Proportional reserve system The central bank keeps a percentage in gold and remaining portion in government securities against notes issued. Generally 25 to 40% is kept in gold or silver before issue of money. A %age of money is to be kept in gold for new issue of money. It provides essential requirement. • This method was applied in Germany in 1875. • U.S.A in 1914. • France adopted this method after 1928. • In India this system was used in 1927. • Pakistan used this method up to December 1965. Advantages: • It is elastic method so money can be expand and contract to meet the requirements of trade and industry. • It is suitable for the developing countries. • The expansion of money is in the hands of monetary authority provided gold reserve is maintained. Disadvantages: • The contraction of money in this method is not always possible. • The metallic reserves remain idle. • During emergencies noted are not convertible into gold because cent percent reserves are not kept.
