XN000022-1972-12-13 — Page 33

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Wednesday, December 13, 1972

British Government as part and parcel of a renegotiation for a further

two years from 25th September 1971 of the terms of the three year Sterling

Guarantee Agreements and naturally this concession was extended to those

countries with five year agreements.

1971 International Monetary Crisis

The U.S. dollar crisis was resolved by the Smithsonian settlement

announced on 19th December. For a variety of reasons, which I explained

at length in an adjournment debate in this Council on 5th January last,

the Government decided to maintain the gold parity of the Hong Kong

dollar, thereby revaluing against the U.S. dollar by 8.57% and maintaining

the then Hong Kong dollar/sterling parity. So this decision had no

implications for the value in Hong Kong dollar terms of our external

exchange reserves given that they are - or were then

T

almost entirely held

in sterling. However, the British Government insisted that the sterling

balances of all countries with whom they had entered into agreements remained

guaranteed at US $2.40, that is to say, that the new Sterling/U.S. dollar

rate of US $2.6057 was not applicable. Yet we immediately realised that any

devaluation of sterling which was not followed by an adjustment of the

Sterling/Hong Kong dollar rate would mean that the Hong Kong dollar value of

the banks' sterling assets would have to be restored through the Exchange

Fund. This was the origin of many subsequent difficulties.

/During