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its cost. Consequently, in comparison with the uncoined metal, the silver dollar pos- sesses grave disadvantages, in that its import and export points are widely removed.

27. As regards the possibility and means of controlling this premium, we con- sider that if the issuing banks here were to give out notes freely in exchange for legal silver coins, the exchange level of Hong Kong currency must approximate to sil- ver parity, but, as we have already indicated, the inconveniences attendant on the use of silver dollars discourage the banks of issue from accepting any more of them than is absolutely necessary for their business. If it is assumed that silver parity is maintained in Shanghai, the local quotation for taels day by day against a parity of roughly Tls. 72 accurately indicates the extent of the premium here, but in spite of large imports of British dollars the expected effect of removing the premium or restor- ing a normal tael rate has not followed. An exchange corrective therefore has still to be found.

28. We might here refer in passing to the use of sycee in Shanghai, and re- mark how in spite of its disabilities this medium functions within certain limits as an exchange corrective. The exchange level in Shanghai cannot remain for long too high above the laying-down cost of silver; and again, opposite but natural forces are immediately put in action should the exchange level tend to move too far below the actual value of silver. It may be assumed roughly that, when exchange in Shanghai is quoted at 44% below silver, a point has been reached at which it begins to be pro- fitable to ship sycee and sell it for its silver content. We have previously shown that the export point of the British dollar does not arrive until our exchange falls to over 3% below the price of the silver content of the dollar. Bearing in mind then that as a circulating medium British dollars have a very limited use, and in settlement of inter-bank commitments are far from being acceptable, it occurs to us to put forward the suggestion that some scheme might be agreed upon among the banks whereby bar-silver might be utilised in the place of minted coins in inter-bank settlements. All indications seem to show that there is a glut of silver dollars in the Colony, and if some such scheme for the use of bar-silver could be agreed upon among the banks the loss on seigniorage might be avoided, and it might then be possible to prevent the further indiscriminate minting of British dollars, for minting which permission might be granted by Government only in special circunstances when the note reserves ov the Colony's requirements demand a further supply. We do not consider that outside. interests should be allowed the latitude permitted under the present system of saddi- ing Hong Kong with superfluous coins in order to gain an immediate profit, a practice which incidentally aggravates the problem for the Colony if and when stabilisation has to be effected.

As the law

29. To give effect to these measures of reform, and provide for that elasticity in the currency which is necessary to meet the growing needs of the Colony, we have arrived at the conclusion, after our examination of all aspects of the case, that some readjustment may be called for in the restrictions now imposed upon the note-issuing banks. Admittedly the power of note issue possessed by banks involves a serious responsibility on their part to Government, which represents the interests of the pub- lic, and we make the following proposal therefore with some diffidence. stands at present the extent of note issue is limited by the amount of the capital of the bank concerned. Only the Hong Kong and Shanghai Banking Corporation may issue notes in excess of the statutory limit, and then only under onerous conditions. We think the prescribed limit should be less arbitrary and should be subject to periodical revision, provided always that the banks of issue fully cover their notes by the deposit in the Colony of bullion or silver dollars to the extent of at least one- third, the balance being covered by approved securities deposited entirely under Government control. The public would thus be adequately safe-guarded.

30. As the root of the difficulties in connection with the premium is to be traced to an excess of inward remittances, it is obvious that the recent lowering of the rate of interest allowed by banks on deposits should also in the long run tend to remedy the situation. But owing to the unprecedented fall in silver, overseas Chinese have been induced to make excessively large remittances to Hong Kong with a view to getting the benefit from an expected rise in exchange, and it may be some time therefore before the action of the banks will make itself fully felt.

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