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Wednesday, December 13, 1972
had a variable exchange relationship with London because the sterling (or
gold) value of the Hong Kong dollar varied with the price of silver. But
this had the advantage of establishing a stable exchange relationship with
China whose currency was also based on a silver standard and thus of preserving
the stability of the entrepot trade on which Hong Kong's economy then largely
depended. When China abandoned the silver standard in 1935, Hong Kong followed.
The note issuing banks were obliged to surrender all silver previously held
by them against their note issues in exchange for certificates of indebtedness.
The silver surrendered by the banks was used to set up an Exchange Fund which,
from the outset, kept its assets in sterling, a not surprising move given the
range of banking and investment facilities available in London. The Fund buys and
sells sterling at fixed rates close to par - or did so until sterling floated -
and thereby regulated the exchange value of the Hong Kong dollar. The sterling
area as it is known to-day came into being in the early days of the last war
basically as an aid to assuring that the foreign earnings of the Commonwealth
were centralised for the common good. Hong Kong, then, became a member of
the sterling area which in effect meant that the Government's reserves and
the greater part of the reserves of the banking system had to be kept in London
in sterling assets.
In 1935 the exchange value of the Hong Kong dollar was fixed at
approximately 1/3d. or at a rate of HK$16 to the £ sterling; and, with the
setting up of the International Monetary Fund after the war, the Hong Kong
dollar was given a gold parity which reflected this rate. Together with
most other sterling area currencies - and indeed those of a large number of
other countries as well Hong Kong, followed britain when sterling was devalued
in terms of the U.S. dollar in 1949. This strengthened the view widely held in
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