Historical Perspective: Aurora has its roots in an earlier game called Starfire, which was (is) a multi-player, refereed, interstellar war game. The referee (or "spacemaster") was there to provide fog-of-war - the players gave him their orders, and he managed interaction between the players and the NPRs that they activated. Think dungeon master in D&D.
Steve wrote a program called Starfire Assistant (SA) that helped SMs (and players) manage the (copious amounts of) book-keeping involved in a game of Starfire. The players would pass the DB around, adding their orders for the upcoming turn (it was turn-based), then the SM would run the turn. The SM was also the one responsible for placing the initial player empires. SM mode was put in to allow the SM to adjust reality the way it needed to be, e.g. during setup or when the program didn't handle some book-keeping properly and required human intervention. The Rigellian Diary is the campaign write-up of Steve's campaign that drove most of the development of SA.
Even during SA, a lot of people (e.g. Steve in the Rigellian Diary campaign) used it to play solo games, where they wore both the player and SM hats. So the purpose of the SM password was two-fold: 1) It kept players in multi-player campaigns from seeing/doing things they shouldn't and 2) in solo campaigns it helped the player to avoid doing things while wearing the player hat that should only be done under the SM hat.
When SA turned into Aurora, the multi-player aspect (mostly) went away. SM mode stuck around, however, because players still need to act as their own SM and it's useful to have a distinct interface mode so that you can be aware when you're performing SM functions.
John