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It appears to be the opinion of the Bankers that the premium commenced when the Bank stopped clearing in silver and adopted the practice of clearing in The time of this seems to be un ertain, and the causes which gave rise to it are far from clear.
notes.
Incidentally it was agreed that there is a serious shortage of one dollar notes. The issue of $3,000,000 by the Hong Kong Bank, which is the maximum at present allowed, is inadequate for daily use. The Hong Kong Bank has no desire to issue more one dollar notes owing to the expense.
The Chartered Bank Manager was willing to issue one dollar notes except that his Charter prevents him and his Head Ofice does not appear desirous of issuing
them.
The Mercantile Bank Manager said he thought his Bank might be willing to assist if desired, but reference would have to he made to London.
It was the general opinion that at least another $3,000,000 one dollar notes were required.
It was further suggested that an increase in the number of fifty cent coins might help the difficulties caused by the shortage of one dollar notes.
The shortage of one dollar notes has no particular bearing on the premium of notes over silver.
I asked the Bankers for their views as to appointing a Commission to investigate the whole question. They were of opinion that a Commission would be unable to offer any solution and its only value would be to show the public that the matter had been considered and that it did not permit of any immediate remedy.
Consequently they were of opinion that no public enquiry was necessary or even
desirable.
They suggested that if the Chinese Bankers were really interested in the matter they might be asked to meet the Treasurer and put up to him their suggestions for a remedy.
19th August, 1929.
I-C.
(Sd.) W. T. SOUTHORN,
Colonial Secretary.
Premium on Bank Notes,
Before reporting on the events which led up to the recent subsidence of the premium in the first week of October I propose to supplement briefly my previous remarks on the cause and on the effect of the premium in the light of further ex- perience during August and September; of the two the effect of the premium pre- sents less difficulty, and I shall deal with it first. In my considered opinion it is abnormal, and when it is not actually detrimental to the Colony's trading interests it is at best neutral and in no case beneficial. I am of course concerned with the general trade point of view. The individual on a dollar salary must be ignored in this connection. He must no doubt suffer at the outset but after the usual economic lag in such matters his position will be adjusted.
Hong Kong's economic role is to handle not only the trade between South China and gold countries but the trade between South China and the rest of China, the only silver country now remaining. As regards the latter the presence of the premium introduces a superfluous exchange transaction which can only be a handi- cap. As regards the former exports from South China are unaffected but imports are affected because the premium involves an exchange barrier between the Hong Kong importer and the Chinese dealer in the interior. The latter as he sells in silver desires to buy from Hong Kong in silver and be rid of the exchange factor leaving it to the Hong Kong merchant to settle beforehand. The varying premium consti- tutes an impediment. Consequently the Shanghai importer who settles silver ex- change with the foreign country in the initial stage of the transaction has an ad- vantage over the Hong Kong merchant who can only settle exchange as far as Hong Kong and has to leave the dealer in the interior to negotiate a fluctuating premium in the final stage of the transaction. I have ascertained that in imports Hong Kong has undoubtedly lost much business to Shanghai. This loss very apparent quite re- cently is not of course all due to the premium as many contend. Shanghai has the permanent advantage of being within China's tariff wall and when duties are increas- ed her merchants can import beforehand as much as they can finance whereas Hong Kong merchants can only import what their dealers in the interior can clear before the new duties come into force.
Hong Kong local industries, ship building, sugar refining, cement manufactur- ing etc., and the various domestic industries which are more numerous and impor- tant than is generally realised are probably handicapped by the premium in respect of the fact of wages. The removal of the premium will of course act as a strong stimulant though wage-increases may eventually undo its beneficial effects.
In my previous remarks I did not, I fear, sufficiently stress the detrimental effect on the general financing of trade that must inevitably accompany the preiniun
The fact that an advance which necessarily was made in notes (the customary commercial currency) might be legally discharged by repayment in silver dollars, (the legal currency), created an atmosphere of insecurity and nervousness on the part of credit institutions aggravated not so much by the actual dimensions of the premium as by the feeling that there was no real or visible check on its upward movements. Bankers whose role it is to finance trade and who normally can rely on the pressure they can put on debtors to enforce repayment in paper currency be- came increasingly nervous as repayment in silver dollars became more profitable to the debtor. If the premium continued to mount to even higher levels, the necessary advances required for trade would need to be hedged round with such safeguards as would ultimately cripple enterprise.
One is therefore on reasonably firm ground in deciding that the premium on notes is ultimately detrimental. But the causes underlying the premium remain, I must confess, singularly obscure and elusive, and though the problem may be re- garded as one of academic interest only now that the premium has shrunk to rea- sonable dimensions. I do not think it should be dismissed without a serious investi- gation by currency experts, if future control of the currency situation in the Colony is to be effective.
I am not however, convinced as to the exact causes of the premium. There are several undoubtedly. One is portability as previously explained. Another is the heavy surplus of remittance from abroad causing the banks to be overbought in gold and desirous of "cover" in local currency, But neither of these or of the other factors previously mentioned has appreciably altered during recent years and yet the premium has this summer reached 20% a height previously undreamt of though the issuing Banks have not in any way restricted the note issue.
It might be worth while therefore to consider how European and American coun- tries regulate interchangeable currencies and to what extent such machinery is absent in local banking practice. In Hong Kong trade usually works on practically a fixed interest basis. As there is no discounting of bills, no discount rate or Government Bank rate is quoted. The note issuing banks are also the chief banks of deposit, to which surplus currency soon returns for deposit. Paper currency they can readily ad- just by withdrawing it from circulation when it is not required for trade, but the sil-
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