What Is Banking Principle?

Generally speaking, a banking principle is the amount of the credit which the bank can raise against the bank notes which are known as elastic currencies. As banks are involved with the monetary transactions like loan, custody, issue of money, credit etc. Therefore, the banking principles are also same as that of money and credit principles. Money is usually available in two forms: Metallic and commodity money. According to first banking principle, there is no need of complete metallic money. The banks can also rely on the notes to fulfill the business needs. For complete details:

Banking Principle

Banking Principle:
According to this principle, there is no need to have full metallic banking of the paper currency laid down by law. The banks should be fully relied upon and authorized to regulate the note issue strictly in accordance with the business needs of the country. There should not be any reserve requirements of gold and silver for the notes issued. The banks themselves will maintain an adequate reserve of gold bullion for meeting their obligations of notes. They are of the strong view that if there is an over issue of the notes, the excess money will be automatically presented for cash payment and thus the proper ratio will be maintained between the supply of money and the gold reserves.

The merit of this principle is that it secures elasticity in the issue of currency but no safety. The banking history of England has numerous instances of monetary mismanagement by applying this principle.After studying the currency principle and the banking principle, one can easily arrive at a conclusion that both these system of note issue are defective.

One sacrifices elasticity at the altar of security and the other safety at the altar of elasticity. For the sound system of note issue security and elasticity must go side by side. The countries of the world now have struck a nice balance between these two conflicting principles and have devised new methods of regulating note issue. The new system of note issue are;-Fixed fiduciary issue,Proportional reserve system