PUBLIC RECORD OFFICE
Reference :-
ELLICO. 882
9
PUBLIC RECORD OFFICE, LONDON:
ALLY WITHOUT PERMISSION OF THE BE REPRODUCED PHOTOGRAPHIC- COPYRIGHT PHOTOGRAPH—NOT TO ]
47225
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No. 196.
THE SECRETARY OF STATE to THE GOVERNOR.
(Confidential.)
[Austered by N», 223.]
SIR,
Downing Street, 18th January, 1907 I HAVE the honour to acknowledge the receipt of your confidential despatches of the 29th of November and the 13th December,* with regard to the currency.
In view of the re-coinage operations now proceeding, which will take a long time to complete, it is unnecessary to come to a definite decision as to the proportion of the metallic reserve against the note-issue which should be held in silver dollars. The total metallic reserve must, of course, be equivalent to at least one-half of the note-issue, and the proportion to be held in silver dollars must be sufficient to secure the payment in silver of any notes presented. It is possible that five million dollars may hereafter be found enough, or more than enough, for this purpose; and I agree with you that as much of the metallic reserve should be held in gold as prudence allows. Circumstances have made it necessary to declare gold legal tender, and this provision will interfere with its accumulation by the Government. It is the more desirable, therefore, that the gold in the hands of the Government should be held tenaciously, in order that it may be available to check a fall in exchange below the fixed rate.
Future expansions of the currency can only be made by the issue of notes in exchange for gold. This statement must be qualified because of the fact that gold is itself legal tender, but in view of the unsuitability of the sovereign for circulation (especially if the Government does nothing to encourage it, which in its own interests it should refrain from doing) there is little doubt that future expansions will mean the tender of gold to the Currency Commissioners for notes, and the gold note reserve will accumulate. When the silver reserve sinks below the minimum decided on, say, five million dollars, silver will be purchased with part of the gold and more dollars will be coined. The system will thus work mechanically. The profit on coining will, of course, not be paid to the note reserve, but to the gold standard reserve fund, which will be kept distinct. This is already provided for by the amendment of the Currency Note Ordinance made in accordance with my predecessor's despatch, No. 229, of the 14th of October, 1904,† and previous despatches from the Secretary of State.
I think it desirable to emphasize the necessity for a separate gold standard reserve fund since the first supplies of the new dollars will shortly be shipped, and four of the lighter dollars will be received for three that were sent home. It is essen- tial that the note reserve should only receive the same number of dollars as were sent home, and that the balance should be credited to the gold standard reserve fund, which will be built up out of the present and all future coinage operations. In time it may be possible to invest all or a portion of this reserve, but the profits from investments will be paid into the fund itself, as in India; and the fund will exist solely for the purpose of ultimately guaranteeing the difference between the intrinsic and the token value of all Straits Settlements dollars, whether in active circulation or in the note reserve. During the process of re-coinage and exchange the gold standard reserve will not actually hold its dollars, but the account should at once be opened.
The expense of the coining of the old Straits Settlements dollar was borne by general revenue, and indeed this was necessary as there was no other fund to meet it. I consider that in view of the great profit made on the present re-coinage the charges in connexion with it may properly be met from the profits which would otherwise go to the gold standard reserve fund in full. And similarly in future the expenses of coinage will be met from the gold reserve fund. In fact, all opera- tions in connexion with the buying and selling of coin should be the business of that fund, and I am inclined to think that this arrangement should be extended to include subsidiary coinage, the profits on which have hitherto been paid to general revenue. The expenses or profits of remittance to or from the Colony in con- nexion with the maintenance of the gold standard should also appertain to that
Nos. 187 and 191.
+ No. 72,
account.
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The note reserve should only incur charges or reap profits in connexion with remittances when those remittances are made strictly for the purpose of investment, as before the currency changes commenced.
As regards the amount of new dollars to be coined, I am prepared to guide myself by your advice. It may be necessary, or, at any rate, desirable, hereafter But I to provide for the demonetization of the old Straits Settlements dollar. could not agree to this step being taken until full opportunity had been given for exchange. That dollar having been issued by the Government and having been fixed at 2s. 4d., it is incumbent on the Government to offer the new 25. 4d. dollar or notes in exchange for the old. Unless silver rises still further there can be little doubt that this offer will be taken advantage of to the full. If the price of silver continues to rise there will no doubt be a tendency for the old dollars to leave the Peninsula, and the only action that the Government can take is to make the present prohibition of its export as stringent as possible, so that it may be exported in the form of bullion, and thus give rise to no further claims hereafter.
I do not think that it is desirable to give the banks a commission for assisting in the exchange of dollars. The new dollars can only arrive gradually, in batches, and cannot doubt that the Government will have ample means of putting them into circulation. A commission to the banks could scarcely be kept secret, and the fact of its being given would tend to discredit to some slight extent the new coin, besides unduly favouring the banks as compared with other large holders of dollars.
I understand from your despatch of the 29th of November* that there is at present a considerable excess in the supply of dollars, including those in the note reserve, but not in the circulating medium as a whole; indeed, it is clear that there is no excess in the circulation of unlimited legal tender currency since there has been no difficulty hitherto in maintaining the parity of exchange, and little demand on the Government for gold. It is obvious, therefore, that the existing stock of dollars in circulation must be replaced by an equivalent amount of dollars or notes or gold. Of course, if silver rises, holders of dollars may sell them as bullion, but this is only a contingency. The Government must, therefore, be prepared to exchange them. Gold it should not give, except to maintain exchange. There remain notes or new dollars. I consider that new dollars must be provided so far as they are required, but that notes should be given in preference. If notes are freely accepted, I agree with you that it will not be necessary to coin so many new dollars as there are old dollars at present. In that case the Note Commissioners will give notes against old dollars, and pass them on to the gold standard reserve against gold at the 2s. 4d. rate. The old dollars so received can then be sold as bullion, and the proceeds paid to the gold standard reserve.
I do not quite understand the remarks in paragraph 10 of your despatch of the 29th of November.* There must immediately be a profit of 25 per cent. (minus coining charges) out of every batch of new dollars supplied, and this will go into the gold standard reserve in the shape of an equivalent number of old dollars to be sold as bullion. The amount of it will, of course, depend on the number of new dollars coined, and the only set-off will apparently be in cases where notes are supplied against old dollars and the latter are passed on to the gold standard reserve against gold. But at the present price of silver the loss occasioned to the gold standard reserve will be slight, and it may be observed that as the gold is paid into the note reserve it reduces the risk of the loss of the fixed ratio, to secure which the gold standard reserve exists.
As regards subsidiary coins, I would refer you to my confidential despatch of the 13th ultimo.tThe matter of re-coinage appears not to be pressing, and I telegraphed to you accordingly on the 2nd instant in reply to your telegram of the 31st ultimo.§
I have, &o.,
ELGIN.
• No. 187.
↑ No. 184.
No. 189.
f No. 188.
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