PUBLIC RECORD OFFICE
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C.O. 882
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PUBLIC RECORD OFFICE, LONDON
ALLY WITHOUT PERMISSION OF THE BE REPRODUCED PHOTOGRAPHIC- COPYRIGHT PHOTOGRAPH—NOT TO
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circumstances were never adverse enough to compel the Banks to make use of this section It was only made use of once, and that by the Netherlands Trading Society when it had run short of local currency and was refused accommodation by the other Banks except at exorbitant rates
I think the existence of a gold reserve here will be a direct temptation to the Banks to supply demands with which the Colony has no concern, such as the demand which arose in India at the end of 1906. The bank rate was forced up very rapidly and some injury must have resulted to the produce business of the Colony.
Supposing the Commissioners had then had the powers which it is suggested by Government should be given to them by amending Section 7 B (1), what would have been the result The Commissioners would have bought drafts on London, counter- acted the rise in exchange, and accumulated gold in London.
This is, however, exactly what the Banks do not want. They contend that it would introduce an element of uncertainty and upset their calculations, that it would be safer to have fixed limits within which they could operate without inter- ference, that much would depend on the personal character of the Commissioners, and that the personal element is undesirable.
The only alternatives I can suggest, with a view to accumulating and conserv- ing our gold reserve, are to fix a minimum by law below which it shall not be lawful to issue gold against notes, and to compel the Banks by law to declare their cash balances and to maintain a liquid balance in proportion to the amounts of their current accounts and fixed deposits.
I forward a copy of the draft Report* together with the memorandum referred to therein and also a copy of a letter addressed by the Manager of the Mercantile Bank to the Chairman of the Chamber of Commerce which has been communicated to me by Mr. Linton.
27 August, 1908.
J. O. ANTHONISZ.
TREASURER'S MEMORANDUM REFERRED TO IN DRAFT REPORT. The object of the amendment to Section 7 B (1) is to enable the Commissioners, if they think fit, to remit to London at a cheaper rate than that allowed under the present section. The rate as it now stands must cover the cost of freight, insurance, packing, and interest at the bank rate on the gold during the period of transit to London. This has been worked out at 2s. 4d. 5/16, and as I have stated to the Committee only one transaction has taken place under this section.
There is, therefore, little chance of accumulating a gold reserve in London by means of transfers, and the only alternative left for working up a reserve with the Crown Agents is that of shipping the gold received here at 2s. 4d. to London. I may state that the Chartered Bank approached me on this matter, and suggested I should give
them notes here in exchange for gold delivered in London out of shipments from Australia, the notes to be given out on delivery of documents after the ship reaches Colombo. It was pointed out to me that if the Commissioners wanted the gold in London it would be an economy to the parties concerned to avoid the ship- ment to Singapore, the double handling, and the reshipment from Singapore to London. This is the practice adopted in India. The rates in such cases were of course, to be less than the rates fixed under Section 7 B (1).
The two objections urged in Committee were :-
(a) That it would encourage Banks to work on dangerously low balances, knowing as they would that they could obtain dollars of the Govern- ment at a moment's notice by the purchase of telegraphic transfers on Singapore from the Crown Agents in London.
(6) That there would be danger of the local currency (currency notes and silver dollars) depreciating in value unless they were exchangeable for transfers at a sufficient margin above the parity of exchange to cover the cost of shipment to London.
The answers to the first objection (a) are:-
(1) That it is within the discretion of the Currency Commissioners to purchase transfers, and that they will not do so unless the rate of exchange is unduly high and the local currency requires expansion.
(2) That transfers by cable are not required by the amended section, and that
the sale of drafts could be limited to demand drafts or time drafts.
Not printed. The final report has now been presented.
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As regards objection (b) my experience is that the use of gold for purposes of circulation or for the local adjustment of foreign trade balances is practically nil. It is useful to the Banks here for the purpose of supplying foreign countries on the occurrence of a monetary stringency which may have no connection whatever with Gold has for us the Colony's requirements for the adjustment of trade balances. only an exchange value.
The answers to objection (b) are:—
(1) That it is the duty of the Commissioners to maintain the parity of exchange and that all exchange operations are bound to cease when- ever the dollar falls to within the neighbourhood of 2s. 4d., say. 2s. + 1/16d.
(2) That the movement of market rates would ordinarily give ample warning
of a demand for dollar drafts or gold drafts.
Govern-
(3) That by the withdrawal of the Government balances in the Bank,
ment has a ready weapon to prevent any undue depreciation. One argument put forward is that unless the dollar were poised exactly between two limits for purchase and sale there is no possibility of its maintaining its parity of exchange. As I have stated before, gold has only an exchange value, is not a circulating medium, and is not required locally for the adjustment of trade balances. The gold liability is mainly in London, and the gold asset should be there.
In the light of our present experience it seems to me absurd to argue that by keeping the limits for sale and purchase equidistant from the fixed rate, that the operations on one side would counterbalance the operations on the other. The value of the single operation under Section 7 (B) was £50,000, the value of the operations under Section 7(C) over £800,000. No one can contend that under our present "perfect" system the exchange value of the dollar has been maintained at par during the last nine months and the Commissioners cannot view with indifference any exchange operations on the part of the Government independently of them. The main foundation of our currency system is the credit of our Government and the Government surplus balances are a most potent factor in the maintenance of the parity of exchange.
One objection formerly urged, but which was not put forward at our Committee meetings, was that an exchange standard would unduly interfere with the business of the Banks.
This is, I consider, the main objection. It is probable that the Colonial Government and the Federated Malay States Government will be in a position sometimes to give the Crown Agents gold in exchange for notes at a reasonable rate of exchange, and to that extent there will be competition with the Banks. The retention of the present section makes it almost impossible for the Government to carry through any such transactions, and the Banks will accordingly profit to that extent.
If the section is amended, the Banks will be the principal if not the only customers of the Commissioners. Drafts of only large amounts will be sold by the Crown Agents and the Banks will be practically the only bodies in a position to buy. Giving out notes in exchange for gold drafts will not interfere with the business of the Banks any more than giving out notes in exchange for sovereigns received here.
SIR,
MANAGER, Mercantile Bank, to CHAIRMAN, Chamber of Commerce.
19 August, 1908.
WITH reference to the letter, dated 15th instant, written to you by the Honourable T. S. Baker, on the subject of the proposed change in Section 7 B (1) of the Currency Note Ordinance, and the memorandum thereon by the Honourable J. O. Anthonisz, I would like to make a few remarks:-
If the Commissioners of Currency undertake to always sell drafts or telegraphic transfers on London when applied for in Singapore, I think it would be advisable that the Gold Reserve should be held in London for the reason that it would not then be liable to depletion by temporary demands from other points. As an instance may mention that during October, November, and December, 1906, large ship- ments of sovereigns took place from here to India to relieve the money market there with the result that our currency was temporarily contracted causing a rise of 18. 4d. in our rates, and there is no reason why we should be subjected to inconvenience
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