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CONFIDENTIAL
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HONG KONG EXCHANGE FUND
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The straightforward answer to the request in your minute of 16 July for comments on the Exchange Fund Report and Accounts is that I have none. This is a factual and routine document, and I am sure that the facts recorded are accurate.
2. But I recognise that your request goes deeper than that; essentially, I imagine, you are asking whether a mechanism like the Exchange Fund is an appropriate mechanism for Hong Kong in this day and age. The Bank of England is, of course, the real source of advice on monetary machinery: and "private advice on which the Governor could rely" could better come from them. You might, indeed, like to consider when and how the Bank of England could be brought into this exercise.
3. So far as I am aware, those at the Bank who are best versed in Hong Kong financial matters still take the view that it would be in the interests of Hong Kong to move towards a situation in which the centre-piece of the financial machinery in Hong Kong should be some form of Monetary Authority. This, of course, is more easily said than done. Any transition towards new machinery has to be handled with extreme care because of potential problems of confidence in general and of confidence in the banking system in particular. No doubt these sorts of problems are more acute in Hong Kong than elsewhere; but I would be surprised if they were insuperable given the whole-hearted support of the Government of Hong Kong. Without that, of course nothing can be done: it would indeed be dangerous even to contemplate that a "solution" could be imposed without the active support of the Government of Hong Kong.
4.
That said, I am pretty sure that what is really at issue here is not just a question of machinery. At bottom is, I suspect, the problem of financial control. Anyone who serves as a Chancellor of the Exchequer or equivalent cannot fail to be acutely conscious of pressures to spend more and to give the public sector a larger role. Almost inevitably, it is he who has the thankless task of convincing his colleagues (and perhaps sections of the general public) that this or that otherwise worthy scheme cannot be afforded. There is indeed a sufficiency of examples to demonstrate that profligacy leads to ruin of one sort or another. In these circumstances, it is very useful for Chancellors and their like to be able to pray in aid certain rules or nostrums to support their case. This is where something like the Exchange Fund, antediluvian though it may be, can come in handy. Those reserves are just not available for spending, because they are earmarked as cover for the currency. If, as at present, the exchange fund
CONFIDENTIAL
/reserves