44
FINANCIAL STRUCTURE
gave Hong Kong a variable exchange relationship with London and the world at large, but a reasonably stable one with China.
In 1845 the Oriental Bank issued the first bank notes in the Colony, and the Chartered Bank of India, Australia and China, the Chartered Mercantile Bank of India, and the Hongkong and Shanghai Banking Corporation followed suit. Although not legal tender, these notes increasingly became the customary means of payment because of the inconvenience of dealing with large amounts of silver. By 1890 they had become established by convention as practically the sole medium of exchange apart from subsidiary coinage. An ordinance of 1895 restricted the issue of banknotes to specifically authorized banks the Hongkong and Shanghai Banking Corporation and the Chartered Bank of India, Australia and China (now the Chartered Bank). By then the Oriental Bank had closed its doors and the Chartered Mercantile Bank of India had been reorganized. In 1911 this reorganized bank (now the Mercantile Bank Limited) was added to the list of authorized note-issuing banks.
The rising price of silver from 1931 onwards forced China to abandon the silver standard in 1935. Hong Kong followed. The Currency Ordinance of that year, later renamed the Exchange Fund Ordinance, set up an exchange fund to which note-issuing banks were obliged to surrender all silver previously held by them against their note issues in exchange for certificates of indebtedness. The certificates, which are non-interest-bearing and are issued and redeemed at the discretion of the Financial Secretary, became the legal backing for the notes issued by the note-issuing banks, apart from their fiduciary issues. The silver surrendered by the banks was used to set up an exchange fund, which in practice keeps its assets in Sterling and operates in a similar manner to traditional Colonial Currency Boards. The ordinance also made the banknotes legal tender.
At the same time the government undertook to issue one-dollar currency notes to replace the silver dollars in circulation. In 1960, because of the heavy expense of keeping clean notes in circulation, a dollar coin of cupro-nickel and about the same size as a British florin was re-introduced. Stocks are sufficient to replace all notes issued but, although banks have been asked to withdraw all notes