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Without any census statistics to bear out our argument that the population not only on the Island but on the Mainland has increased enormously of recent years, I think looking casually at the new houses and buildings which have been erected this feature will be readily admitted all round. The number of semi-foreign Banks has been added to twice over and to meet their ordinary counter demands, a certain reserve in Bank Notes must be held by them, and an increased Note Circulation has to he expected from this quarter. Moving with the times, wages from the coolie- class upwards have tended to improve and we have therefore to deal with more than a large addition to the population, when labour costs have gone up probably 50 to 75% in the last 15 years. The large amount of Notes which find their way to Canton and circulate in Kwangtung cannot be estimated but the total amount may run to mil- lions of dollars. The point for consideration is whether or not the increase in the circulation of the Issuing Banks has moved up sufficiently to meet the growing de- mand of the Colony.
The real basis of the Note Circulation by the three Issuing Banks of the Colony is determined by the amount of their paid-up Capital. Admittedly the Hong Kong Bank has power to increase his Note Circulation to any extent above $45 millions pro- vided he deposits dollar for dollar. Even allowing for the remission of the tax recently sanctioned, there is no great inducement offered him to supply the Colony's increasing Note requirements. In my opinion this restriction is wrong on principle and it should be sufficient as it is consistent with safety that the Note Circulation should be two thirds covered either in Gold or Silver Bullion or gilt-edged interest bearing Securities deposited with the Crown Agents or other Government Depart- ment at home, and always not less than one third of the total issue deposited in actual coins in Hong Kong, under the direct control of the Hong Kong Government. In other words the capital of the Issuing Banks matters little as long as Government is 100% covered for any issue they may sanction. Here is therefore a suggestion to bring about greater elasticity in the Note Circulation without losing any of the essential safe-guards to the public. It would be an absurdity to expect the three Issuing Banks to increase their capital to secure less onerous conditions to supply the Colony's needs for an increased Note Circulation.
I have mentioned previously that bringing in Silver Dollars appears the only feasible method of getting our exchange down to where it belongs. It is not im- probable that the difficulty of storing the coins will be surmounted as there may be more storage available than is generally surmised, and again Banks between them- selves may make mutual arrangements for accommodation and actual transfer of the coins may be obviated. Under the old exchange dispensation, Notes were essential as by custom the legal currency in respect to Dollar coins had become divorced from usage. It was this practice that occasioned a feeling of enmity against the Hong Kong Bank as he had the advantage of being able to expand his note issue at will and if he refrained from buying, rates became more or less what he cared to make them. The other Banks through a free silver market are now endeavouring to break what they described as a monopoly on the part of the Hong Kong Bank, althongh in reality they are doing little beyond adhering to the status of the currency as laid down by
law.
It is difficult estimating what should be saturation point as regards imports of British or Mexican Dollars but provided sufficient Treasury space on joint account for all the Banks in the Colony can be provided (on similar lines to the existing arrange- ments made with Banque de l'Indo Chine, who has stored $15 millions) we reach a stage which should be the equivalent of the average Clearing Balances deposited with the Hong Kong Bank. Off hand we should say the amount is somewhere be- tween $18 and $25 millions, and if we add a further $10 millions as the total coins which can be readily absorbed as counter Reserves by all the Banks, we should arrive very nearly (subject to correction) at say $30 millions as a maximum
Probably the liability which the Issuing Banks incur and more especially that of the Clearing Bank permitting silver transfer from the general Repository, is not too well understood. It is sometimes assumed wrongly that any reduction in the Note Issue will be brought about by an equivalent reduction in the Issuing Banks' holding of Silver Dollars. If this were so in practice, the attitude of the Hong Kong Bank would be untenable, but after China New Year a reduction in the
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total issue will be manifested without any equivalent demand for coins which will re- main in his vaults or with the French Bank. As pointed out previously the getting rid of redundant coins will cost 6 or 7%. and it is this contingent loss which the Hong Kong Bank is not keen to face, and which probably induces him to discour age the import of coins to an extent approaching saturation point. If for no other reason than to keep Indian speculators from minting British Dollars (which we know is taking place) it seems imperative that the level of our exchange be forced down
It has been suggested as a responsive and convenient means of assisting this eventuality, that the Hong Kong Goverment build a Treasury and issue silver certificates against actual coins deposited by Banks, for amounts of say $5,000 and $10,000. These certificates need only be repayable in coins previously deposited. It is considered that this scheme would lessen the difficulty which obtains at pre- sent, in forcing Native Banks and Chinese Clients to accept payment in silver coins, and it is realised with the Government backing these certificates would inter-change freely and dispense with the inconvenience of counting and of transporting which payment in actual coin necessitates. The Government have shewn a keen interest in the currency problem during the present transition stages and it is realised any such active display in a practical form would be highly appreciated by all the Banks, who recognise that their own Cheques drawn on the Repository Bank would not have the same negotiability and would not possess the same currency life.
Confidential.
My Dear Messer,
(Sd.) A. H. FERGUSON,
Manager.
Chartered Bank of India, Australia & China.
VI-C.
Hong Kong & Shanghai Banking Corporation.
Hong Kong. 20th February, 1930.
I have duly received your letter of 18th February and am very glad that the Secretary of State has taken up the Currency question as the present position is far from satisfactory.
The following are my views on the points you mention?
Bring exchange to parity: By parity I am assuming you mean parity with the cost of laying down British dollars in Hong Kong, including seigniorage, shipping charges and interest. I do not anticipate any great difficulty in bringing exchange to parity, the trouble is to keep it there. It is principally a question of the Note- issuing Banks' buying power. If they can meet, at rates slightly above parity, the general demand of Banks and Merchants who wish to sell, the parity could be maintained. The Note-issuing Banks. ho vever, must obtain cover for their pur- chases of gold exchange to maintain some sort of equilibrium for their gold positions. If imports are not sufficient for this purpose, they must turn to silver-and this brings me to your next point:
A probable surplus of coin in Hong Kong and the difficulty of getting rid of the excess dollars. If all Banks and others interested have the power, as they now have, of obtaining cover for their purchases of gold exchange by minting and import- ing dollars, there is every probability of the Colony being flooded with unwanted coin. Even now there are far too many in the Colony, since the public all wish for
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