CURRENCY PRINCIPLE

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 4s JQO% 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 cbntrol over inflation.
3. Stability
The 1.00% backing gives an element of stability to this system. The value of tju?
currency remains stable and it enjoys a greater dearee of public Confidence.
4. Confidence
As already stated the currency issued under this principle enjpys a complete confidence of public.
Demerits:
Following ate the demerits of this principle: 1. inelastic:
This system is highly inelastic arid rigid As 100% backing is required so when gold reserves are not available central bank cannot issue notes; even though fee economiq situation demands issuance of notes.