Methods of Issue Currency Note

January 12, 2021

Methods of Issue Currency Note

In now days everywhere in the world it is the central bank enjoys the sole are the near monopoly thus in currency note. There are certain principal which are followed for issuing the note

Principal of Fixed Fiduciary Limit

The government determines the demand for money. Average price level and the size of GNP determine the demand for money. Government has to supply money to equal the demand DM=SM. Any disequilibrium in the DM and SM crates in the demand for supply for money in following deflationary gap. They are half full for the economy. The government gets the permission to issue the currency note according to the demand from the legal authority. This permission, stand as assets for the notes liability. The commercial bank has not to maintain any gold reserve for that. In case of higher demand the supply of money has to be increase for any additional currency note. The central bank has to manage the equal amount of gold the legal limit may also be increased.

Proportional Reserve System

The federal reserve system of U.S.A, Bank of France and Germany, Reserve Bank of India and State Bank of Pakistan issue the currency note under this principle. According to it the central bank keeps 20% to 25% gold to the total ratio of issued currency. It is maintained in the form of government securities, bill of exchange, bonds, promissory note etc. thus every issued currency note is100%.

Federal Reserve System of U.S.A maintains 40% gold while central bank of France and Germany maintain 30% gold, silver and approved foreign exchange. The greatest advantages of this principle he is that central bank can expand and contract. The money supplied needs of the economy. Thus it is elastic money supply can expanded by lowering the proportion of gold. It can be contracted by raising the proportion of gold. Thus the economy meets its need according. This is the drawback of this principle. There is no check on the government to expand the supply of money. It always leads to inflation. It is an easy course for the government to print more currency note for all its. Non development expenditure sometimes this principle become hurdle for a developing economy, so the principle is modified

Minimum Proportional System

According to this principle the minimum gold proportions fixed. The government gets the right to issue the currency to any extent against the minimum gold limit. India adopted this principle in 1957 while Pakistan adopted it in 1956. Reserve Bank of India fixed 2000 crore minimum gold limit in 1957 and gets the right to issue the currency according to its needs, two years later in 1959 it was again modified. The minimum gold proportion was fixed at 1500 crore rupees. Approved foreign exchange limit was fixed at 500 crore. It was to promote the export form India. Pakistan fixed the minimum limit at 1500 million rupees in 1975. The limit was reducing to 1200 million rupees.


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