ENG-1970 — Page 60

FINANCIAL STRUCTURE

35

The total currency in nominal circulation at December 31, 1970

was:

Bank note issue

Government $1 coin issue

...

Subsidiary coins

...

Government 1 cent note issue

$2,413,483,000

... $

89,433,639

$

*

74,260,035

$

498,280

Hong Kong has been a part of the sterling area since August 1941. The Defence (Finance) Regulations give power to apply Exchange Controls but a general licence is in force. Certain con- trols are, however, operated in co-operation with the authorised exchange banks; these are designed largely to prevent any prejudice to the sterling area arising from the generally free exchange market in Hong Kong.

The exchange value of the Hong Kong dollar was established in 1935 at approximately 1s 3d. On the setting up of the International Monetary Fund after World War II, the Hong Kong dollar was given its own gold parity at a rate reflecting this relationship. Hong Kong, like the greater part of the sterling area, followed fully Britain's 1949 devaluation. This relationship with sterling was at no time a statutory one; it was established and maintained by the operations of the Exchange Fund in conjunction with the note- issuing banks. It came, however, to be generally regarded, in com- merce and banking, as a fixed relationship; while Hong Kong, as both a dependent territory and a member of the sterling area, was required in practice to keep its official reserves and the greater part of the reserves of the banking system (there being no central bank) in the form of sterling. Towards the end of 1967 Hong Kong's total sterling assets were of the order of £350 million.

In consequence of this situation, when sterling was devalued by 14.3 per cent in November 1967, the immediate effect was a loss which may be estimated at $700 million; and Hong Kong was faced with the dilemma of following the pound down and so letting the loss fall directly and fully on the standard of living of the people (by reason of their almost total reliance on imported food and other goods) along with a costly and completely unnecessary deteriora- tion of terms of trade; or of not devaluing the Hong Kong dollar and taking the loss, for the most part, directly on the reserves of Government and the commercial banks. After an initial devaluation

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