Monetary standard

  PRINCIPLE OF NOTE ISSUE To ensure a good note issue system, two principles of note issue have been advocated:-  (a) CURRENCY PRINCIPLE (b) BANKING PRINCIPLE (A) CURRENCY PRINCIPLE :-  It is based on the assumption that a sound system of note issue should command the greatest public confidence. This requires that the note issue should be backed by 100% gold or silver reserves. Or in other words, paper currency should be fully convertible into gold or silver. Thus, according to this principle, the supply of paper currency is subjected to the availability of metallic reserves and varies directly with the variations in the metallic reserves. MERITS:-  1) It has maximum public confidence 2) There is no danger of over issue of notes leading to inflation 3) It makes the paper currency sstems automatic and leaves nothing to the will of monetary authority. DEMERITS:- 1) It makes the monetary system inelastic as it does not allow the monetary authority to expand the supply a...

 MEANING It refers to a monetary standard in which inconvertible paper money circulates as unlimited legal tender. Under paper money standard, although the standard money is made of paper, both currency and coins serve as standard money for purpose of payment. The paper standard is known as MANAGED STANDARD because the quantity of Money in circulation is controlled and managed by the monetary authority with a view to maintain stability in prices and income within the country. It is also called FIAT STANDARD because paper money is inconvertible in gold and still regarded as full legal tender. After the breakdown of gold standard almost all countries of the world shifted to paper standard. FEATURES The paper standard has the following features:-  1) Paper money circulates as standard money and accepted as unlimited legal tender in the discharge of obligations. 2) The unit of Money is not defined in terms of commodity. 3) The intrinsic value of the circulating money is particular...