The legal tender money :
It consists of coins and paper currency. This is completely controlled by the central bank of the country (RBI in India). The legislature of the country lays down the system of note issue. Since 1952 we have adopted the fixed fiduciary system of note issue. The outline of the system is as follows:
The notes issued constitute a liability on the part of the RBI. The liabilities must be balanced by equivalent assets. These assets are composed of three parts
- Gold plus Foreign securities worth not less than Rs 200 crores
- Out of this the value of gold should not be less than Rs 115 crores.
- Government of India securities worth the remaining part of the note issued.
Thus the RBI cannot increase the supply of legal tender money without acquiring the required monetary reserves.
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