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(c) If the situation is unsatisfactory in what way can it be remedied?

19. As regards remedies for the premium we deal with these fully in our reply to question (d).

20. As regards remedies for the inconvenience attending the use of the silver dollar we consider that this inconvenience might be lessened to some extent, and at the same time the further minting of British dollars stopped, if more advantage were taken of the means that already exist of issuing notes against deposits of bar-silver in Hong Kong or in London. In general the practice of issuing notes against bar-silver seems to us preferable to issuing them against silver dollars. We realise however that many coins may still be needed as currency and that there would be difficulty in dis- posing of those already minted without loss of the cost of making and importing them. We do not favour any attempt to prohibit the minting or importation of British dollars, as such action might simply tend to raise the premium on the note, until some exchange corrective in the form of silver hurs is provided.

21. As regards the control of note issue by private banking institutions we have more to say on this topic when we come to discuss the remedies for the premium. Those who are dissatisfied with the system of issue by private banks have suggested to us as alternatives, either that Government should take over the whole note issue. or that it should exercise a much more direct control than it does at present over the issuing banks. We have given careful consideration to their views, but have concluded that much of their dissatisfaction arises from a misapprehension regarding the obligation of the note-issuing banks. Although notes were never legal tender, but were primarily a convenient appendage to the currency, and although the law never contemplated that they should supplant silver dollars, it has come about that a demand for currency is in fact a demand for notes, to supply which in practice entails a pur- chase of gold by a bank of issue. Consequently what the party of demand regards prima facie as an obligation in regard to currency becomes, from the point of view of the party of supply, nothing more or less than an exchange operation, which can only be optional. We doubt whether in the special circumstances of this Colony, from which a large quantity of notes must continually he drained into the hinterland of China, such an obligation could be placed even on Government as a note-issuing authority.

22. We cannot moreover see that in the circumstances of this Colony a Gov- ernment note-issue would have any advantages over a properly controlled private note- On the contrary it might involve Government, and indirectly the taxpayer. in the risks of heavy losses due to fluctuations in the value of silver and securities, risks which bankers, being daily engaged in them, are more competent both to anticipate and cover. A Government note-issue again would involve Government in heavy initial expenditure in laying down notes and building treasuries to hold the reserves against them, and in a constantly recurring charge for the staff of a special note department.

(i) Is the premium on notes over silver detrimental to the prosperity of the Colony? If so, can it be controlled and by what means?

23. We find, and are supported in our finding by all the evidence, that the pre- mium, as a fluctuating and uncertain factor, tends to drive trade past the Colony, and is thus detrimental to its prosperity.

24. The causes from which the premium arises are fully discussed in various memoranda printed in Part III. Briefly summarised they are as follows:-

There is a chronic excess of "invisible" exports consisting of Chinese emi- grants' remittances from abroad, which lead to large purchases of gold all round by the banks. Presumably cover in the shape of sales of gold is wanting, and thus the market becomes one-sided. It might have been expected that relief would have been obtained by the resumption of the import of silver dollars, but the difficulties attending their use for inter-bank commitments are still considerable, even though since Octo- ber last year it was agreed between banks to accept them freely. Prior to that date by tacit understanding between banks they were not accepted at all, and consequent- ly no actual exchange corrective existed. The British dollar is current to any large extent only in Hong Kong and its costs through seigniorage and interest are appro- ximately 5%; moreover since the only way of disposing of it elsewhere is by melting it down, to meet the loss thereby incurred, another 3% might have to be added to