BANKING PRINCIPLE

BANKING PRINCIPLE
Theory:

, Banking principle lies on the other end. This principle says that ribte issuance should be dealt independently by central bank and :it shall be allowed to issue notes according, to the .ongoing circumstances. Also there is no need of full backing of gold under ibis principle. Only a percentage of issued note are backed by gold. However all the notes are issued with the guarantee of convertibility into gold..
Merits:
1. Elastic Supply:
The principle gives an elastic supply of carrency. As there is no restriction of 100% backing of gold, so central bank can issue currency in response to change in economic and monetary situation.
2. Economical:
This principle'is economical in a sense that only a[percentage of notes issued are backed by gold. So the rest of the gold can be used^br other purposes.
3. Usage of Gold Reserves:
This system allows thft govt. or issuing authority to make effective and efficient wage of gold and metallic reserves. As only proportional of notes issued are'to be hacked by gold. So major part of countries' gold reserves can be used to fulfil other economic requirements.
-4. Public Confidence:
.This system also enjoy^agood'jdegree of public confidence just like the currency
principle. People have a good trust on the currency as it has been declared as legal tender
by the issuing authority
SL. Suitable for Modem Economy:
. This principle is suitable for the needs of modern.ecomomy. It is flexible and and more responsive to change in "economic climate.
Helpful in Emergency:

 This principle is helpful in emergency. This means that in times of need .such; 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 isi required sp there is a tendency-tqwards issuance of notes which may lead to inflation that^
 can be disastrous for the economy.
2. Lack of Convertibility: t
As there is no hundred percent backing, so bank faiture^may occur-in a very
unlikely situation if all notes-are presented fbf converting into gold. IJ&wevef, theft is*
very rare chance that such situation appeal's