CONTROL OF CREDIT

Objectives of Credit Control A central bank contruls credit with the following objects in view:

(iI) to safeguard It gokl re ‘C\’C g.lIn~t intcrnal and external dram , [II) to maintain qahillt) of I tell I nee (c) to achieve stahilit) of Iorcign exchanges: (iI) to eliminate fluctuations m out I ut IIlI employment: and (1’) to assist in economic growth. This assistance is required not only In underdeveloped countries dcs irous cof accelerating economic development but also in ).ieveloJ1ed countries desirous of maintaining and improving their living standards. ‘- Now a word about each. Safeguarding Gold Reserves. The necessity of safeguarding gold reserves arises under a gold standard. In a gold standard country, gold can be freely imported and exported as the currency of the country is convertible by law into gold coin or gold bullion. In such a country, an over-expansion of credit causes inflatiou. High prices at home first lead to withdrawal of more cash from the banks and [hen gold from the central bank to carryon transactions at a higher Icvel. This is called the “internal drain:’ Scc()IIlIl~.the home price-level being higher than the international price-level, imports arc encouraged and exports discouraged. An unfuvourablc balance of trade i<;created which has to he met by export of gold This is called the “external drain.” Gold may also move out because the foreign investors have lost confidence in the luuu c vI’ the currency under question and they begin tu Withdraw their funds. In these circumstances, the central bank must take steps to contract credit, bring prices down and stop the internal and external drain of gultl. Now nu country is on a gold standard and movemcnt of gold is generally banned. It is now the duty uf the central bank to safeguard the Iorcig» exchange reserves of the country. Price Stahilit)’. Another object of credit control is to maintain stability or internal prices. We have already rcfcn cd to the various disad vantages of fluctuating prices. Price instability causes disturbuncos in economic relations. muludjusuucnts and serious social consequences, The central hank by rcguluting the supply of purchasing power, according to the needs of the people, can rcdu ‘e economic fluctuations to a large extent  ln the interest of smooth flow of international If. de and for settlement or international obligations. tability of foreign exchange rates is essential lnst.lbliity of foreign exchange rate (value of foreign money in tenus of home money) distur bs international trade and makes the sculcmcnt uf interu. nional (lbllg.lllon\ difficult. Ihere ha hccn considcrahlc controversy as tll which of the objects,  internal price stability ur exchange <rabrhty, should the central trade (t’,I(” India) would concentrate more 011 internal stabihty.