However, to the credit of Exter, many safeguards, checks and balances were added to the law establishing the central  2  BIS Review 92/2007  bank to prevent such undisciplined monetary management by the new central bank. The absence of even a single episode of hyper-inflation or crises of monetary nature during the past 57 years of existence of the central bank is testimony to the efficacy of these measures added to the law. The role of the new central bank The mandate given to Exter was, inter alia, to “report on the organization and functions of a Reserve Bank with a view to ensuring, within the limits of monetary action, full employment of the economic resources of the country, and, if need be, on the promotion of supplemental credit institutions in furtherance of this policy…”. The mandate itself had recognized that the central bank should facilitate economic development “within the limits of monetary action”. This meant that, though short-term economic stimuli could be provided by raising money and credit, the bank should not do that, since it leads to the abandonment of price stability. Any stimulus to be provided by the central bank should, therefore, be practised cautiously and with due regard to its impact on price stability. While emphasizing on the importance of money and credit on an economy, Exter referred to this as “stable money which is essential to performance under contracts and to the equitable liquidation of debt”.
He justified his limitation arguing that “many central banks and national economies have come to grief because governments have had too easy access to central bank credit”. Hence, he argued that it would be wise to limit such credit just to meet only the very short term cash requirements of the government arising from seasonal requirements of funds. This wisdom of Exter was not followed and, as a result, provisional advances which were meant to be short term credit facilities for six months became permanent credit. As a result, the level continued to increase to a new high level in each successive year with increased estimates of government revenue. It has, therefore, provided permanent free funding to the government, almost similar to the annual profit transfer which the Central Bank makes to the government. 2. The Central Bank has been authorized to acquire Treasury bills from the primary issues and it, therefore, constitutes another form of lending to the government. The Bank has been prohibited to subscribe to primary issues of or, underwrite, the other types of government securities, viz., Rupee securities or Treasury bonds. Exter justified this prohibition on the ground of the obvious possibilities of abuse by governments. Even the purpose of investing in Treasury bills was not to finance the government but to acquire the necessary liquidity for conducting smooth open market operations. This was explained by Exter as an injunction familiar to central bankers and commercial bankers alike that a bank should look to the liquidity of its portfolio.