Correspondence relating to the Currency Position in Hong Kong 1929-1930.
I.
I-A.
I-B.
Report on the Currency situation in Hong Kong as at October 31st, 1929.
The premium on Bank Notes is not a problem of recent origin. It has appeared and reappeared at intervals for at least 30 years; but it has never been brought under control, partly because it involves the solution of a very baffling currency pro- blem, and partly because owing to its intermittent character its acute phases have usually passed away before any satisfactory solution could be devised. In this con- nection reference is invited to Lord Crewe's despatch No. 208 of the 22nd July, 1910, and to the Governor's confidential despatch of the 10th June, 1927.
2. In a general way the premium on bank notes follows in the wake of a fall in silver, and vanishes when the price of the metal is firm or advancing. In other words after a drop in silver and the corresponding drop in the exchange value of the silver dollar, the note "lags" and tends to remain above parity by the percen- tage which represents the premium. As the note has, moreover, usurped the place of the silver dollar in commercial practice as the medium of exchange, it follows that the premium puts all Hong Kong exchange rates out of step with silver parity.
3. This year has witnessed a steady depression in the market value of silver and consequently the premium became excessively high. In previous years a 7% premium was regarded as serious; but in July this year the premium on bank notes reached 14% and shewed indications of climbing still higher. Normally, the ex- change rate between Shanghai which is actually on a silver basis, (the "tael" being a weight of silver), and Hong Kong, which legally is also on a silver basis, should be about 72 taels in silver content $100 (Hong Kong currency). But in July $100 H.K. currency should command 82 taels and in September 86 taels. As Shanghai is in the most intimate trade relations with the Colony the financial repercussion provoked was considerable. The exchanges with gold currency countries were simi- larly affected; but as these must vary in any case with the price of silver, their dis- parities were not so obvious to the Chinese community or so acutely resented.
4. Though reluctant to interfere in matters of exchange, His Excellency found in July that the situation could be ignored no longer, and instructed the Colonial Treasurer to draw up
out a preliminary memorandum (IA) setting
the history, cause and effect of the premium on bank notes. The views expressed therein were then referred to the British banking community and do not appear to have been seriously challenged.
5. In the meantime the question had become acutely controversial; and, as out- side banking circles there was a dearth of expert authorities qualified to advise on matters of currency and exchange, His Excellency decided to summon the managers of the three leading British Banks to meet in conference with the Colonial Secretary and the Colonial Treasurer with a view to surveying the position and exploring the possibility of remedial measures. The proceedings at the Conference which took place on August 19th are recorded in document No. IB. The conclusions arrived at were briefly as follows:-
(a) The cumulative effect of the premium on the general trade of the Colony
was undoubtedly detrimental."
(b) Its sudden and precipitate removal would dislocate commerce too vio-
lently.
It was further suggested that in the autumn, when the import season comes round and the seasonal increase of sterling purchases ought naturally to reduce the pre- mium, an opportunity might arise to stabilise the position and keep the silver dollar thenceforward circulating on the same basis as bank notes.
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