OBJECTIVES OF CREDIT CONTROL

The old objective of controlling credit creation by the commercial banks in the country was dictated by considerations of maintaining stability of the rate of foreign exchange. The international gold standard was maintained for this purpose from 1857 to1914. During the war period of 1914-18, it was temporarily suspended but it was re established in the post war period from 1925-36 in various forms and degrees. But exchange rate stability was incompatible with the domestic price stability. Exchange rate stability was possible at the heavy cost of causing fluctuations in the domestic and international prices. Consequently, such exchange rate stability was followed by fluctuations in the level of economic activity. Naturally, with the passage of time though was given to the maintenance of price stability instead of exchange rate stability as the main objective of credit policy of the central bank. The reason for emphasising exchange rate stability as the goal of central bank credit policy before the breakdown of international gold standard in1936 rested on the universal belief that exchange rate stability was essential for international prestige of a country and for the smooth flow of international trade and lending.

After the breakdown of international gold standard in the thirties, price stability as the goal of economic policy attracted more attention. The economic rot brought by the great depression of the thirties convinced the economists and financial experts of the futility of achieving the foreign exchange rate stability in the face of fluctuating domestic prices that did irreparable harm to the stability of domestic economy of a country. The opinion that price stability should be preferred to exchange rate stability if the former was incompatible with the latter gained support on the plea that stabilisation of domestic prices was most conducive to the national economic welfare.

Apart from those who support either exchange rate stability or domestic price stability as the goal of central bank monetary policy there are those who argue that the fundamental objective of central bank monetary policy should be to promote accelerated growth of the economy by preventing the occurrence of booms and slums and unemployment. These economists consider economic growth with stability, as against either mere price or exchange rate stability. As the sine qua non of maximisation of national welfare. In recent times the emphasis has shifted from mere economic stability to economic stability compatible with full employment and high per capital income in the economy. So important has the achievement of full employment and growth become as the goals of central bank monetary policy that many countries have officially declared that the basic objective of their economic policy is to achieve full employment and accelerated growth of the economy and monetary policy of the central bank is directed towards the achievement of these twin objectives. In the context of rapid economic growth the special function of central bank in a free enterprise economy are:

1.To improve the existing system of financial intermediaries in order to ensure the maximum productive investment of community savings.

2.To provide direct loans in those areas where the commercial bank do not find it profitable to operate.

3.To conduct its policy of credit control in a manner so as promote the maximum growth rate without causing runaway inflation or unmanageable deficit in country external balance of payments.