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 ”. within that limitation, the exter report has highlighted that “ the greatest significance of the introduction of a central bank lies in the power of the bank consciously to influence the supply, availability and cost of money in ceylon ”. while this conscious action constitutes monetary policy, it differs from what a currency board does and even from a central bank ’ s creation of money through similar action by foreign exchange operations. foreign exchange operations are compulsory and a central bank has no choice in that. when commercial banks offer foreign exchange to the central bank, it has to buy that exchange and issue local currency. but, a central bank ’ s credit creation through domestic operations is discretionary and voluntary. so, a central bank is in a position to regulate such money creation depending on the situation and the credit requirements of the economy. hence, exter did not expect the new central bank to have an open policy of creating money to finance the domestic operations. he wanted such operations to be conducted at the sole discretion of the bank. exter also empowered the central bank to examine and supervise commercial banks in order to strengthen the banking system. such powers would prevent banks from engaging in unsound practices, protect the depositors against bank failures and, with “ lender of last resort ” facility, provide liquidity in times

the bank. in other words, capital and reserves of the bank should be higher than 100 percent of the domestic assets of the bank. the independence of the central bank central banks have been created by societies to issue the medium of exchange and preserve its value. the power given to central banks as sole issuers of currency is similar to nationalization of money supply. this is an extraordinary monopoly power vested with a central bank. hence, there is the possibility that this power can be abused by the masters who have given the power to a central bank. since the history is full of examples of governments ’ abuse of this power, the question of the independence of central banks has come to the focus. noble laureate, f. a, hayek, arguing that inflation throughout the history has largely been engineered by the governments, made even the suggestion that the central banks should be dissolved and money supply should be de - nationalized ( denatinalisation of money, hobart paperback no 70, 1978 ). some have even cynically referred to central banks as “ necessary evils ”. against this background, the issue of the independence of central banks is of crucial importance. in this regard, the independence of the central bank of sri lanka has been raised by many at numerous public fora. the question of bank ’ s independence has come to limelight due to the secretary of ministry of finance sitting as a vote carrying member of the monetary board, the highest policy making body in the central bank. the critics have argued that, since he is a government official, he would steamroll all other members of the board and get the central bank to comply with government wishes. many have found fault with exter for making the secretary to the ministry of finance a member of the monetary board. the criticism is that the secretary, acting in his own selfinterest, would get the central bank to fund the government budget through money creation, thereby permitting the fiscal policy to override the monetary policy. it has been equated by some critics to the case of permitting a child to put his hand into a cookie jar as many times as he wishes. while these criticisms may have some validity, exter ’ s wisdom was to create an environment for both the government and the central bank to have a peaceful and amicable cohabitation. exter argued in his report that “ …. there are, however, many important problems of monetary policy, especially those relating to fiscal policy, on which a central bank should work in