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[-0.
I-D.
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It was, of course, postulated that success required the co-operation of all the Colony's banks and that it might be necessary to withdraw temporarily from cir- culation the one dollar bank note until the public grew accustomed to handling sil- ver again. Of the total note issue of $64,000,000 the one dollar note accounts for $3,000,000 only.
6. The subsequent course of events culminating in the subsidence of the per- mium early in October is recorded by the Colonial Treasurer, in a supplementary me- morandum (No. IC) prefaced by some additional observations on the causes and the effects of the premium suggested by further experience of its workings.
7. The premium continued to climb in September and the Colonial Treasurer after a series of interviews with individual bankers invited representatives of all the Chinese banks of the Colony to meet at the Treasury and place before him any con- crete proposal they wished to put forward to relieve the situation. At the close of the meeting, the proceedings of which are recorded in document No. II), the Treasurer took the opportunity to assure the bankers that the Government was giving the most careful consideration to the problem and would, if necessary, call in expert advice with a view to finding out what action, if any, could be taken to control the situation.
8. The immediate sequel was a sudden demand for Gold currency in anticipa- tion of the disappearance of the premium and so insistent was this demand that the premium melted away in about three days (October 3rd to 5th) and has so far (ie. November 4th, 1929) shown no indication of recurring.
4th November, 1929.
I-A.
(ed.)
M. J. BREEN,
Acting Colonial Treasurer.
Premium on Bank Notes.
The Metallic units of the Hong Kong Currency are the British silver dollar and the Mexican dollar both of which are legal tender to any amount and can be exported or imported without restriction. The former contains 374.4 grains of silver, and the latter 375.62. Three Banks, the Hong Kong and Shanghai, The Char- tered and The Mercantile, are permitted to issue notes which are likewise unlimited customary tender in ordinary commercial usage.
The British dollar was minted in London and Bombay originally for British places in Asia. As separate local currencies were instituted in the Straits and Malaya, its legal circulation was progressively restricted and is now in effect con- fined to Hong Kong alone. It circulates with other dollars to a limited extent in China, but not to any great extent. A small number of Hong Kong dollars were minted at the Hong Kong Mint years ago but they are now obsolete and hardly ever met with. The number of British dollars in circulation is about 200,000,000. The number of Mexican dollars is unknown. They are no longer minted.
The extent of the note issue current is as follows:-
Hong Kong & Shanghai Bank
Chartered Bank
Mercantile Bank
$47,198,193 15,205,761 1,699,455
or a total of $64,103,409 being $85 per head of the Colony's population. The cor- responding figures for The Straits and Malaya and for Ceylon are $47 and Rs.14 per head respectively.
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Periodic discrepancies in value between silver dollars and notes have always been a feature of Hong Kong's currency system as they had been of the Straits system prior to the institution of a Government note issue in that colony in 1899. The re- cords shew a comparatively narrow range of movement compared to the present record figure of 15% but the inconvenience was so resented by the Straits mer- cantile community that the Colonial Government took over the note issue in 1899. (They did not however put their currency on a fixed gold basis until some years later).
The Hong Kong Government was pressed to follow suit the same year but the then Governor Sir W. Robinson was in favour of awaiting the result of a few years' working of the note issue of the Straits Government. Consequently the question was shelved indefinitely, though the Secretary of State had originally suggested it.
In 1908 the premium reached as high as 33% and the problem became acute once more, and an agitation sprang up to force the Government to improve the "mobility" of the currency. About the same time the Mercantile Bank demanded the privilege of a note issue, a concession that could only be withheld if the Gov- ernment note issue was to be instituted. Consequently the issue had to be faced It? was assumed that any further extension of the banks' note issue would only prove a stop gap as it would necessarily be limited and also assumed a little precipitately that a Government issue being unlimited would alone solve the problem permanently and legislation based on the Straits Ordinance was proceeded with. It was hoped to commence with an issue of $8,000,000 placing half as cover and investing the re- maining half in gold securities, as there were no suitable silver securities.
It was estimated that the interest on the securities would suffice to build up a security de- preciation fund to provide against an appreciation of silver, meet recurrent expendi- ture, replace the stamp duty hitherto paid by the banks of issue and yield a profit. The bill was approved by Executive Council printed and sent to the Secretary of State. In the meantime it was ascertained that the Straits Treasury after 10 years working of the note issue had brought nothing to revenue and serious misgivings about the Colony's ability to finance the note issue arose as the problem came to be studied more closely. The benefit to the public in reducing the premium became more dubious and the possibility of a rise in silver causing a depreciation of gold securities became more threatening. The Secretary of State, however, relieved the Government of responsibility by advising that the scheme be abandoned in July, 1910, on the ground that "it was not an undertaking it would be prudent for the Colony to embark on". He advised alternatively that the note premium problem could be met temporarily though not permanently by extending the note issue privilege to the Mercantile Bank. He also advised that the premium situation might be alleviated by exempting the various banks' excess issues from the incidence of the 1% stamp tax. The project went into abeyance consequently. The remission of the stamp tax was e not affected. The problem of the premium did not of course disappear.
submerged during the war, but after the return of silver to post war price levels it reappeared in cycles and in a progressively aggravated scale after each cycle. It is now at 15% or 11% over the importation point of silver, a limit considered in- superable before the war.
It was
Now that the discussion of the premium has had to be reopened it is a neces- sary preliminary to investigate it from three aspects :—
(a) To what extent is the premium beneficial or detrimental to the general
trade interests of the Colony?
(b) What causes bring it about and what measure of responsibility if any
attaches to the banks of issue?
(c) What measures could the Government take to remove it?
As regards the effect of the premium on trade opinions differ. The bank note as will be explained later has become the recognised currency of the Colony and the effect of the premium is simply that exchange has been kept at a higher level than silver parity justified. This benefits the imports and depresses the exports of the Colony proper.
It has no ultimate effect on the transit trade through Hong Kong
to South China, as the Hong Kong currency is then only a medium of exchange be- tween South China's silver and the various foreign currencies. The premium, there-
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