A deposit banker could not launch a career of “fractional-reserve” fraud and inflation from the start. If I have never opened a Rothbard Bank, I could not simply launch one and start issuing fraudulent warehouse-receipts. For who would take them? First, I would have to build up over the years a brand name for honest, 100-percent reserve banking; my career of fraud would have to be built parasitically upon my previous and properly built-up reputation for integrity and rectitude.

We get closer to the nub of the problem when we realize that, historically, there has existed a very different type of “bank” that has no necessary logical connection, although it often had a practical connection, with loan banking. Gold coins are often heavy, difficult to carry around, and subject to risk of loss or theft. People began to “deposit” coins, as well as gold or silver bullion, into institutions for safekeeping.

Government paper, as pernicious as it may be, is a relatively straightforward form of counterfeiting. The public can understand the concept of “printing dollars” and spending them, and they can understand why such a flood of dollars will come to be worth a great deal less than gold, or than uninflated paper, of the same denomination, whether “dollar,” “franc,” or “mark.” Far more difficult to grasp, however, and therefore far more insidious, are the nature and consequences of “fractional-reserve banking,” a more subtle and modern form of counterfeiting.

Counterfeiters are generally reviled, and for good reason. One reason that gold and silver make good moneys is that they are easily recognizable, and are particularly difficult to simulate by counterfeits. “Coin-clipping,” the practice of shaving edges off coins, was effectively stopped when the process of “milling” (putting vertical ridges onto the edges of coins) was developed. Private counterfeiting, therefore, has never been an important problem. But what happens when government sanctions, and in effect legalizes, counterfeiting, either by itself or by other institutions?

Suppose that a precious metal such as gold becomes a society’s money, and a certain weight of gold becomes the currency unit in which all prices and assets are reckoned. Then, so long as the society remains on this pure gold or silver “standard,” there will probably be only gradual annual increases in the supply of money, from the output of gold mines. The supply of gold is severely limited, and it is costly to mine further gold; and the great durability of gold means that any annual output will constitute a small portion of the total gold stock accumulated over the centuries.

The total stock, or “supply,” or quantity of money in any area or society at any given time is simply the sum total of all the ounces of gold, or units of money, in that particular society or region. Economists have often been concerned with the question: what is the “optimal” quantity of money, what should the total money stock be, at the present time? How fast should that total “grow”?

It is impossible to understand money and how it functions, and therefore how the Fed functions, without looking at the logic of how money, banking, and Central Banking developed. The reason is that money is unique in possessing a vital historical component. You can explain the needs and the demand for everything else: for bread, computers, concerts, airplanes, medical care, etc., solely by how these goods and services are valued now by consumers. For all of these goods are valued and purchased for their own sake.

By far the most secret and least accountable operation of the federal government is not, as one might expect, the CIA, DIA, or some other super-secret intelligence agency. The CIA and other intelligence operations are under control of the Congress. They are accountable: a Congressional committee supervises these operations, controls their budgets, and is informed of their covert activities. It is true that the committee hearings and activities are closed to the public; but at least the people’s representatives in Congress insure some accountability for these secret agencies.