Lack of instruments to control an inflationary situation: If there is a continuous surplus in the balance of payments, a currency board has to necessarily monetize the surplus at the cost of building inflationary pressures. But it does not have instruments to contain it and is reduced to the status of a passive spectator. In view of the above shortcomings of a currency board system, Exter recommended that Ceylon should establish a central bank with wide powers. Exter could not be faulted for making this recommendation, since this was the accepted wisdom at that time. The frustration of the newly independent nations regarding their colonial past, the desire to attain economic independence soon to match the political independence and the obvious inflexibility of currency board systems to supply liquidity in a growing trade and payment era would have contributed to the popular belief at that time that the Currency board should be replaced by a central bank. However, about two and a half decades later when Singapore had to make the same choice, “Dr Goh and the Cabinet chose the path of prudence for Singapore and sought to preserve the Currency Board System for its in-built financial discipline” (Prudence at the Helm, 1992, p 15). Many nations since then, after devastating experiences with undisciplined monetary management, chose for currency board systems to institutionalize monetary discipline by legal means. Ironically, this virtue of a currency board system had not been dealt with in the Exter Report, possibly it would not have been foreseen at that time.
He argued quite correctly that such complex and delicate relationships cannot be established full-blown by a piece of legislation. It must be the result of years of experience and the slow growth of political conventions. Exter Report testifies to the fact that the independence of the Central Bank should be attained and maintained by people in both the Central Bank and the Ministry of Finance and working with a “moral consciousness” regarding the well-being of the whole society rather than narrow self-interest objectives. Conclusions Six decades is a long period during which a society should necessarily undergo tremendous political, social and economic transformation. The onslaughts of new technology, globalization and advancements in fast communication systems have changed the ideals of the people of all societies throughout the globe. Hence, one may tempt to question whether the ideals expressed by Exter more than a half a century ago are still valid and relevant. Though the ideals of societies have changed, the core principles that are embodied in the philosophy of central banking have not changed over the time. In fact, they have become much more hardened today than 60 years ago. Nations throughout the world have gone for price stability as a necessary prerequisite for continuous prosperity. Hence, the hands of central bankers have been strengthened much more today in all parts of the world to facilitate central banks to function independently and make appropriate policies for monetary stability.