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would have to be disposed of in some way and both British dollars and Mexican dollars subsequently barred from local circulation. The discount on these latter would probably increase and the consequent separation from South China's monetary system would tend to encourage the settlement of South China's commercial busi- Fluctuations in ness direct instead of through the intermediary of Hong Kong. exchange with other currencies, silver dollars, and Chinese subsidiary currency would increase and the principal object of the issue be frustrated.
3. The suggestion that Government take over the note issue has been revived. The forces which bring it This would not affect the premium situation one “iota." about now would still operate and merely transfer it to the new Government issue. Moreover it would be à formidable undertaking as was established in 1910 involving the Treasury in the provision of a large silver reserve a gold securities depreciation fund, and inevitable exchange operations in order to obviate an cumulation of silver dollars. Whether it could be worked at a profit at any rate for a number of years is open to grave doubt.
enormous
ac-
4. The banks concerned might be compelled to issue notes on demand against silver dollars once the bullion point was passed. This would in turn compel the It would also public and the other banks to accept payment similarly in dollars.
compel the banks of issue to yield control of their note issue by having to increase them indefinitely (on demand against silver dollars which they could not utilise) at a time when slackness of trade requires that currency be contracted rather than ex- panded.
My conclusions are that at the moment the premium is so great that any have serious con- legislative attempt to bridge it forcibly an abruptly might sequences. The import trade the revival of which would remedy the situation would on the contrary be paralysed by a drop of 3d, in exchange (the present excess över parity) and in other directions the results might be disastrous.
I am however inclined to the opinion that if the existing abnormal situation took a turn for the better (either because of a revival of imports or of an upward move- ment of silver for any reason) so that the effects of inward remittances were offset and the premium once lowered to bullion point advantage should be taken of it and It might be successful and the an attempt then made to obviate a recurrence. preminum pegged if all the banks combined to resist an upward movement and to let be known that their influence would be used for that purpose. It might also help if the Government (disregarding for the movement the revenue point of view) made the conditions attaching to excess note issues less onerous either by some remission of the stamp duty or by accepting as deposit against the issue a proportion of first class securities or commercial paper. The cumulative effect of such co-operation might restrain the speculation at any rate which now aggravates the evil and keep the movement within narrower limits.
I should suggest therefore a conference of local bank managers with a view to devising a method of procuring co-operation and that the Secretary of State be asked to seek technical advice in London as to the form the aid of the Government should take.
If no means of control can be devised and if exchange as far as its higher level is concerned gets entirely divorced from silver the resulting feeling of instability will be such that it would be better to adopt a gold basis than to remain on the present intangible system.
27th July, 1929.
(Sd.) M..J. BREEN, Acting Colonial Treasurer.
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I-B.
Memorandum of a meeting held at the Colonial Secretary's Office, Hong Kong on 19th August, 1929.
A meeting was held this evening, attended by The Hon. Mr. A. C. Hynes, Chief Manager, the Hong Kong & Shanghai Bank, Mr. A. II. Ferguson, Manager. The Chartered Bank, Mr. C. L. Sandes, Manager, The Mercantile Bank, The Hon. Colonial Treasurer and presided over by the Hon. the Colonial Secretary to discuss the position of the Hong Kong currency and in particular the fact that notes are at a premium of about 15% above silver. The meeting had before it the Treasurer's memorandum entitled "The Premium on Bank Notes," dated the 27th of July, 1929.
The following is the unanimous opinion of the Bankers on the three questions appearing on page 3 of the memorandum :
Question.
(a) To what extent the premium beneficial or detrimental to the general
trade interests of the Colony?
The premium is not beneficial and it would be to the interest of the Colony if the premium could be reduced to something not exceeding 4%, which would be the cost of laying down silver dollars in Hong Kong.
Generally speaking, the premium is beneficial to imports and detrimental to exports.
Question.
(b) What causes bring it about and what measure of responsibility if any,
attaches to the banks of issue?
The premium is caused by an excess of exports (particularly invisible exports) over imports, and the Banks are not responsible for the premium and have no power
prevent it.
Question.
(c) What measures could the Government take to remove it?
To remove the premium suddenly would so upset the trade of the Colony as to be highly detrimental and no particular measure can be suggested for removing the premium which would be not likely to do more harm than good. The only possible course is to wait for natural causes (for example, a rise in the price of silver or an increase in imports,) to reduce the premium to a more manageable limit.
There appear to be three possible methods of reducing the premium :-
1. To adopt a Gold Basis.
2. To adopt a Silver Basis.
3. For Government to take over the issue of notes.
At the present time any of these three remedies would appear to be worse than the disease. The premium is not due to shortage of notes, but to the shortage of cover, and it cannot be cured by a further issue of notes even if the 1% stamp tax on issue were removed or if the issue of notes were otherwise made less onerous to the Banks.
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