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local currency into a more desirable external currency, there is no

backing of external and/or other assets to be held against the coinage

liability. The receipts of issue are treated as income and not as

capital sums to be invested pending a future need to discharge the

liability.

6.6

J

(Notes

With notes, on the other hand, the position is different.

Notes were originally issued as substitutes for coins or for bullion,

as evidence of debt or IOUS which were issued only against equivalent

value and which could be exchanged on demand for coins or bullion.

This concept of repayment has become a fiction although it has been

perpetuated by the formula "I promise to pay the bearer..." on Bank of

England notes, which is given plausibility by the interpretation that

one note is always exchangeable through the Bank for another note or

notes of the same face value. This is now the only sense in which

notes can strictly be said to be "redeemable" in the hands of the public a situation which is relevant for practical purposes only

when notes of a particular issue cease to be legal tender.

can, of course, also be exchanged for a bank deposit.)

6.7

But in a broader sense surplus notes held by the banking

system can be redeemed at any time in exchange for balances at the

Bank of England, and these balances can in turn, through the mechanism

of the Bank's Issue Department (formally the issuing authority operated

on behalf of HMG), be exchanged for other financial assets such as

British Government securities and, subject to exchange control

limitations, assets abroad. Notes are liabilities of the Issue

Department and at all times "backed" by assets, mainly Government

securities. Only in this very limited sense are they "redeemable".

7. PRACTICE IN UK DEPENDENT TERRITORIES

7.1

The treatment of currency as regards its "backing" in these

territories (as well as in many countries which were formerly UK

dependencies) tends to reflect UK doctrine rather than UK practice.

7.2

The background is the former widespread use of British currency in British colonial territories. Particularly in those areas

that were economically most backward, coins were the main element in

the money supply until quite recently. However, though the pattern

was not uniform, until the first two decades of this century there

were few examples of conscious policy in currency matters by the British

authorities. Coins and tokens of European and local origin circulated

alongside British coins. In 1912 a Treasury witness, speaking to

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