwartz, makes the now standard interpretation of what made the "great contraction" so severe. It was not the downturn in the business cycle, trade protectionism or the 1929 stock market crash that plunged the country into deep depression. It was the collapse of the banking system during three waves of panics over the 1930-33 period.

31. The Financial Crisis – The End of a Fraudulent System? • Bretton Woods (July 1944): Free trade relied on the free convertibility of currencies. Negotiators at the Bretton Woods conference, fresh from what they perceived as a disastrous experience with floating rates in the 1930s, concluded that major monetary fluctuations could stall the free flow of trade. • The liberal economic system required an accepted vehicle for investment, trade, and payments. Unlike national economies, however, the international economy lacks a central government that can issue currency and manage its use. In the past this problem had been solved through the gold standard, but the architects of Bretton Woods did not consider this option feasible for the postwar political economy. Instead, they set up a system of fixed exchange rates managed by a series of newly created international institutions using the U.S. dollar (which was a gold standard currency for central banks) as a reserve currency.

32. The Financial Crisis – The End of a Fraudulent System? • The U.S. balance of payments crisis (1958–68): On March 17, 1968, there was a run on gold, the London Gold Pool was dissolved, and a series of meetings began to rescue or reform the existing system. The attempt to maintain the gold peg collapsed in November 1968, and a new policy program was attempted: to convert Bretton Woods to a system where the enforcement mechanism floated by some means, which would be set by either fiat, or by a restriction to honor foreign accounts.

33. The Financial Crisis – The End of a Fraudulent System? • The "Nixon Shock": By the early 1970s, as the Vietnam War accelerated inflation, the United States as a whole began running a trade deficit (for the first time in the twentieth century). The crucial turning point was 1970, which saw U.S. gold coverage deteriorate from 55% to 22%. In December 1971 a general revaluation of major currencies took place, which were henceforth allowed 2.25% devaluations from the agreed exchange rate. But even the more flexible official rates could not be defended against the speculators. By March 1976, all the major currencies were floating—in other words, exchange rates were no longer the principal method used by governments to administer monetary policy.

34. The Financial Crisis – The End of a Fraudulent System? • A number of economists (e.g. Dooley, Folkerts-Landau and Garber) have referred to the system of currency relations which evolved after 2001, in which currencies, particularly the Chinese renminbi (yuan), remained fixed to the U.S. dollar as Bretton Woods II. The argument is that a system of pegged currencies is both stable and desirable, a notion that causes considerable controversy. • However, this informal meaning has been superseded in the wake of the Global financial crisis of 2008. • On September 26, 2008, French, and current European Union president, Nicolas Sarkozy, said, "we must rethink the financial system from scratch, as at Bretton Woods.” • On October 8, 2008, Argentine President Cristina Fernandez de Kirchner said "the financial world crisis will need a strong regulation in the matter of financial markets and capital movements throughout the world. A new Bretton Woods will be needed".

35. The Financial Crisis – The End of a Fraudulent System? • The End of the US Monetary System: The $700 billion that was arm-twisted from Congress by Treasury Secretary Hank Paulson in October was evidently just the camel’s nose under the tent.  According to a November 24 Bloomberg report, the Paulson/Bernanke team is now prepared to pay $7.76 trillion to rescue the financial system.

36. What Can We Do? • Spread Out Information: • About How Money is Created (Faked) by Banks • That Real Democracy Starts with a Generally Accepted Monetary System (GAMS) • Be Creative: • Try to Simulate Money Systems (with NetLogo, e.g.) • Try to Design new Money Systems (that don‘t increase public debt and perhaps even don‘t use compount interest!)

37. What Can We Do? • What should Money be? • A bridge over time (between giving and taking) • A set of rules for distributing goods and services in the population •  There are NO LIMITS OF CREATIVITY to reach those goals!

38. What Can We Do? • How do we earn (and spend) money? • Virtual communities will provide their own money (money-servers, economy-servers, LET-Systems: http://www.gmlets.u-net.com/, http://www.openmoney.org/, http://www.complementarycurrency.org/, e.g.) • Virtual realities will spread and transform into „parallel economies“, where soon children will earn more money than their parents (http://www.entropiauniverse.com/, http://www.secondlife.com/, e.g.)

39. Literature and Websites Comer: The Committee on Monetary and Economic Reform (Canada) Creating Community Currencies Forum for Stable Currencies (UK) Thomas H. Greco Jr.: ReinventingMoney.com G. Edward Griffin: The Creature from Jekyll Island Ellen Hodgson Brown: The Web of Debt – Homepage, Book Joel Kurtzman: The Death of Money MoneyReformParty (UK) Stephen A. Zarlenga: The Lost Science of Money, American Monetary Institute