FINANCIAL STRUCTURE
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'fiduciary' issues. (These are limited to a total of $95 million and are issued against securities, of a kind approved by the Secretary of State, which are held by the banks and deposited with the Crown Agents in London). The Fund's resources are invested in a variety of sterling securities, both long and short-term. Out of the income derived, the Fund bears the cost of the note issue except for a small proportion, equivalent to the proportion borne by the 'fiduciary' issues to the total note issue, which is met by the note-issuing banks. In practice, from 1937 to 1968, the Exchange Fund operated in a similar manner to traditional Colonial Currency Boards.
Hong Kong has been a part of the sterling area since August 1941. The Defence (Finance) Regulations give power to apply exchange controls but a general licence is in force. Certain controls are, how- ever, exercised in co-operation with the authorised exchange banks, and are designed largely to prevent any prejudice to the sterling area arising from the generally free exchange market in Hong Kong.
The exchange value of the Hong Kong dollar was established in 1935 at approximately 1s 3d. On the setting up of the International Monetary Fund after World War II, the Hong Kong dollar was given its own gold parity at a rate reflecting this relationship. The relationship with sterling was, however, not a statutory one, and was established and maintained by the operations of the Exchange Fund in conjunction with the note-issuing banks. Nevertheless, it came to be generally regarded as a fixed relationship, particularly since Hong Kong, as both a dependent territory and a member of the sterling area, was required in practice to keep its official reserves, and the greater part of the reserves of the banking system, in the form of sterling.
Thus, when sterling was devalued by 14.3 per cent in November 1967, Hong Kong suffered a substantial loss estimated at £50 million. After an immediate devaluation of the same proportion, the Hong Kong dollar was revalued by 10 per cent four days after the British move, making a final devaluation of 5.7 per cent. This did not reduce in any way the loss to the community; rather it determined where the loss would fall. The cost to the Colony's public funds amounted to $450 million, including compensation paid from the Exchange Fund to commercial banks against their consequential losses.
These events finally made it clear that the old relationship with the pound was no longer appropriate to Hong Kong's economic situation. On the other hand, it was not possible for Britain to