TNAG-0717-FCO40-914-Banking-and-monetary-matters-in-the-Dependent-Territories-is-1978 — Page 107

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transactions should be based on the cost of freighting silver to and

from London.

7.5

These arguments can be taken for the purposes of this report

as broadly typical of those applied in dependencies elsewhere. The

principles of the existing philosophy of currency management in

accordance with the "British" model can be clearly seen in them.

"Redeemability" or "convertibility" of both notes and coins of the

local currency in terms of an external currency, originally sterling,

now more usually US dollars, has been regarded as a condition of issue

that is essential for confidence. Even though the power to surrender

notes and coins for redemption has been confined in practice to the

commercial banks because a wholesale system of dealing in large

minimum amounts was obviously more convenient and less expensive

and even though the power of individual holders of local currency to

convert it into an external currency has also at times been restricted

by exchange control measures, the underlying principle of automatic

convertibility, for a small commission or charge, has remained. And

in this respect no distinction has been made between notes and coins.

Notes have always, and coins have increasingly, been tokens, with little

or no intrinsic value, and thus the value of the "backing" assets into

which they could be converted has been important.

7.6

The status of legal tender coins in the dependencies is

therefore in sharp contrast to that in the UK. Given the lapse of

time and changing circumstances, it must obviously be asked how far

the arguments for the redeemability of dependencies' coin issues are

still relevant. How much value is now attributed by holders of such

coins to their redeemability? It is probably not a question which is

often, if ever, asked. Coins in ordinary circulation, whether in the

UK or in the dependencies, are no more than small change. It is

probably only the fact that banking accounts can be credited with

surplus holdings of coins that is important to the public. So the

question is more for the commercial banks, which are the bulk handlers

of coins. There have doubtless been occasions when surplus stocks of

coin have been redeemed (as distinct from "exchanged" for new issues);

but, with the world-wide inflation of recent years, these must have

been infrequent. The banks' willingness (at some cost to them for handling and storage) to act as wholesalers of coins for the

convenience of the public would probably be severely jolted if the

power to redeem were to be removed. To separate the treatment of coins from that of notes in the dependencies would in general represent