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I rang Mr Gordon Hall to ask him whether any of the currency
authorities in his bailliwick had experienced difficulties result-
He said he had
think fat ing from the depreciation of their reserve assets.
not heard of any. He deals, inter alia, with all the dependency
currency authorities except that of the Seychelles.
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2.
He said all the authorities kept special depreciation reserves on which they could draw to ensure that their assets matched their liabilities. (In the old days, to ensure this, there was often a requirement that the Currency Fund itself be allowed to reach 110%- 115% before profit distribution.) Some of the newer authorities
like the ECCA had sterling reserves other than the Currency Fund. A currency authority has no capital, so that some other provision
has to be made to ensure the maintenance of reserves.
3.
If a situation did arise in which a currency authority could
not mobilise sufficient sterling from its own resources to purchase
the local currency offered to it by the banks, then all currency
authority legislation required the Government of the territory to meet the deficit. Mr Hall said that failing to maintain a fixed rate with the currency in which the reserves of the currency authority
and of the banks were held could create difficulties, but none of the territories referred to had done that (Bermuda ?). All
currency boards and their equivalents have authority to invest a proportion of their currency reserves (usually up to 30%) in local securities (most hold some local securities). The Bank of England
maintains that the fact that part of the currency circulation is never likely to be presented for circulation is the justification
for a fiduciary issue but not the the absence of backing for the
currency.
4.
Hongkong is of course a more complicated economy than those
referred to above, although the Hongkong Exchange Fund, until quite
recently, has operated much in the same way as other currency "boards". The Fund Report for 1973 demonstrates (see para 12(iv)) that, like other currency boards, the deficit caused by the fall in the value
of its investments could have been met from income and previous
surpluses; the difficulties were caused by the compensation payments
1.
/to the