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.
Proportional reserve method: Under this system the central bank is required to keep a certain percentage varying from 25 to 0% of gold reserve against the note-issue and the remainder of the note issue is conversed by securities. France adopted this method after 1928. Reserve bank of India also adopted this system on the recommendation of Hilton Young commission. This system has also been adopted by U.S.A. The only merit of the system is its elasticity. But if the reserve decreases slightly the currency will be contracted violently. But this system locks up unnecessarily a huge amount of gold. Percentage deposit method: It is a variation of the percentage deposit method. The point of view is to ring economy and to keep a minimum of reserve. Under this system the central bank is allowed to hold part of the legal percentage of the reserve in foreign exchange, including currency, foreign bills and deposits in foreign banks. The foreign country should be such where gold standards prevail. Until 1965 this system prevailed in Pakistan when the state bank of Pakistan held 40% of the amount of the total notes in the form of reserve of 60% could be kept in the form of sterling's.This system is very economical and can be easily adopted by poor countries