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It is no doubt inevitable if we are to bring exchange down to Silver parity that Banks in due course will be forced to settle payments in coin, but with the balance of trade always in favour of Hong Kong with the invisible exports which in this case comprise enormous remittances from Chinese abroad and the Hong Kong Bank as a private institution looking to its own interests before that of the Colony in respect of the issue of notes, it would appear that unless a central vault capable of storing at least $50,000,000 in case of necessity is built and a special Silver Clearing House established by the Banks, the premium on notes will still continue as the only way to reduce this premium is by the continued importation of silver dollars into the Colony when it is more than likely the cure will be worse than the disease.
The problem of adjusting the currency as best suited to the needs of the Colony is one which is fraught with grave danger, not only to the business houses, but also to the finances of the Colony and it is essential that in view of the economic laws which operate in every country and which have apparently been ignored in Hong Kong when the exchange was lowered 2d by one fell swoop that a commission be appointed to go into the question and obtain data whether it will ultimately benefit the Colony or the reverse if we are to link ourselves indissolubly to silver with its violent fluctuations in price leading to speculation and its concomitent evils, or grad- ually allow the premium on notes by reason of economic laws to operate again. It is however against all principles of sound Banking and finance to force the premium on notes down artificially only to be resurrected again,
Until China and Hong Kong adopt a gold standard we must accept the lessor of two evils and one least liable to injure the trade of the Colony and the question is which is it to be.
Since writing above I understand further orders for silver dollars have been sent to Bombay and it is rumoured that the Hong Kong Bank and Bank of China are the importers.
Confidential.
VI-B.
Chartered Bank of India. Australia and China.
Hong Kong. 17th February, 1930.
While I consider the memorandum (Mr. Waddington's, returned herewith) a fair resumé of exchange happenings during the reviewed period I would not go so far as to endorse entirely the views expressed therein. For instance at the bottom of page 3 it is stated "a money stringency began to be felt." In reality there has heen no money stringency for many months and in fact although appearances point- ed that way at the time mentioned, one must look for other causes producing a similar exchange effect. Occasioned by the comparatively low rates of exchange. heavy outside drawings well ahead of the usual before December-before China New Year remittances were engaged principally from the United States of America and Canada. The desire for cover-as the trend of exchange was still uncertain-in- duced several Banks to come out as keen sellers, and other Banks probably with more funds than they required, not knowing what calls might ultimately be made on them. refused to accommodate and being themselves rather heavily overbought at higher rates did not see their way to increase their position now that the level of exchange had fallen so much. It was then that the Hong Kong Bank refused to buy outright but was prepared to cross or "budlee" sterling at 1/8th difference (say 1/2% clear). Even presuming wrongly his local funds cost nothing, and allowing for a high Bank of England rate which was very short-lived, 11 3/4% interest seems an overstate- ment. Presuming the conditions were so advantageous, why did certain other Banks with money refuse to come in? This phase in any case was only temporary and the situation soon righted itself. At the moment, rates for near exchange are 1/16 lower than a few months' forward, sure evidence that money is not tight.
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Reference is made to a "dual" currency which continue to exist. The cause is probably not very difficult to understand. The Issuing Banks only undertake to pay out silver coins in exchange for Notes but do not undertake, nor can they be compelled to give freely, Notes in exchange for legal silver-coins. The convenience in handling Notes is apparent and Native Banks receiving payments from outside the Colony always insist upon receiving Notes, although taking full advantage of tender- ing Mexican Dollars (which they imported from Shanghai) when the operation is reversed. I understand even now that Money-changers and certain Chinese Stores only give value of 90 cents for a silver dollar. This is nothing more nor less than a form of squeeze which unfortunately they get away with. We had information from the States that certain Banks in San Francisco were advertising in the press to sell drafts on Hong Kong "payable in Bank Notes," thus trying to steal a march on their competitors from whom they expected to receive Notes ad lib to carry out an un- mecessary obligation to the purchasers of their drafts. The whole atmosphere is 12 cherchanged therefore with a feeling that silver parity (or if you prefer it the legal status of our currency) cannot be maintained Patience seems all that is required to alter the Chinese view-point. Much of the drawings from abroad, I believe, remain on deposit here which suggests that the increase in the so-called invisible exports is little else than speculative. Recently, similar operations from the Straits point to a ficti- tious demand for Hong Kong currency, assisted by the knowledge that Silver is now at the lowest price on record, and supposedly a reaction is inevitable. Until China settles down and is given a lengthy rest from provincial military squabbles to enable exports to materialise in sufficient quantities, the outlook of Silver is not very rosy, Here again, a persistent or still further fall in the price of the metal might tire out our speculative friends and compel them to cut their loss and get out.
Apart from the feeling permeating local Chinese that the silver dollar will never be exchangeable pari passu with Notes and ultimately the currency will return to its former fictitious basis, there seems only one effective method under the present system to refute their arguments and that is by bringing in more British Dollars. a means that in its essence is cumbersome and what is even more important very ex- pensive. It has to be remembered that outside the Colony there is no outlet for British Dollars and should supplies of these coins at any time become redundant or in excess of the Colony's requirements there has not only to be faced the resultant loss from melting down to take advantage of the silver content, but the seigniorage and certain interest charges, roughly 4 1/2%, go by the board in the process In spite of these objections which are well known to all Banks here we find that it is still considered of the most vital importance that our exchange should be made to align itself with Silver, for after assuming the Issuing Banks had no fresh proposals to bring forward to ameliorate the situation, the non-Issuing Banks under the date 4th February last write as follows :—
"The undersigned Banks propose to resume the minting and importa- tion of British dollars in sufficient quantities to adjust the balance of the Colony's trade and thereby restore the Exchange Market of the Colony to normality, as the undersigned banks are of the opinion that any restric- tions on the free movement of silver in a market theoretically based on the white metal are fundamentally unsound. The principal objection to im- porting more Silver Dollars would seem to be the problem of storing them. The undersigned Banks feel that, after all, this is an individual problem, and the banks must regulate their cash positions as best they can.'
Running through the Memorandum are hints if not actual accusations that the Hong Kong Bank has not assisted to the full extent in his power any reasonable efforts to place our currency on a proper Silver basis. At the outset the Chief Manager may have had the feeling that we were tackling a currency problem which was imprac- ticable, or at least from the objections I have stated previously, would be far from satisfactory, even if the desired change was successfully brought about. therefore rightly or wrongly he has had to bear the brunt of the attack, it might be as well to discuss briefly the conditions of the Note Circulation in the Colony and try to see for ourselves whether the paper currency is sufficiently elastic and in- creases readily with the Colony's note requirements. The Non-Issuing Banks assert there is invariably a shortage of Notes; the Hong Kong Bank denies the statement and retaliates that there is only an absence of exchange-buying power.
While
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