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.
