Can You Explain Any Two Methods Of Note Issue?


2 Answers

Haider Imtiaz Profile
Haider Imtiaz answered
1. Fixed Fiduciary system:
This is based on currency principle. According to this system, the central bank can issue notes up to a certain limit fixed by the Government., without gold backing. The remaining notes are backed by Government., securities and bonds and if at any time the Central bank wants to issue more notes then, it should be backed by 100% gold reserve. We can say in other words that Central bank can issue notes up to same limit against Government., security and excess of amount should be backed by 100% metallic reserve.

1. This system is check on inflation and there is no chance of over issue because of 100% metallic reserve.
2. This system provides security for the convertibility of notes.

1. In emergency, if there is no gold is available for reserves then, this system is inelastic.

2. Proportional reserve system:
According to this system, a portion of the note issued is backed by metallic reserve and rest of the amount is backed by Government., securities and bonds. In other words central bank issued currency notes from 25% to 40% of which is backed by gold and the rest of 75% or 60% is backed by government, securities.

This proportion is different from country to country. In Pakistan, this percentage is 30%. It means that 100 rupee note is issued against 30 gold coins reserve etc. Govt. can change to percentage required for metallic reserve in certain conditions.

1. Elastic system:
The main advantage of this system is that it makes the supply of money elastic.
2. A proportion of note issued are covered by gold reserves.
1. Chance of over issue may cause problem of inflation in the country.
2. Note stability of value of money can not be ensured.
Karl Sagan Profile
Karl Sagan answered

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