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fore, only affects goods actually produce in the Colony or imported for consump- tion therein, making the former relatively dearer and the latter cheaper. However, as one of Hong Kong's chief exports is "services" this latter handicap on exports is more serious than would appear at first sight. Trade-handling charges of every des- cription whether coolies wages, godown charges, insurance commissions, agents' costs, etc., etc., all are 15% dearer than in Shanghai on account of currency considera- tions alone.
On the other hand there is one effect which is undoubtedly beneficial, the steadiness of exchange. If the note currency had followed silver movements more closely, exchange fluctuations would have been more frequent than they have been.
I should not conclude my remarks on the effects of the premium without re- ferring to the feeling of nervousness and insecurity the premium causes creditors vis-a-vis debtors. The higher the premium goes the greater the temptation to a debtor to discharge his debt (originally contracted in notes) by repaying silver dollars under the plea that they were legal tender thereby benefiting to the extent of the premium rate.
(b) The cause which brings about the premium is complex and obscure. The premium is of course merely an expression of the excess of the demand for notes over the supply. The note issue must in accordance with financial doctrine and sound banking practice be limited. The demand for notes is on the other hand practically unlimited. as it resolved itself in practice into the amount of legal silver dollars available for importation into the Colony which when eventually tendered to the Banks constitute a demand for notes. The extent of the note issue is $64,103,409. a generous allowance for the needs of the Colony proper, whereas the number of British dollars minted is about $200,000,000 irrespective of the number of Mexican dollars.
One unquestioned cause of the premium is the convenience and portability of the note. It is more easily carried and what is perhaps more important in a semi lawless land, concealed. However, the degree of convenience possessed by the note vis-a-vis the cumbersome silver dollar cannot alter much from year to year. Con- venience therefore cannot be the sole factor operating, Otherwise the premium would remain more or less constant. There must therefore be other contributory causes which are not constant and depend on political vicissitudes and market fluc- tuations. This variable element must resolve itself finally into a surplus of demand for Hong Kong currency which has now become in practice nothing but Hong Kong bank notes for the following reasons:-
For many years the commercial medium of South China was the Mexican dollar and the 20 cts. piece minted in Canton. Both circulated in the Colony as well and were imported and exported without restriction. Exchange then followed silver parity and any local departures therefrom could never exceed the bullion points, i.e., the points where either exportation or importation became profitable. The note premium was small being merely an expression of its convenience for circulation locally. Then a double change took place. The 20 cts. piece began to displace the Mexican dollar which was the better coin. Provincial dollars of inferior fineness began to appear and completed the process of driving the Mexican dollar out of South China. Then the provincial dollar and the 20 cts. piece were in their turn subsequently debased below their original standard of fineness and generally speaking progressive debasement marked each successive issue. In Hong Kong though it had always been the policy to adhere as closely as possible to the currency of China. action had to be taken and in 1912 Chinese subsidiary coins and provincial dollars had to be barred from circulation. In South China the value of the silver currency became too uncertain to be accepted as a reliable currency and as result the Colony's commercial hinterland had no option but to adopt the only uniformly safe currency that remained namely the Hong Kong bank note. The British dollar never circulated in China to any extent and even if it had, the universal currency law that a bad coin drives a good coin out of circulation would have operated just as it did with the Mexican dollar. The Colony itself had to follow suit, being the commercial cen- tre of South China and consequently the note became established as the sole com-
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mercial medium in actual practice. (How pressing is South China's need for a stable currency is shewn by the large circulation of the Straits dollar note in the Swatow and Amoy districts though it is on a gold basis and entirely alien to the Chinese currency system. It was introduced no doubt by the returned emigrants from the Straits). In Shanghai where the tael which is only a theoretical weight of silver formed the basis of currency the position remained unaltered, and consequent- ly there exchange must follow moderately closely the movements of silver.
The problem now returns to the consideration of the causes underlying the de- mand for Hong Kong currency which as we see means the notes now the effective medium of commerce not only here but in the neighbouring provinces. The pre- mium excess when the constant "convenience" factor is deducted signifies that there must be a surplus balance of exports (or the equivalent thereof) from the Colony's hinterland. When such is the case, final settlement of the balance has to be effected by the transference to the exporting country of its currency or rather of the currency regarded as such. Had the balance been the other way South China would have had to part with notes.
But such information as is available fails to shew any abnormal balance of exports. Actually both exports and imports are at a low ebb and the surplus of the former cannot be considerable. There is however the important factor of invisible exports i.e. the export of the services of the Southern Chinese who are working abroad and remitting their savings home. The prosperity of the rubber and tin- mining industries and the cheapness of silver has undoubtedly stimulated emigrants' remittances. Consequently the Banks have to pay out in notes on drafts from Singapore, Java, U.S.A., etc., very considerable sums entirely independent of trade considerations, i.e., they are continually receiving gold currency for exchange into notes without any counterbalancing demand for foreign currency to meet payments for imports.
It should in this connection be remembered that these remittances being the equivalent of an invisible export are like other exports from China, unaffected by the premium of the Hong Kong note. In other words they either remain on deposit in the Colony or if they are remitted into the country they fetch correspondingly as many 20 cent pieces by virtue of the premium as they would have had they been converted into such directly from the gold currency, of origin in accordance with the parity of silver.
Like all note
There may be other factors operating to bring the premium about. The note issue is necessarily limited by law though probably at a figure ample for the normal trade requirements of Hong Kong and its commercial hinterland. issues but unlike metallic currency it contracts automatically by withdrawal from circulation of all notes not required to finance trade. But it does not expand so readily beyond the fixed limits on account of deterrents. For instance the banks have then to deposit dollar for dollar with the Government, losing interest thereon, pay initial printing costs and subsequent registering and renewing costs, and in addition pay a 1% stamp tax per annum. Unless then the issue can be readily and profitably utilised at a counterbalancing profit, the banks will hardly have a sufficient inducement to increase their issue and keep circulation elastic.
(c) As regards the possibility of removing the premium or rather reducing it to a constant percentage based on the "convenience" factor numerous suggestions have been made. In theory numerous methods to that end present themselves but all are open to objection for either political or financial reasons.
If
1. Theoretically the only ideal and infallible method is a gold basis currency. It would however completely divorce Hong Kong from the currency of China. China adopted an identical gold basis currency the objection would disappear but until then the objection is insuperable.
2. Hong Kong might mint its own silver dollar like the Straits and make it legal tender to the exclusion of the Mexican dollar. The new currency if rigidly controlled could be kept at par with the note. However the existing stock of British dollars in circulation in Hong Kong and held by the Banks as specie reserve
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