Minimum Reserves System

Minimum Reserves System
Under the Minimum Reserve System method of note- issue the central bank has to keep only a minimum amount of reserves, against all the notes issued. This means that any volume of currency can be issued by the central bank depending on the demands of economy. There is no fixed maximum limit under this system. Once a central authority decides a minimum value of reserves the issuing authority is at liberty to expand or contract supply of currency. The reserves are kept in the form of gold and foreign exchange. Usually 20% to 30% of the notes issued are backed by the reserves.
Merits:
(a) Elasticity:
The important merit of this system is elasticity. The state bank can increase or decrease the supply of currency in response to the changes in economic activities.
(b) Responsive:
This system has higher degree of responsiveness than other, systems. This means that if economy demands increase in the supply of currency then under this system appropriate immediate response can be undertaken by the central monetary authorities and supply of currency can be increased according to the requirements of the state of economy.
(c) Safety:
This system enjoys higher degree of safety. The central monetary authorities keep a close eye on the state of affairs of the economy. The notes are issued in response to changes in the market activity and demand for currency

Suitable for Modern World:
This system is widely practised in different modern economies. This system caters to the needs of the growing developed economies. It is also 'suitable for developing economies. The central monetary authorities is ,in a position to manage the supply of currency so as to achieve both short-term and long-term monetary and fiscal targets.
Demerits:
(a) Inconvertibility
The demerit is that - the paper currency under this method is absolutely inconvertible.
(b) No Intrinsic Value:
Major disadvantage is that currency issued under this system has no intrinsic value. This means that the worth of the paper is far less than the value that it claims due to its status of being a legal tender. In simple words, take the example often rupees note in your pocket. The worth of the paper of which the note is made is very low but it claims the purchasing power equivalent to ten rupees just because that it is a legal tender.