The most important part of the money supply is the paper currency, which is an obligation of the Central Government as well as of the central bank. The central bank in every country today enjoys the monopoly of issuing notes, although in certain countries like India, the Central Government also issue notes along with the central bank. For instance, in our country, one rupee note is issued by the Ministry of Finance, Government of in our country, one rupee note is issued by the Ministry of Finance, Government of India, but the remaining notes of higher denominations and coins are issued by the Reserve Bank of India.

Systems of Note Issue. The paper currency in a country is regulated in according with the system laid down by the monetary authority. Broadly speaking, there are the main systems of note issue:

(1)    The fixed fiduciary system;
(2)    The proportional reserve system; and
(3)    The minimum reserve system.

(1)    Fixed Fiduciary System. Under this system the central bank of a country is permitted to issue a fixed amount of notes without keeping any metallic reserves. This portion is called fiduciary issue and is backed by government securities. But all notes issue above this amount must be covered by 100 per cent metallic reserves. The object of this system is to ensure the convertibility of paper currency.

(2)    Proportional Reserve System. Under this system, the central bank is required to keep a certain percentage of gold against the note issue and the remainder of the note issue is covered by securities,

(3)    Minimum Reserve System. Under this system, the central bank is permitted to issue notes to any extent provided a fixed minimum reserve is maintained in gold and foreign securities.

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