Banking Principle

BANKING PRINCIPLE
Banking principle lies on the other end. This principle says that note issuance be dealt independently by central bank and it shall be allowed to issue notes to the ongoing circumstances. Also there is no need of full backing of gold ±is principle. Only a percentage of issued note are backed by gold. However all are issued with the guarantee of convertibility into gold.
Elastic Supply:
e principle gives an elastic supply of currency. As there is no restriction of MCS backing of gold, so central bank can issue currency in response to change in •ranomic and monetary situation.
Economical:
This principle is economical in a sense that only a percentage of notes issued are Mated by gold. So the rest of the gold can be used for other purposes.
Usage of Gold Reserves:
This system allows the govt. or issuing authority to make effective and efficient of gold and metallic reserves. As only proportional of notes issued are to be backed So major part of countries' gold reserves can be used to fulfil other economic
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Public Confidence:
• i This system also enjoys a good degree of public confidence just like the currency
- - - . People have a good trust on the currency as it has been declared as legal tender i-: issuing authority.
Suitable for Modern Economy:
This principle is suitable for the needs of modern economy. It is flexible and tc and more responsive to change in economic clirhate.
Helpful in Emergency:
This principle is helpful in emergency. This means that in times of need such as wars, or natural disasters govt. can print notes without keeping 100% reserves.
Demerits:
1. Danger of Over Issue:
The danger of over issue always exists in this principle. As no 100% backing is required so there is a tendency towards issuance of notes which may lead to inflation that can be disastrous for the economy.
2. Lack of Convertibility:
As there is no hundred percent backing, so bank failure may occur in a very-unlikely situation if all notes are presented for converting into gold.'However, there is a
very rare chance that such situation appears.