Enclosure 2.
FORWARD EXCHANGE CONTRACTS.
17
The history of the Forward Exchange Contract, to
which the D.C.A. raises objections, is briefly as follows.
In September, 1931, exchange fluctuated considerably
as a result of England abandoning the gold standard and the estimates for 1932 had just been prepared on the basis of $1 The sterling rate rose from 11. 7/8d on the 21st to 1s/2d. on the 26th and the banks were then of the opinion that the rate
would not be maintained at that figure.
1st
Prominent business men, who were consulted, agreed
that the Bank's advice to cover future sterling commitments promptly, was sound, and after the matter had been fully dis- cussed with His Excellency the Governor and the Colonial Secretary I made a contract for £200,000 at 1/3d. $1 for 1932.
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I maintain that in those difficult days, having
budgetted on the assumption that exchange would average 1s/-, it was wise and proper to assure a more favourable rate to the extent of approximately half our sterling commitments.
The D.C.A. regards this as speculation with public
funds and that appears to be his sole objection.
I regard it as protection of public funds. The
contract covered definite commitments and its purpose was to
assure the stability of the Budget containing those commitments. Government followed the principles of sound finance in protecting
its financial programme against the vagaries of violent exchange
fluctuations.
In the Report of the Commission appointed by the
S. of S. for the Colonies on Hong Kong currency you will find
the view advanced that the merchant who does not settle his
exchange forward is a gambler. (para.51). Of course, it depends
entirely on circumstances. Had I contracted for £2,000,000 - about five times our normal annual requirements that would have been speculation, but in the contract to which the D.C.A. objects, the charge of speculation is untenable.
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