Minimum Reserves System

Minimum Reserves System

Under Use 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 stale of economy.

(c)      Safety:

This system.enjoys higher degree of safety. The centra! monetary authorities keep a dose eye on^:1he 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 modem economies. This system caters to the needs of the growing developed economies. It is also 'suitable for developing •economies. The central monetary authorities isjn 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 fee value that it claims due to its status of being a legal tender. In simple words, take the example of ten 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 legit tender.