Methods which are used to Issue the Currency Note

Currency Note

Currency Note

The central bank enjoys the sole authority and has the monopoly to issue the currency note in all over the world now a day.There are certain principal which followed for issuing the currency 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. Legal limit may also increased because the central bank has to mange the equal amount of gold, the 

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 maintained in the form of government securities, bill of exchange, bonds, promissory note etc thus every issued currency note is 100%.

Federal Reserve System of U.S.A maintains 40% gold while central bank of France and Germany maintain 30% gold, sliver 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  elastic money supply can expanded by lowering the proportion of gold. It can contracted by raising the proportion of gold. Thus the economy meets its need according. This is the draw back 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 some times become hurdle for a developing economy, so the principle modified

Minimum Proportional System

According tot his 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 in 1956. Reserve Bank of India issue the currency according to its needs In 1957 Reserve Bank of India fixed minimum gold limit 2000 crore and in 1959 is modified. The minimum gold proportion was fixed at 1500 crore rupees and 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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