Paper money is being used in the monetary system of most of the countries since very early times. The term paper money included the paper currency issued by the government or the Central Bank of country as a legal tender money. Cheques, bills of exchange and other kinds of money issued by the commercial banks is not included in the paper money because such money is not legal tender.
There are different methods of issuing paper money followed by different countries. Some of the important methods are discussed below:
Fixed Fiduciary System. According to this system, the Central Bank of country is permitted to issue a fixed amount of currency notes without keeping any metallic reserve (gold, silver, etc) against the issue. But all notes issued beyond this fixed amount are to be covered by hundred per cent reserve of precious metal such as gold. This system of note issue is safe because it puts a restraint on the issue of currency inelastic and unresponsive to changing requirement of trade and industry.
Proportional Reserve System. Under this system the Central Bank is required to keep a fixed percentage of gold reserve against the issue of paper currency. This system of note issue was adopted by many counties including France. The chief merit of this system is that is that it is elastic. Requirements of more currency can be met by a greater amount of note issue and keeping only a small proportion of it in the form of gold reserves.
Minimum Reserve system. Under this system, the Central Bank is required to keep with it certain minimum amount of gold reserves as prescribed by law and against this, issue any amount of paper currency keeping in view the requirements of the economy. In India this system of note issue being currently followed. The idea behind the adoption of this method of note issue is to ensure that the currency requirements of the trade and industry in the developing economy are being met adequately. Thus, the system of issuing paper currency is more elastic and works wonderfully well if it is properly regulated and constantly watched by the government.
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