Currency principle:
According to the advocates of the currency principle, the paper money in an economical and convenient substitute of metallic money. The paper money, therefore, they insist should have a 100% backing of gold reserves. They are the strong view that in order to maintain the prestige of paper money, there should always be gold available for redemption of notes when presented. The advantages claimed for this system of notes issue are that it gives full safety and security to the paper currency.
Moreover, there is no danger of over issue of the currency which is an effective check to the possibilities of inflation.The disadvantages of the currency principle are that it makes the supply of money highly inelastic. According to this principle, paper currency can only be printed and issued if there is a 100% gold cover available against it. The issue of currency is thus completely dependent upon the availability of gold rather than on the needs of the trade and industry which is of primary importance. Too much gold is also unnecessary locked up in the currency chest.
These are the two different views regarding the right principles of notes issue in the country. One was fully convertibility of notes into gold bullion.
According to the advocates of the currency principle, the paper money in an economical and convenient substitute of metallic money. The paper money, therefore, they insist should have a 100% backing of gold reserves. They are the strong view that in order to maintain the prestige of paper money, there should always be gold available for redemption of notes when presented. The advantages claimed for this system of notes issue are that it gives full safety and security to the paper currency.
Moreover, there is no danger of over issue of the currency which is an effective check to the possibilities of inflation.The disadvantages of the currency principle are that it makes the supply of money highly inelastic. According to this principle, paper currency can only be printed and issued if there is a 100% gold cover available against it. The issue of currency is thus completely dependent upon the availability of gold rather than on the needs of the trade and industry which is of primary importance. Too much gold is also unnecessary locked up in the currency chest.
These are the two different views regarding the right principles of notes issue in the country. One was fully convertibility of notes into gold bullion.
