CONFIDENTIAL
Money Supply
11. The end of the property boom in the mid-1960's led to a run on the banks, largely on account of their having become over- committed in their lending to the building and construction industry. But this and the net outflow of funds through the foreign exchange market during the 1967 disturbances apart, the money supply was able (even in the absence of a central bank) to increase during the decade at a sufficiently rapid rate to finance the substantial expansion of Hong Kong's trade. By 1971, total deposits with the commercial banks amounted to HK$18,800 million, equivalent to about HK$4,500 (US$900) per head of the population. Of this, about a third was in the form of savings deposits. The degree of confidence in the banking system at this time can be illustrated by the fact that by 1971 some 12% only of the total money supply was in the form of cash with the non-bank public (the ratio is now even lower, at 9%).
12.
The need for the money supply to increase at least as fast as the growth of overseas demand, has, in the absence of a central bank and even allowing for the possibility of changes in the banks' lending policies, emphasised the importance of having a more or less continual net inward movement of funds through the foreign exchange market. Hong Kong has always had a deficit in its visible trade but this has generally more than been off-set by a surplus on invisibles and by net inward movements of capital. These capital inflows have to an extent been associated with Hong Kong's political stability, but they have also been influenced by the stability and strength of the Hong Kong dollar and by the absence of exchange controls. Even now, the government is not prepared to manipulate the exchange rate for the purposes of demand management, and it is still the case that the banks do not have to differentiate between resident and non-resident accounts. During the 1960's (and, indeed, before) government revenue almost always exceeded public expenditure by a wide margin and this exerted a
/downward
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CONFIDENTIAL