ENG-1954 — Page 63

CURRENCY AND BANKING ...

of India, Australia and China, the Chartered Mercantile Bank of India, and the Hongkong and Shanghai Banking Corporation. Although not legal tender these notes became more and more the customary means of payment because of the inconvenience of dealing with large amounts of silver and from 1890 onwards they were established by convention as practically the sole medium of exchange apart from subsidiary coinage. An Ordinance of 1895 restricted the issue of banknotes to specifically authorized banks-the Hongkong and Shanghai Banking Corporation and the Chartered Bank of India, Australia & China-the Oriental Bank having closed its doors and the Chartered Mercantile Bank of India having reorganized. In 1911 the reorganized Mercantile Bank of India was added to the list of authorized note-issuing banks.

The rising price of silver from 1931 onwards forced China to abandon the silver standard in 1935 and Hong Kong followed. By the Currency Ordinance of that year, later renamed the Exchange Fund Ordinance, an exchange fund was set up to which note-issuing banks were obliged to surrender in exchange for certificates of indebtedness all silver previously held by them against their note issues. These certificates, which are non-interest bearing and are issued or redeemed at the discretion of the Financial Secretary, became the legal backing for the notes issued by the note-issuing banks, apart from their fiduciary issues. The silver sur- rendered by the banks was used to set up an exchange fund, which in practice keeps its assets in the form of sterling and operates in a similar manner to the normal Colonial Currency Board. The Ordinance also made the banknotes legal tender. At the same time the Government undertook to issue one-dollar currency

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