No. 24
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3. It will be observed that Sir F. Lugard wishes to be allowed to proceed with the scherne described in his despatch, of which a copy accompanied the letter from this Office of the 8th of April 1910. But Mr. Harcourt does not see how the scheme can be carried out with any prospect of success except at a cost beyond the present means of the Colony. It appears to him that if there is to be no "repudiation" of the subsidiary silver coins now circulating in China, as well as in the Colony, and if the question of depreciation is to be dealt with, it must be dealt with comprehensively, and having regard to the resources of the Colony this can only be effected by the issue of Government notes of unlimited legal tender in place of the redundant subsidiary coins.
4. The difference in the intrinsic value of the subsidiary as compared with the stand- ard coins, the former being 800 fine as compared with the latter which are 900 fine, is not so great as to make a sound scheme of note issue impossible, especially when it is remember- ed that the subsidiary coin can be bought up from time to time at a price based approximately on the prevailing rate of discount. The notes when issued cân thus be Lacked at once by a reserve of standard dollars amounting to two-thirds of the issue, and, after paying expenses of the note issue, there will still remain a balance to be invested, which will in course of time, as interest is added to the investment fund, fully cover the issue of notes. Moreover the note issue will of course be secured by the General Revenue and Assets of the Colony, so that there will be no cause for lack of confidence in the issue.
5. The demand for notes in Hongkong has recently been so great that the notes of the Banks, which are not legal tender, lave stood at a premium, and as Their Lordships are aware the Mercantile Bank of India are now being allowed to issue notes so that the deinand may be more completely inet.
6. An issue of Government notes is not in itself desirable at present for the reasons giren in the letter from this Office of the 16th of February 1910. The chief reason against a Government Note Issue is the possibility that China may within a reasonable time have a currency based on gold, in which case Hongkong would have to follow suit, and a. Note Issue might then have to be redeemned in gold or in specie of higher gold value than that originally paid for the notes. The experience of the Straits Settlements is of impor- tance on this point.
7. Mr. Harcourt would therefore propose that the issue of Government notes should be strictly confined to what is necessary in coping with the problem of the redundant subsidiary silver coin, and that notes should not be issued on the demand of the public but simply to suit the convenience and purposes of the Government.
8. Mr. Harcourt wishes, moreover, to interfere as little as possible with the note issues of the Banks, especially as the Mercantile Bank of India are now arranging for an issue of notes, whilst the Chartered Bank were given to understand in 1910, in reply to an enquiry, that there is no prospect of a general Government note issue in the near future.
9. None of the Banks, however, issue notes of a less denomination than 5 dollars, with the exception of a special issue of one dollar notes by the Hongkong and Shanghai Bank, which is limited to 226,000 dollars and which the Bank are under an obligation to withdraw at once if the Government issue notes of less than 5 dollars.
10. In the Malay Peninsula the issue of one dollar notes by the Straits Settlements Government has been an enormous success. Mr. Harcourt does not see why one dollar notes should not also be a success at Hongkong and it may be noted that the Hongkong and Shanghai Bank has recently stated that its issue of one dollar notes is always at the limit authorised. Reference may also be made on this point to the despatch from the Officer Administering the Government of the Colony of which a copy was enclosed in the letter from this Office of the 15th of December, 1910*. The community are therefore accustomed to notes of this low value and evidently appreciate them. State would not, however, object if Their Lordships thought it desirable to have also a The Secretary of. Government note of two dollars. He prefers an issue of one dollar notes only, which are most near in value to the subsidiary coins which they will replace:-They will of course be unlimited legal tender except by the Currency Commissioners at the Office of issue.
*Not printed.
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11. The procedure to be adopted would be as follows:-A stock of notes would be prepared and sent to Hongkong. The Government would then take from a Bank an accumulated stock of silver subsidiary coin, calculated at a price based on the prevailing rate of discount, plus a commission to the Bank. The amount to be paid may be called 2. The silver subsidiary coin would then be sold on a guarantee that it will be melted down. Notes to the amount of z would be paid to the Bank, and from the proceeds of the sale of the subsidiary silver coin as bullion standard dollars to the amount of two thirds of z would be held as a specic reserve against the notes issued. The remainder of the price received from the sale of subsidiary coins, after payment of expenses of the note issue, would be invested by the Crown Agents in London, part of it possibly in silver securities, if suitable silver securities can be found. Profits on investments would be added to the investment portion of the Note Guarantee Fund.
12. The Government should also sell from time to time the stock of subsidiary silver coin which they accumulate from payments made by the public. They should then put notes into circulation equal to the nominal value of the subsidiary coin, minus the current depreciation of that coin (which loss should be met from Revenue), and back the notes to the extent of two-thirds with standard dollars received from the sale of the subsidiary The remainder of what they receive from the sale of the subsidiary coin
coin as bullion.
should be invested as above.
13. In course of time, when the success of the Government Note Issue is assured, the specie reserve held in standard dollars could be reduced to one half, and the investments increased accordingly, so as to hasten the complete covering of the issue by security in cash or investments. This will be the more desirable as it may be anticipated that, as the operation progresses, the discount on the subsidiary coin will diminish and the Government will therefore have to pay a higher price to the Banks for them.
14. When the subsidiary coins rise to par the issue of Government notes will be discontinued. If it falls again, the issue of notes can be resumed. The process of reducing the redundancy of the supply of subsidiary coin will therefore be largely automatic.
15. There can be little doubt that after the scheme is introduced there will soon be a marked difference between the value of Hongkong and of Chinese subsidiary coins-a difference which the Chinese are quick to notice. There will probably be no need to prohibit the importation or circulation of Chinese coins, but this matter can be left for future consideration in the light of experience of the working of the scheme.
16. Government notes issued under this scheme will no doubt, go into China and
it is possible that the notes may at some future date be excluded by the Government or driven out by new currency conditions but there seems little danger that, when that day comes, the notes will not be sufficiently covered to make their encashment in standard dollars a matter of no difficulty.
17. Legislation in the Colony will of course be necessary to authorise the issue of notes, and the proposals of the Government will therefore have to be made public. This announcement will probably at once raise the value of the Hongkong subsidiary coin, and reduce to a corresponding extent the amount of the fund for investment.
It may be desirable therefore before introducing the legislation to come to an arrangement with the banks as to the rate at which they will be prepared to sell to the Government a substantial amount of subsidiary coinage. When the legislation has been passed, as the issue of notes will be entirely at the option of the Government, the issue can be stopped at any time if there is a lack of confidence in the notes, and in any case the operation of redeeming the large mass of subsidiary coins in circulation can be spread over as long a period as may be thought necessary.
18. Mr. Harcourt will be glad to be favoured with Their Lordships' views on the above proposals as soon as possible.
THE SECRETARY TO THE TREASURY.
I have, &c.,
H. W. JUST.
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