Proportionate Reserve System

Proportionate Reserve System;
Under .this system the central bank is required to keep 100% reserves for a particular percentage of notes issued. The rest of the notes issued are backed by Government securities and Government bills. Usually 25% to 40% of notes issued are fiilly backed by gold and rest- are backed by Government securities.
This system remained in force in many countries of the world: such as in France, and Germany with 30% and 40% bacicing respectively.
Merits:
(a) . A Widely Prevailed System:
This system remained in-ferce in many parts of the world for different time period. This system is. also adopted by United States and UK and many other economically stronger countries. This method ensures a considerable and moderate control over supply of currency.
(b) Elastic:
This system is elastic in a sense that if economy is under expansion, then naturally there will be a need td expand the.cUrrency and credit. In such situations,'central bank will be at case under this system to expand the supply of currency.
(c) High Degree of Safety:'
This system is safer and more'sound as compared to others. In mis system lb,e
chances of over-issue of currency are less and so there is less danger of unwanted
inflation.
(d) Responsive:
This system has higher degree of responsiveness. This means that if economy demands an increase in the supply of currency then under this system appropriate immediate response can be undertaken by the central monetary authorities
Demerits:
"(a) Rigid: .
This system is rigid. As notes cannot be issued over a particular limit without keeping Government securities, so this may lead ,to rigid supply of currency even when economic and fiscal situation demands expansion in the currency supply.
(b) Contraction in Money Supply::
An other disadvantage is that governments some times have to do unwanted
contractions in money supply. This occurs when the gold reserves are diminishing. Then
the central bank in such circumstances has to reduce the money supply. This can lead to
various adverse effects on the economy provided that the ongoing situation demands
expansionist currency supply. ,
Note: Pakistan also adopted the proportionate reserve! system and, remained on it till 1965.