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able and prudent measure for steadying exchange in a time of stress and that its continued and perhaps imperceptible increase was accepted without protest by the public because in general a high exchange, or a rising ex- change, is popularly considered to be beneficial to the Colony as a whole. Whether this popular view is in fact a correct view is at least arguable, but The position as I saw it that it does exist is, I think, open to no doubt, then was that we had drifted into dangerous waters on an easy current of complacency and it was not fully realised until last August that skilled pilot- age would be necessary to get us clear again.
As regards (1) I do not think there is now any doubt as to this major premise. The premium must go, and the only question is as to the best means of getting rid of it. In July I hazarded an opinion that it would take two years to get back to parity without unduly disturbing the exchange market. I did not then contem- plate that the exchange banks would make a public pronouncement that it was their declared policy to revert to silver parity. The effect of this pronouncement was to rehabilitate the silver dollar, to cause an immediate fall of about two pence in ex- change and to bring about heavy purchases of silver for minting. Ordinarily these purchases should have strengthened the silver market and the rise in the price of the metal coupled with the fall in sterling exchange should have brought us some- where near parity and solved our problem at the not inconsiderable cost of a depre- ciation without precedent in recent years.
Unfortunately the adoption of a Gold Exchange Standard in Indo China resulted in large supplies of silver being placed on the market and, more unfortunately, the Government of India and the Royal Mint released considerable holdings to meet the China demand. As a consequence the price of silver actually declined and we have not been able to overtake the fall. The nett result is that, although we are much nearer parity now than we were six months ago, we are still very inconveniently over it.
As regards (2) many theories were advanced to explain or justify the premium and it will be unprofitable to discuss them in detail. None of them were convincing to me and I will only add that they carried no weight with others better qualified than myself to judge their soundness, to whom I submitted them at home.
At the moment we are less concerned with controversial ideas as to the cause of the premium than with devising means of getting rid of it, and this object can obviously be achieved only by lowering exchange or raising the price of silver. How this can best be done in the shortest time and with the least disturbance to trade is the problem we have to solve. It may, however, help in the solution if we recall that one of the arguments put forward to explain the premium was brief- In the light of what ly, that the supply of currency was not equal to the demand. has happened since this quantitative theory was advanced six months ago
may be as well to re-examine one aspect of it, not so much from the point of view of its contributing cause to the premium, as from the standpoint of its possibilities as a means of getting rid of the premium.
I still hold that the premium was not brought about by an increasing demand for banknotes. Supply and demand of currency, dependent, as it is, on the ebb and flow of trade and the vagaries of speculation, is admittedly a prime factor in exchange fluctuation, but I have not been able to trace that this consideration has any connection whatsoever with the divorcement of our currency from the silver Standard established by law.
The problem, however, of getting back to the silver standard does involve me consideration of currency needs. Also it is conceivable that some of our present disabilities that are attributed to the premium on the paper dollar are more intimately connected with the question of the supply and demand of banknotes. It is possible to sustain both these opinions without necessarily subscribing to the argu- ment that the premium was caused by a shortage of notes.
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The particular aspect of this quantitative theory that I think might usefully be examined is concerned with the general opinion that bank deposits have increased enormously during the last six months, due in part to an abnormal influx of over- seas remittances on account of our low exchange and in part to the slackening of local business that has prevented a free circulation of money. In addition it is held that the increased population and extensive development of the Colony during recent years must have added to its wealth out of all proportion to the expansion of its currency, which latter, by a peculiar association of ideas, is linked by law to the capital of the note-issuing Banks, instead of being adaptable to the real needs of the Colony.
The wealth of the Colony must be regarded in the light of that which is avail- able and that which is potential. Available wealth consists of deposits and invest- ments of all kinds. Potential wealth consists of business possibilities or other latent and undeveloped resources that may be transformed into available wealth by the use of capital. Capital must have an adequate supply of currency in order to function properly and when it is functioning properly it is releasing for business purposes a vastly greater amount of credit.
Credit alone does not increase available wealth but by increasing the efficiency of capital it lessens the need for money and increases potential wealth. It has been urged that if there is in fact a shortage of currency and a consequent restriction of credit interest rates would be high. We are faced with the apparent anomaly that interest rates are low. The explanation, to my mind, is that a restriction of credit due to a shortage of currency means a shrinking in banking profits that can be cor- rected only by such a reduction in interest rates as will attract fresh borrowing. If capital is starved for currency there must be a slowing up of productive effort and the capital that is represented by the available wealth must therefore tend to become frozen. I think it not unlikely that this has happened, though it is a condition almost impossible to prove and that can only with difficulty be deduced by very careful observation over a lengthy period.
As our principal markets in adjoining territory have largely adopted our cur- rency we cannot expect to fully develop our business with them unless we provide them with the means of trading with us. Depressed conditions in business are not improved by increased available wealth that is only represented by added figures in the Bank ledgers of the Colony, but by the active employment of capital and the free circulation of currency. It is for these reasons that I think that some of the difficul- ties attributed to the premium on the paper dollar are possibly really due to an in- adequate supply of currency and that these difficulties would still have existed if the dollar had never gone over silver parity.
With this reference to the possibly beneficial effect of an increase in the note currency on conditions that may have been wrongly attributed to the premium, I will proceed to consider how such an increase would tend also toward the removal of the premium, which is an admitted evil.
The generally advocated policy for getting down to silver parity is to continue the importation of silver dollars, and this policy in fact is nothing more than what our currency system, with the disabilities attaching to it as a purely silver standard, im- poses upon us.
The objection to this policy is that the preference in this Colony is for paper dollars as against cumbersome silver dollars. It is not an unnatural preference and it acquires significance from the fact that the greater part of our currency circu- lates in South China, that shows little disposition to absorb silver dollars, but a mark- ed tendency to absorb paper dollars. Nobody seriously advocates the importation of silver dollars except as a measure of expediency when other more convenient me- thods of expanding the currency have failed. There is not only the high cost of im- porting them to relieve what may be, for all we definitely know to the contrary, a temporary strain, but there will be the higher cost of exporting them when the strain. if it proves to be temporary, is over. There are also physical difficulties concerned with their storage, shroffing and transport from bank to bank in settlement of clearing balances. These latter might be overcome if we had a proper central clearing house
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