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ver dollar is indestructible and may involve them in loss of deposit interest as it cannot be exported temporarily for employment outside China without the expense and exchange risk of conversion into gold. It may well be that the premium acts in the absence of regulating interest rates to discourage the importation of unneces- sary silver dollars and to protect the banks from a surplus of silver. I may add that I have not succeeded in convincing local bankers that there is any connection between local banking deposit rates and the premium. or conversely that adjustment of the rate of interest to periodic requirement would help to prevent fluctuations of the premium. The innovation would not of course be popular and no individual bank might care to lose good will in introducing it.
Another factor complicating the situation arises from the employment on a large scale of the Hong Kong notes in South China as the medium in which all large busi- ness transactions are conducted. It is hoarded by those who can afford to lock money up and treated as a safe deposit without interest always readily convertible or accep- table for payments to any amount. Moreover its possibilities in the way of increase of premium may be regarded as a substitute for loss of interest. However the actual position of the premium today and its recent fluctuations are of more immediate in- terest. The situation in July was such that the premium stood at about 14% with a rising tendency and the problem demanded attention; accordingly a conference of the three managers of the Banks of Issue and the Colonial Treasurer was summoned for August 19th by the Colonial Secretary who presided. It was felt that the op- See document portunity should be taken to stabilise the position whenever silver and notes circulated freely on equal terms and to keep silver permanently in circulation after- wards. One means suggested of attaining this result was the temporary withdrawal of the $1 note.
No. 1B.
Document No. 1D.
Contrary to anticipation the premium mounted still higher and towards the end of September actually reached 20%. After numerous conferences with individual bankers the managers of the twenty-four Chinese Banks of the Colony met in the Treasury on Tuesday, October 1st. The enclosure hereto (document No. ID) contains a brief résume of the proceedings and the Colonial Treasurer concluded the meeting by informing the bankers that it was the definite policy of the Government and of the three banks of issue to grapple with the problem at the earliest moment and if neces- sary summon expert assistance in devising a permanent solution.
Almost immediately the premium on the note fell within a week from 20% to 5% (the normal figure aimed at as previously explained) and the disparity between Hong Kong and Shanghai exchanges disappeared. The mere anticipation of possible Government action in collaboration with the banks sufficed to accomplish the results: nor has the premium shown any inclination to reappear. The position at the moment then is that the premium has been removed and the free circulation of silver has been obtained with a smoothness and absence of dislocation almost beyond expectation and the problem of stabilising the existing position now remains.
The only immediate action taken is that with the concurrence of the Govern ment the Banks have decided to receive and pay out Mexican and British dollars on the same basis as the notes of the Banks of issue on and after the 24th October, 1929. It was considered advisable that the issue of $1 notes be withdrawn from cir- culation, in order that the public should become accustomed to silver dollars.
(Sd). M. J. BREEN.
Acting Colonial Treasurer.
24th October, 1920.
E.
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I-D.
Colonial Treasurer's Interview with Chinese Bankers on 30th Sept. 1929.
1. Mr. P. L. Li, Manager or Industrial and Commercial Bank, pointed out that two-thirds of the securities against the note issue are in gold or in gold securities. We might as well realise that our currency is on a paper basis and not on silver. He considers that the present has the disadvantages of a gold basis currency without its advantages of positive and definite stability. He was not (and the meeting agreed) in favour of a gold basis for the Colony.
2. Mr. Shou J. Chen, Manager of Bank of China, held that the Government should authorise the three Banks of issue to issue $50,000,000-more notes. buy stering with them, and with the sterling buy silver (bar). This would bring the Lou- don exchange down to 1/9. Then there should be free circulation of silver and notes which would be equal. The Banks would from then on do inter bank clear- ing in silver or notes ou an equal basis.
3. Mr. Li (Industrial & Commercial Bank) remarked at this stage that two points were involved.
(1) Are we to alter the existing system of covering the note issue to the
extent of two-thirds in gold?
(2) Are we not, therefore, complling the three issue banks to take up an "over bought" position in silver? Because silver is depreciating in terms of gold.
4. Mr. Chen replied that the issue banks need not use gold to effect the pur- chase of silver. They could keep the gold in London and issue notes.
5. Mr. Li said we should go back to silver somehow if the Government Treas- ury were to issue notes for coin and coin for notes. He remarked incidentally that the Hong Kong Bank never gave the Chinese Banks interest on their current account with it (as the clearing bank).
6. Mr. Li Tse Fong, Manager of Bank of East Asia, suggested adopting the pooling method as outlined in attached circular, suggested by Mr. Dutton the Manager of the American Express Co. coupled with the withdrawal of the $1 note.
7. Mr. Li (Industrial & Commercial Bank) said the currency should be made more elastic by an amendment of the ordinance. The issue banks have the privileges of the note issue without the duties. They have withdrawn from helping the other banks. For instance in 1925, only the Trade Loan was available as a support.
8. Mr. Lam (Ilo Hong Bank) doubted if the three banks of issue could effect re- medies alone. The Government ought to call a meeting of Bankers and ask them all to co-operate in the pool; when the premium is reduced and steady the Govern- ment should make the issue banks buy taels. He would retain the $1 note however. Mr. Li (Industrial & Commercial Bank) was in favour of the pool system. The premium must come down. The Government Treasury should receive silver and pay it out.
Mr. Tsui Cham Sing (National Commercial & Savings Bank) said he was not clear as regards the cause of the premium. If the silver dollar is legal, the Gov- ernment should take over the whole note issue and coin its own silver currency.
Finally Mr. Li Tse Fong suggested as a small remedy that the stamp duties on exchange contracts he lowered or abolished. At present Shanghai pays no such duty and has an advantage.
Present also Hon. Mr. W. E. L. Shenton and Hon. Mr. R. II. Kotewall.
1st October, 1929.
(Initialled) M. J. B.
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