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successful, people were encouraged to convert more assets out of Hong Kong dollars and a vicious circle was created. One approach
was
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to the problem was through controlling the currency by means of a currency board or monetary base system. If the Hong Kong dollar
backed one for one by the United States dollar and the Hong Kong reserves of the US dollars were big enough to make this possible people would be willing to hold the Hong Kong dollar and confidence would be maintained.
to
In discussion it was argued that a scheme of this sort would not necessarily give adequate backing for banking deposits denominated in Hong Kong dollars, which were many times as large as the Hong Kong currency. A similar scheme in the United States in 1907 had led only
a very small discount on bank deposits, but this might not apply in the different circumstances which were causing the current fears in Hong Kong. It was inevitable that a Chinese takeover would ultimately lead to a substantial fall in the value of Hong Kong assets: nevertheless, it was right to look for a financial mechanism which would, if possible, prevent a precipitate collapse in confidence. But there was a distinction between action by the Hong Kong authorities and action directly involving Her Majesty' S Government: the latter might be very expensive and the Foreign and Commonwealth Secretary had expressed concern about the effect that it could have on the Chinese Government.
Summing up the discussion, the Prime Minister said that it was necessary to consider the options urgently. The Hong Kong Executive Council would be making a further visit to the United Kingdom in the following week. She asked the Chancellor of the Exchequer, in consultation with the Governor, to consider the studies which were being prepared for their return and to let her have a paper on Tuesday, 4 October as a basis for a further meeting the following day.
I am copying this letter to Brian Fall, (Foreign and Commonwealth Office), Tim Allen (Governor of the Bank of England's Office) and Richard Hatfield (Cabinet Office).
John Kerr, Esq.,
HM Treasury
Your ever
Robin Buttar
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