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But Government did not make any stipulation as to how this extra note issue was to be put into circulation, and therefore the monopoly abolished by the free importa- tion of Silver Dollars into the Colony by all banks came into operation again in a modified form, and the tael cross rate. which is the indication of difference between local gold values and Silver parity, again began to rise.
The method adopted by the note issuing banks, for the release of these additional notes, was by way of exchange purchases. For instance the only way a non note- issuing bank could obtain any of the old or of the new tax-free note issue they had petitioned for, was by offering an unremuneratively attractive exchange rate to the note issuing banks.
Some banks, notwithstanding the public announcement made in October last. re- fused to sell currency excepting on the understanding that payment would be made in notes, claiming they had no room to store Silver Dollars.
A larger demand for local currency, by the non note-issuing banks, meant that more tempting rates had to be offered, and so we have a gradually increasing differ- ence between the value of the Hong Kong Dollar and the parity of silver, with no prospects of a remedy in sight, and therefore a certain return to the same impossible position, as far as the Colony's business is concerned, as we had prior to October fifth last.
It is useless blaming the note-issuing banks for the present state of things, as of course it is the duty of such banks to study the interests of their shareholders, and it is hardly fair to expect them to relinquish their advantages in this connection, advantages which, under existing circumstances and without Government instructions to the contrary, they are quite entitled to avail themselves of.
But in the interests of the Colony such an old fashioned method of granting three banks the note issue monopoly of the Colony must be abolished, or at any rate temporarily suspended.
Apart from native banks there are at least twenty banks specialising in foreign exchanges (and it seems extraordinary that all are dependent on the note issues of three banks for currency. It is well known that two out of these three banks have issued up to their maximum, so the position really is that the twenty banks are de- pendent on one bank for the release of the petitioned for note issue.
Under such circumstances the Colony can never hope to get back to Silver parity, unless this one note issuing bank is prepared to buy exchange uncessingly without covering, and release notes to an unknown but very extensive amount, against such purchases, but no bank, no matter how strong, could be expected, at these low rates, to build up such a heavy long position that would be necessary to clear the market of the very large purchases held by all the banks and speculators, even if the bank's security would permit of such a large note issue.
Therefore some other method is needed.
The desired result is to bring the value of Silver and the value of Hong Kong Dollars nearer together. If some scheme is devised to liquidate the present large over-bought position, or to force heavy gold currency purchasing, then exchange must weaken. To make heavy gold purchases at present rates, without cover, would be exceedingly risky, but if the sterling purchases that require to be liquidated, or the new heavy purchases suggested, are offset by a corresponding purchase of Silver in London, the dollars used for the purchase of the gold currency still remain dol- lars, or rather still remain Silver currency, but the currency is now Bar Silver. It is immaterial whether the old position is liquidated by buying Silver, or is liquidated by selling to the banks, who in turn buy Silver with their Gold purchases. The re- sult will be the same. By buying Silver and simultaneously buying sterling we have at least assisted in bringing these two together, which as mentioned at the commen- cement of this paragraph, is the one thing needed.
The next step therefore is to convert the Bar Silver into usable currency, with- out the clumsy method of minting and importing Dollars.
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The Government can solve this problem by permitting any Bank or firm accep table to Government-and Government must shew sound reasons for the refusal in the event of not granting this facility to any bank or firm-to deposit with the Crown Agents in London, Bar Silver against an unlimited Governinent note issue here, such note issue to be loaned by Government against the value of the Bar Silver security, on the day the loan is made.
If, during the period the Dollar loan is in force, Silver appreciates that is to say, for the purpose of illustration, that £10,000 worth of Silver against which Government advanced $100,000 appreciates to £11,000 exchange will have corres- respondingly appreciated, and £11,000, will still only equal $100,000.
On the other hand if Silver declines to say £9,000, exchange will also have declined, and the dollar equivalent will still be $100,000.
The Government note issue should not be in less amounts than $1,000, and banks must be forced by ordinance to handle such Government notes at par, either receiving or paying, and in the case of withdrawals by depositors of lesser sums than the minimum $1,000, payment must be made either in Silver Dollars, or Bank Notes, at the option of the recipient, but of course at the convenience of the bank.
The conversion of the Bar Silver security value into Government notes should be calculated at the same rate as the competitive Shanghai Dollar, to settle once and for all, any difference between the two, and according to The China Year Book the cost of one Dollar, apart from minting charges etc., is 70811 to a tael.
On the 13th February 1930 Bar Silver was 204 and the bank's sterling buying rate in Shanghai was 2/- per tael, plus 1/16% brokerage and the rate for convert- ing taels into dollars was 71.6 which made the dollar value 17.19474 pence.
In granting a note issue Government should be permitted to charge one per cent tax on all notes they issue plus one per cent to cover cost of storage in London, insurance against all risks, and out of pocket expenses for printing etc., a total of two per cent, paid annually.
Based on 70811 the previously mentioned ratio of Shanghai Dollars to taels, plus two per cent to Government as mentioned, the Hong Kong Dollar would be 17.35 pence, which would be one per cent higher than the Shanghai Dollar value, the cross rate for Hong Kong Dollars to taels then being 72.227 against the afore- said Shanghai 71.6, but when the security is released and the Government notes paid off, this extra one per cent would disappear and we would be exactly on the Shanghai Dollar basis for Hong Kong Dollars,
Therefore the value of the Hong Kong Dollar for Government note issue pur- poses would be the price of Silver in London multiplied by .84 plus two per cent.
An issue of notes by Government should be made against telegraphic advice certain from the Crown Agents in London that they have received for deposit a number of ounces of Bar Silver.
Later on, when exchange has adjusted itself the bank or firm taking the original loan will, on application by Government, have to repay Government either by Gov- ernment notes, or by notes of the note issuing banks, or by Hong Kong or Mexican Silver Dollars (which will still be legal tender in the Colony) and take the security
away.
The charges for tax and storage, payable per annum, should be payable in advance, and will be charged to the original borrower until the loan is discharged. and the responsibility for liquidating the loan must be fixed by ordinance as a first charge against any bank or firm using the facility. Borrowers should be permitted to pay off their loans at any time convenient to themselves notwithstanding that Government may not have requested re-payment.
A further feature of the above scheme would be the ascertaining of the Colony's requirements as regards note issue.
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