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The Achilles Heel of Modern Capitalism

Feb 16, 2009

For too long we have minded our own business and allowed the economists to be the "experts" on the economy. But these are extraordinary times, and anyone who has anything to lose in an economic crash is going to have to learn some basic facts. The alternative is to do what your broker tells you, or (worse yet) respond to the rhetoric of government officials who try to inspire you to put good money into failing projects in an attempt to prevent their failure.

If you want to school yourself in a crash course on economics, I recommend:


One of the best summaries of the present crisis is from Financial Sense, just published the other day:


The Financial Sense editorial by Daniel Schoon is about the World Economic Forum recently held in Davos, Switzerland. There is a great quotation on the first page from Sir Josiah Stamp, who in 1927 was the second richest man in England and the former head of the Bank of England:

"Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen, they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear--and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money."

Schoon understands that the real underlying issue is the lawful right to create money. Where does money come from? Most people think our government creates it. That is not true. The government creates bonds--which are IOU notes. They sell those bonds to those who have previously-created money to buy them, and the rest get sold to the Federal Reserve, which creates new money for the government to spend.

The Federal Reserve Bank is a private corporation masquerading as "federal." It is no more federal than Federal Express. If it were truly federal, the government would not have to repay anything to the Fed. The government would simply print money instead of bonds (IOU notes).

Schoon traces the history of modern banking to the Bank of England in 1694, saying,

"Capitalism, which began in 1694 with the issuance of debt-based money from The Bank of England, has now over three hundred years later reached its last and final stage. Capitalism is not ending because those enslaved by bankers revolted. Capitalism is ending because the bankers' insatiable greed destroyed the mechanism by which bankers indebt others."

He calls it "Capitalism," for that is the most well-known description of it. I call it "Babylon." One should never confuse Capitalism with Free Enterprise. I am a believer in Free Enterprise, as long as it operates under the moral laws of the Kingdom of God. I do not believe in the debt-usury-based monetary system called Capitalism or Babylon.

Schoon says that the inherent problems of Babylonian Capitalism were kept well under control by the gold standard.

"That such a system has lasted over three hundred years is extraordinary; but it was not until the 20th century when the linkage between paper money and gold began to fail that the problems inherent in paper money systems became more apparent."

This is mostly true, but here is where we also begin to differ. While it is true that a gold standard put a damper on the creation of new money, and that this dampening effect greatly extended the life of the debt-money system, the problem is not paper vs. gold, but debt-money vs. positive money.

I see no point in waging war on paper. Paper in itself is neither good nor bad. It is what it says it is, or what it does NOT say it is. If we used only gold and silver as money, the problem would still be the same, if that metallic money were issued as a debt. If the Bank of England loaned gold at interest, the debtors would still be faced with the problem of having to pay back more than they borrowed. The primary difference is that if the Bank had to transfer gold to the government, they would actually be loaning the government something of intrinsic value. A paper loan creates something out of nothing, rather than loaning metal that has been mined by men's actual labor.

A growing economy with a growing population base needs an increasing amount of money in circulation with which to conduct business. If a nation has no gold or silver, can it have money? or should that nation stay on the barter system and use no money at all? No nation should be enslaved to the amount of gold or silver in its vaults. In fact, if a nation is on the gold standard and finds itself short of gold, it will inevitably simply raise the price of gold to cover the amount of money that it needs in circulation. A gold standard is no guarantee that there will always be a proper amount of money in circulation.

In today's world, however, we not only cut the dollar loose from gold in 1971, but we also retained the Fed's right to create money out of nothing and loan it to the American government at interest. What did the Fed's stockholders do to earn such enormous returns? Did they fork up their own hard-earned money? Of course not. They simply created a bookkeeping entry, originally with a pencil, and today with a computer entry. They did so without even breaking a sweat. But that piece of work earned them billions of dollars in interest payments on another unpayable debt.

I suggest that President Obama issue an Executive Order stating that for one day, say, April 1, 2009, the price of gold will officially be set at $1 trillion per ounce. Then on that day, the nation's debt to the Fed will be repaid at the lawful rate. Give the Fed about 11 ounces of gold, and the debt is repaid.

Of course, it is highly doubtful that anyone else in America would want to buy any gold at the official rate. Everyone would ignore the government decree for a day. But the Fed would have no choice but to accept it. That would, in effect, be a partial National Jubilee. This suggestion, of course, is not acceptable to the bankers who presently run the treasury. And if a president were to issue such an Executive Order, you can bet on it that he would not survive long in the White House, and the Vice President would "see the light" and instantly repeal such an Order and thereby live to see the next sunrise.

Schoon then hits the nail on the head:

"Debt, in capitalist systems, is a wondrous device. That is, until it can't be paid back. Under capitalism, credit fuels expansion, but it does so at a cost. As capitalism expands, credit becomes debt and the greater the expansion, the greater the debt. . . .

"Capitalism's fatal flaw is apparent only in its later stages. . . The very expansion of capitalism sets in motion its demise. The Achilles heel of capitalism is its perpetual need to expand. Only perpetual capital expansion can create sufficient capital flows to service and retire previously created debts, the amounts of which are always increasing because of the accruing compound interest being charged. While any slowdown is cause for worry, a contraction bodes far worse."

Today the debt has reached the point where we can no longer continue buying. The debt-system is now unsustainable, and no bailout package can reverse this.

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Category: Financial

Dr. Stephen Jones

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