Important Topic Money & Banking for Upcoming Bank Exams
Principles of Note Issue:
There are two basic principles of managing the issue of paper money, Currency Principle and Banking Principle. The Currency Principle assumes that paper money will command the confidence of people only if it is convertible into gold or silver. In other words, for every note issued by the monetary authority, there should be an equivalent amount of gold or silver in the currency reserve so as to guarantee 100% convertibility of the paper money, if need be. The only advantage of following this principle is the saving of wastage involved in the circulation of metallic currency. But the issue of paper money is also restricted in the process because monetary gold may not be available adequately for increasing the volume of notes. Thus, the system is found to be highly inelastic.
According to the Baking Principle, the metallic reserve against the issue of paper currency need not be held in the ratio of 1:1. To sustain public confidence it may be enough to hold a certain proportion of the money supply in metallic reserve. This is because every one is not interested in converting paper currency into gold. Indeed none may be so inclined under normal conditions. The banking principle gives more elasticity to the currency system. It is also economical as it does not require 100% metallic reserve against the paper money in circulation. The monetary authorities can regulate the money supply within a wider range at their discretion.
Methods of Managing Paper Money:
The monetary systems involving the issue of paper currency are scarcely based on the principle of "100% reserve ". By and large, the principle followed is that of "Partial reserve" or "Partial deposit". In practice, several versions of the "Partial deposit" plan have been in use.
The Systems used for Managing Paper Money:
- Fixed Fiduciary System
- Maximum Fiduciary System
- Proportional Reserve System
- Maximum Reserve System
Difference Between Money Rate and Bank Rate:
Money Rate:
The Price at which transactions take place in a money market are the interest rates charged on short-term loans. Money rate refers to the interest rate which is charged on short-term loans in the money market. Like all interest rates, money rate also varies in accordance with the demand and supply of loanable funds. Actually, there are various money rates which apply to loans of different maturities and risks.
Call Money Rate refers to the interest rate charged by commercial banks on advances which are made to bill and stock brokers repayable on twenty-four hours notice.
Bazar Bill Rate is the money rate of interest at which bills of small traders are discounted by moneylenders.
Hundi Rate refers to the rate of interest which is applied for discounting hundis.
Bank Rate:
The rate at which bills are rediscounted and advances are made by the central bank in favour of commercial banks is known as "Bank Rate". This is also referred to as "Discount Rate" or "Rediscount Rate".
0 comments: