Monetary system

4. BI METALLION:
Bimetallic standard is a monetary system under which the monetary unit of the country is expressed
by law in terms of two metals, usually gold and silver, in specific ratio. In other words under bimetallic
both silver and gold silver circulate simultaneously within the country. They are unlimited legal tender.
Characteristics of BI Metallion:
1. Both coins are full bodied coins further both the coins are unlimited legal tender.
2. The government fixes in advance the rate of which tow coins will exchange for each other.
3. There is free and unlimited coinage of both the metals into standard monetary units.
4. There is no restriction on import and export of these metals.
Merits:
1. Adequate supply of money
2. Price stability
3. Stable price of silver
4. Encouragement to foreign trade
5. Easy to keep cash reserve
6. Encouragement to production
Demerits:
1. Inequality of market ratio and mint ratio
2. Operation of gresham’s law
3. Not successful internationally
4. No price stability
5. Encourages speculation
6. Little stimulus to foreign trade.

5.  In the 20th century, both silver and gold lost their former importance within
monetary systems, and monometallic system was abandoned by all nations.
 It was set up in 1976 at the Conference in Kingston (Jamaica), when the gold lost its
role of monetary standard:
 Under this system, the currency of the country is made of paper.
 Generally, the currency system is managed by the CB of the country.
 Today, almost all countries in the world have managed currency standard systems.
 The paper currency standard system is a fiat system:
 does not allow free convertibility of the currency into a metallic standard;
 money is given value by government fiat (is intrinsically useless)
 The value of the money is set by the supply and demand for money and by the
supply and demand for other goods and services in the country.
 The value of the money depends on its purchasing power.
Paper currency standard system (Managed currency standard)

6.  Paper money is economical.
 Its cost of production is negligible.
 It is convenient to handle and it is easily portable.
 It is homogeneous.
 Its supply can be made elastic.
 Its value can be kept stable by proper management.
 Paper currency can function very effectively as money, provided, there is proper
control of it by the managing authority.
 It is ideal for internal trade.
 But for international trade and payments, gold is still found necessary.
Advantages of paper currency system

7.  First important disadvantage:
 There is the danger of over-issue of paper money by the managing authorities:
 Over-issue of currency will result in a rise in prices, adverse foreign
exchange rates and many other evils.
 The over-issue of paper money has ruined many countries in the past.
 Second important disadvantage:
 It will not have universal acceptance:
 It is recognized as money only in the country where it is issued.
 For others, paper money is just bits of paper.
 Gold, on the other hand, has universal acceptance.
Disadvantages of paper currency system

8. Principles and Methods of note issue:
The central bank of a country is responsible for
issuing currency notes for it.
Principles of note issue:
1:Currency principle
2:Banking Principle
On the bases of these principles different methods
or tools can be adopted by central bank to issue
note.

9. 1:Currency principle THEORY:
The currency principle is based on 100% gold backing. According to this
principle central bank must keep 100% reserves against each and every note
issued. So there will be full convertibility under such system.
Merits
Full safety
Ensures public confidence
There is no loss of bullion
No danger of inflation
No danger of over issue
Demerits:
Inelasticity
Bullion lies, inactive
Unnecessary expenditure in mining
Poor countries cannot follow
Lack of economy
Need for precious metals

10. 2: BANKING PRINCIPLE THEORY:
Banking principle lies on the other end. This principle says that note
issuance should be dealt independently by central bank and it shall be
allowed to issue notes according to the ongoing circumstances. Also
there is no need of full backing of gold under this principle. Only a
percentage of issued notes are backed by gold. However all the notes
are issued with the guarantee of convertibility into gold.
Merits:
Elastic system
Government needs
Popularity
Surety
Economics
Demerits:
Over issue
Economic crises
Balance of payment
Lack of security
Less of confidence of people

11. Methods of Note Issue
• Fixed fiduciary system
• Fixed maximum fiduciary system
• Proportional reserve system
• Minimum reserve system
• Percentage system
• Simple deposit system
• Government bond deposit system

12. Fixed fiduciary system
Under this system the central bank of country is
permitted to issue a fixed amount of notes without
keeping any metallic reserves. This portion is called
fiduciary issue and is blocked by government securities.
This system first adopted in England in he year 1844. In
India this system worked from 1861 to 1920.
Merits:
1. Check on excessive issue of notes
2. Public confidence
3. Safety
Demerits:
1. In elasticity: additional notes cannot be issued
2. Costly: need to maintain gold reserve

13. 2. Fixed Maximum Fiduciary System
A maximum amount is fixed upon which the bank can
issue-notes without any gold reserve and this maximum
limit is generally well-above the average annual
circulation of notes.
Merits:
Economy
No risk of over issue
Applicable to all the countries
Elasticity
Demerits:
Rigidity
No guarantee against inflation

14. 3. Proportional reserve system
• Required to keep a certain percentage generally varying
from 25 to 40% of gold against the note-issue is covered by
securities. First adopted in France after 1928 and several
other countries after first world war.
Merits
1. Simplicity
2. Elasticity
3. No fear of excessive issue
4. Convertibility assured.
Demerits:
1. Uneconomical
2. Difficulty in contraction of currency
3. Bullion and gold lie idle in the reserve
4. Imaginary convertibility of the paper notes.

15. 4. Percentage system:
While fixing the portion of metallic reserves with the
paper currency the minimum metallic cover was also
laid down. The minimum metallic cover comprised
not only gold and silver also foreign securities.
Merits:
1. Gold savings
2. Elasticity, economy, and convertibility
Demerits:
1. Uneconomical
2. Difficulty in contraction of currency
3. Bullion and gold lie idle in the reserve
4. Imaginary convertibility of the paper notes.

16. 5. Simple deposit system:
Metallic reserve equal to the amount of note
issue.(USA)
Merits:
Elasticity
Public confidence
No fear of over issue
Demerits
Lack of economy
Lack of elasticity
Difficulty in foreign payment

17. 6. Government bond deposit system
The notes issues are backed up by an equivalent
amount of government bonds or treasury bills. Used
by USA.
Merits:
No danger of over –issue
Full converitbility

18. 7. Minimum reserve system:
Keep a metallic reserve equal to the amount of note
issue. There is principle of note issue.
Merits:
Full convertibility, no danger of over issue
Demerits:
No economy of precious metal
No elasticity of paper currency. Not popular.
8. Simple deposit system:
The note issuing authority keeps and equal quantity
of gold and silver in the metallic reserves as a cover
against note issue.

25. Systems of note issue in India
The present currency system in India is managed by RBI.
Which is based on inconvertible paper currency system.
It has two aspects internal deals with the circulation of
the currency notes and external deals with the value of
money.
1. Coins
2. Currency notes
3. System of notes issue
4. Expansion of Indian currency
5. External value of rupee
6. Exchange control
7. Liberalisation of exchange rate.

26. Qualities of good system of note issue
1. Simplicity
2. Economy
3. Elasticity
4. Legality
5. Convertibility
6. Stability in value of money
7. Automatic working