w/ so
CONFIDENTIAL
Draft telegram to Governor, Hong Kong
STERLING GUARANTEE
We are sorry to see from the recent exchanges of telegrams that the six month arrangement should seemingly have come to an end on a note of discord.
2.
Although we find it a little difficult to see how the relevant provision lends itself to your interpretation, your good faith in the matter has, of course, never been in doubt. We certainly appreciate the circumstances in which you have operated and that (unjustified) criticism may well arise locally when your topping-up purchases become known.
3. However, although you indicate rightly that the point of the guarantee has been to insulate the rate against pressure from switching out, the fact is that any guarantee requires a specification of conditions, and you will appreciate that as a matter of accountability we have to satisfy ourselves that such conditions have been fully met. This is why our telegrams indicated that we were not able entirely to disregard the fact that the Hong Kong position was somewhat below 100 per cent satisfaction of these conditions on three successive monthly reporting dates.
4. We would of course have queried your interpretation earlier had we been aware of it. But we really do not find any clue to this in Blye's letter of 11 February. At an earlier stage, we certainly took para 2 of your telno 1361 of 27 November (which refers to topping up at the end of November to maintain your position) to be entirely consistent with the relevant provisions.
5.
We recognise of course that the amounts of sterling at stake were marginal in relation to your total holdings. But, correspondingly, the modified basis of
1