issuance of Money

Issuance of Money in Pakistan
In the beginning, the SBP issued notes on the basis of SBP act 1956. According to this act the notes were issued on a proportional reserve system.
This method remained in effect till November 1965. Under this method the notes issued had to be backed by an equivalent amount of assets. At least 30% of such assets must be gold coins or gold bullion, silver bullion or approved foreign exchange. The remaining assets might be in the form of securities bill of exchanges, promissory notes etc.
However, afterward in Nov. 1965 the 30% reserve requirement was changed by an ordinance. The ordinance gave the right and authority to federal government that she after consulting with bank would specify the amount of currency that is to be backed by gold and approved foreign exchange.
Afterwards in Dec. 1965, through a further notification, the level of currency backing was made fixed at Rs.1200 million. The state bank then could issue notes according to the requirements of the economy.
The system is more or less a form of minimum reserve system (MRS has been explained above in -detail). This system is flexible and safe. In this system SBP can increase or decrease the supply of currency in the country according to economic climate. Pakistan has adopted this system as it is beneficially capable and responsive to the needs of our slowly growing economy. Further this system is also flexible and enjoys a higher degree of safety. Under this system the quantum of notes issue reflect the demand of economy for currency. The state bank is in a better position to alter the supply of currency in response to changes in aggregate demand, aggregate supply, trends in general price level and state of economic activity. Also as we have studied above this system is more suitable for the modern economy. Further this system also helps the central bank to perform other monetary and fiscal operations easily. However, despite all this, we are facing problems in maintaining the value of our currency. Inflation trends have caused people to lose faith in the currency and mainly savings are held in dollar and gold.
Concluding it can be said that besides taking advantages of flexibility of minimum reserve system, SBP should take steps to strengthen the rupee and to restore confidence of people in it.