BANKS AND PRICES 
79 
§ 3. Banks and Prices. 
Some writers contend that bankers control prices, 
forgetting apparently that prices existed and rose 
and fell for ages before there were any banks. It 
may therefore be well to recapitulate and emphasize 
the doctrine taught in Part I about the relation of 
banks and banking policy to prices. 
Modern banking began to be important in this 
respect when people first found it convenient to 
hold bankers’ notes for sums of money instead of 
gold and silver coins. The practice economized the 
metals, inasmuch as the bankers did not find it 
necessary to keep coin equal to more than a moderate 
fraction, perhaps a third at most, of their liability 
on their notes. So the invention and introduction 
of convertible banknotes tended to reduce the demand 
for the precious metals, to keep their value down, 
and consequently to keep general prices up. But 
the actual effect was small for a long time, because 
the demand for the metals was world-wide, while 
the area in which bank-notes was used was not 
large. Later, when the bank-note area grew in size 
and importance, the ability of banks to economize 
metal was very much restricted by legislation which 
insisted upon their keeping large holdings of metal 
against their notes. If the necessary holding ap- 
proached closely to 100 per cent. the metal would 
not be economized at all, since the fact of being 
able to hold considerable sums in convenient paper 
encourages people to hold larger amounts of currency 
than if they could have nothing but coin. Legis- 
latures have also sometimes prohibited the banks 
from issuin~ =ctes as small ‘n denomination as the 
public wor’ have been ready to accept and hold. 
In spite of these restrictions, however, the aggregate 
economy of metal arising from the use of convertible 
.