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with enough accommodation to store all the dollars we need, but even in that event it would seem that if we are to supply the currency needs of Canton the note-issu- ing banks will have to issue notes against the security of the stored dollars.
It would, therefore appear at first sight to be a better plan to issue further notes against the security of bar silver stored in London, or, if the note-issuing banks cannot supply the demand owing to the limitations imposed upon them by their re- spective note ordinances, for the Government to issue to banks Silver Certificates against bullion stored to order of the Government in London, such Certificates to be of high denomination, say not under ten thousand dollars, for use between banks in the adjustinent of their clearing balances.
There are precedents for the issuing of Silver Certificates for the settlement of inter-bank clearing balances, as temporary measures for expanding currency in times of stress. Such Certificates were issued in 1893 by the New York clearing House to the extent of nearly fifty million gold dollars against securities and sound commercial paper to an amount of 25 per cent above the par value of the Certi- Again ficates. Only by their use were the National Banks saved from suspension. in 1907 recourse was had in New York to Clearing House Certificates in similar circumstances.
Here we have no proper Clearing House and it is suggested that the Government should issue these Certificates, fully secured against bar silver. As an appendix I en- close a scheme proposed by Mr. Priestley that discusses this matter in detail. It is a feasible scheme and would no doubt be effective. All that can be said against it is that it is an emergency measure that calls for Government intervention in matters that have hitherto been outside the province of Government. It implies that the present state of affairs is critical, whereas there is a responsible body of opinion that, while not minimising our difficulties, does not consider that they can be better handled by the Government than by the Banks That the main principle of the scheme is sound is beyond doubt. It may be a short way out of our trouble, but it may well be that a longer and more thorny path will lead us to the same end with less disturbance to business.
It is a matter of opinion. We might, I think, have got rid of the premium in two years without anything like the trouble that has been caused by trying to get rid
of it in a few months. At any rate Mr. Priestley's scheme could hardly be put into see docume operation unless the banks unanimously requested the Government to intervene and No. VI-Do the Government agreed to do, and neither eventuality seems likely at the moment.
The difficulty urged with regard to the further issue of notes is that there is no real standard by which we can estimate the true currency requirements of the Colony and its financial dependents All speculations on the subject must be largely empiri- cal because we do not know where out bank-notes are and for what purpose they are being used.
If, as is not unlikely in these troublous political times, they have been extensive- ly hoarded, the note-issuing banks may well pause at the prospect of feeding further an apparently bottomless pit with banknotes while filling up their coffers with silver reserves. There is no risk in issuing notes that are properly secured, but it is no part of the functions of banking to facilitate the hoarding of money. On the other hand if there are indications that the present issue is insufficient to meet the genuine demand of capital for productive employment the issue should be increased.
The process of increasing it will tend to get rid of the premium on paper, and until that is accomplished it seems hopeless to tackle the problem of what our real currency requirements are. The "absence of exchange-buying power" referred to by the Hong Kong Bank is nothing but the result of speculation on the paper pre- mium, or of purchases having for their object the reduction of the premium. Those banks that had the power to buy can prudently buy no more until they can get trade sales in cover of their purchases. Failing this they must import silver dollars or issue notes against silver purchases in London.
These observations I fear have been somewhat discursive and I will now state the conclusion at which I have arrived after carefully considering the alternatives.
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I see no
The natural corrective is the continued importation of silver dollars. other remedy. Banks that weigh present profits against present difficulties of handling and potential difficulties of disposal will import dollars if they decide that the balance is in their favour. It may be that the banks that are most concerned with the removal of the disabilities attaching to the import of silver will later be more concerned with the disabilities attached to its export. That remains to be seen. Failing a legal embargo on the import of silver dollars-a measure that in my opinion would be most unwise-the simplest remedy is the one clearly indicated by our currency system, imperfect though it may be. The import of silver dollars will continue and exchange will fall until parity with silver is reached. Patience is all that is needed and with the principal banks all working toward the same end there is no reason to suppose that parity will not be reached within a reasonable time, say six months. At any rate, nobody who has followed the course of exchange latterly can fail to be impressed by the fact that the banks are doing all that is possible to remedy the situation and that the daily tendency is in the right direction. There may be troublous times ahead, but we may. I think, hopefully look for the swing of the pendulum before September and I consider that any drastic action now that would interfere with the normal course of events would probably do more harm than good.
Yours faithfully,
(Signed) C. CHAMPKIN.
VI-D (1).
Memorandum by Mr. H. H. Priestley.
SCHEME PROPOSED TO BRING THE VALUE OF THE HONG KONG DOLLAR
TO THE PARITY OF SILVER.
The issuing of notes in the Colony, replacing the free circulation of Silver Dol- lars, has been a monopoly in the hands of three of the British Banks, and has been in force for some time, although for how long I am unable to say. This replacement was so effective that Silver Dollars were no longer acceptable as currency, although still remaining, according to ordinance, the legal tender of the Colony, but even the
payment of taxes, etc. Government refused to accept Silver Dollars
The decision arrived at in October last, to reinstate this free circulation of Silver Dollars, interchangeable with the note issue, was in effect a cancellation of this mono- poly, a very necessary measure, if the Colony's cosmopolitan business interests are to be fostered.
Nevertheless, the minting, importation, and usage of Silver Dollars is not only a very costly procedure, but if continued, would on account of the minting charges etc., always be against the value of the Hong Kong Dollar falling to the parity of Sil- ver, or what is really meant, falling to the value of the competitive dollar current in the Colony's keen business rival, Shanghai.
Further the receiving and paying out of Silver Dollars, apart from the storage question, is a very clumsy method of handling large sums of money, and the banks therefore petitioned the Government to permit an increased note issue, to obviate the necessity of bringing more Silver Dollars into the Colony, and for this extra note issue, Government was asked to waive the customary one per cent tax, and after considering the exceptional circumstances, and with a wish to ease the situation Government agreed, and authorised the note issuing banks to make the further issue.
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