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The sellers of exchange and money changers were however greatly inconveni- enced as the Banks owing to the fact that they were not able to cover their pur- chases due to there being no Merchant demand refused to buy any exchange, except at a difference of anything from 4d to d to compensate for not only the risk in keeping a large overbought position but to make up for losses in the event of the money market getting tighter.
On the 26th November, the non-note-issuing Banks petitioned the Government to make the conditions under which the issuing Banks issue notes less onerous by removing the 1% tax payable on notes issued against Silver dollars held under the control of Government and inter alia it was pointed out that the withdrawal of the 1% tax would be an inducement to the note-issuing Banks to increase their issue of notes which would relieve the shortage.
As the Government had taken no action by the 10th December and as business was at a standstill and the shortage of notes getting more acute, the Banks sent in another petition to Government in which it was pointed out that the Banks in the interests of the Colony had "pegged" the selling rate for exchange for some time in order to facilitate a speedy return to silver purity to prevent the further influx of Silver dollars into the Colony.
The Banks again asked for the 1% tax to be removed and to authorise the note- issuing Banks to issue notes up to $10,000,000 against silver dollars lodged in the vaults of the Banque de l'Indo Chine.
The Banks at the same time emphasised the fact that business was going past the Colony and that the present monetary stringency was likely to lead to grave com- plications and to the detriment of the trade of the Colony and asked that measures be taken at once to relieve the situation.
The Banks also pointed out that Government should make some small sacrifice in helping to adjust the currency of the Colony in the present crisis and not leave
it to the Banks to bear the entire burden of stabilising the currency.
As the shortage of notes began to get more acute due to obvious hoarding by Chinese and Native Banks and as there were large drawings from abroad on certain Banks, the following Banks :-
National City Bank.
American Express Co. Inc.
Equitable Eastern Banking Corporation.
Bank of Canton Limited.
Netherlands India Commercial Bank.
Netherlands Trading Society.
issued a notice to the other Banks that they would not accept through the Hong Kong Bank Clearing House any foreign cheques or drafts drawn on them and that they would have to be presented over the counter and if found in order would be paid either by cheque on the Banque de l'Indo Chine Silver Clearing or in a manner best suited to them.
These Banks also gave as their reason for breaking away from the usual proce- dure the fact that the Hong Kong Bank refused to allow the free interchange of notes and silver in its Clearing account.
It might be pointed out that the Hong Kong Bank had previously agreed to accept the Banque de l'Indo Chine cheques through his own clearing in the event of such a necessity arising, due to the fact that some Banks might become "short" in his clearing and "long" in the Banque de l'Indo Chine.
The "pegged" rates were adhered to until 20th December when owing to the fact that no interbank business had been transacted and some of the Banks princi- pally the American and Chinese Banks still had large overbought positions which they could not liquidate, it was decided to "unpeg" the rate from 23rd December.
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It was felt by the Banks that in view of the Government Notification of 20th December in the Official Gazette which read :—
"Provided also that with effect from the 19th December 1929 and pending the further order or regulation of the Governor in Council the duty on Bank Notes of the Hong Kong & Shanghai Banking Corporation shall not exceed one per cent per annum on $45,000,000 of the aggregate bank note of such corporation".
by which the Hong Kong Bank stood to gain $150,000 per annum in tax, (seeing that his note issue was at the time of the notification in the vicinity of $59,000,000) that he was doing nothing to assist the market by buying exchange, issuing notes against silver dollars, granting loans at reasonable interest or accepting the Banque de l'Indo Chine silver cheques through his own clearing.
It was pointed out at the time that contrary to all expectations a dual currency system still existed to all intent and purposes the Colony and that Bank notes were still at a premium. It was also threatened that if the Hong Kong Bank still refused to recognise the Banque de l'Indo Chine silver clearing as part of his clear- ing to those who were actually short of notes the Banks would withdraw from the clearing house and transact all their business as far as possible through the silver clearing.
This threat had the effect of getting the Hong Kong Bank to definitely agree to accept the Banque de l'Indo Chine cheques through his own clearing.
This move on the part of the Hong Kong Bank was a very significant one and considerably eased the tension and bad feeling between that institution and the other Banks in the Colony.
The silver market continue to weaken and the Hong Kong Bank official rate was lowered by successive stages to 1/6 with actual business being transacted Id. above this rate.
The question now arising is one of grave concern in that the market rate is still about 5% over the silver parity point, the constant for minting silver dollars and laying them down in Hong Kong being at present .89155, basing the charges as 5.729% and is as follows:-
Brokerage .125 Insurance .105
Freight
Minting Interest
.562
4. 60/- per 1000 pieces at 1/6 44% for 24 months
937
5.729
The fact that a profit of almost 5% can still be made on buying sterling ex- change and having minted dollars shipped to Hong Kong is a great temptation to speculators and those Banks who are overbought and it would appear to be the only expedient to bring this market down to silver parity. On the other hand a plethora of silver dollars must arise if unrestricted importation is permitted which will event- ually result in chaos amongst those Banks who have no accommodation for storage of dollars in their vaults, as then dollar payments must of necessity pass from Bank to Bank against payment of Exchange. As mentioned before the Banque de l'Indo Chine vaults can only accommodate approximately $15,000,000 and as far as can be ascertained the other Banks, except perhaps the note-issuing Banks can probably store another $5,000,000.
Furthermore, unless some definite scheme is evolved whereby British dollars can be circulated between Banks without a count there is going to be a considerable dif- ficulty in taking up exchange contracts by payment in coin.
It will reach the point of absurdity when a Bank sends round the coin in pay- ment of T. T. and one can imagine the scene when this is done and the reluctance of the receiving Bank to count more than a given number per day. This must eventually cause serious inconvenience and delay without mentioning the question of storage accommodation in the vaults of the various Banks.
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