Principles and Methods of money Issue

Principles and Methods of Note Issue
At the time of Bank Chartered Act in England in 1844 there was a huge
controversy over the matter as to what is the most suitable method and principle of issuing notes. Some economists favour the currency principle and other advocate for banking principle. Both these principles are discussed below:
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:
1. Full Safety:
This principle is 100% safe as there is 100% backing. So Central Bank is able to convert any number of notes into equivalent reserves of gold. So there will be full safety and there will be no danger or fear of bank runs and panics.
2. No over issue:
The system will restrict the central authority from over issuing notes. Hence there will be an effective control over inflation.
3. Stability:
The 100% backing gives an element of stability to this system. The value of the currency remains stable and it enjoys a greater degree of public confidence.
4. Confidence:
As already stated the currency issued under this principle enjoys a complete confidence of public.
Demerits;
Following are the demerits of this principle: 1. Inelastic:
This system is highly inelastic and rigid. As 100% backing is required so when
gold reserves are not available central bank cannot issue nc. though the this book.
No Use of Gold:
Further this system makes an inefficient use of gold. Tons of gold is stored in and no effective use is made of it.
ot Suitable for Modern Economy:
he currency principle is not suitable for modern economy. It can not be y used in today's complex economic situation which changes very rapidly.