The evolution of the Hong Kong currency board during global exchange rate instability, 1967-1973

Financial History Review

Volumn 16, Issue 2, 2009, Pages 129-156

  Schenk, Catherine R ^a  

^a UNIVERSITY OF GLASGOW   (United Kingdom)

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[No Author keywords available]

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EID: 77949809014     PISSN: 09685650     EISSN: 14740052     Source Type: Journal    
DOI: 10.1017/S0968565009990059     Document Type: Article

References (90)

1. This paper was written while the author was a Research Fellow at the Hong Kong Institute for Monetary Research. Part of the research for this project was undertaken as part of the ESRC World Economy and Finance Programme, Grant RES 165-25-10004 I am grateful for the research assistance of Niall MacKenzie, the archivists of the Bank of England, the HSBC Group Archive London and HSBC Asia-Pacific Archive. I also benefited from comments from Leo Goodstadt, Tony Latter and John Greenwood.
2. Kurt Schuler and Steve Hanke were the most vociferous advocates. K. Schuler, Should Developing Countries Have Central Banks? Currency Quality and Monetary Systems in 155 Countries, Institute of Economic Affairs, 1996.
3. S. Hanke, 'Reflections on exchange rate regimes', Cato Journal, 19 (1999).
4. Hanke finds that after 1992 Hong Kong did not operate a strict currency board because the Hong Kong Monetary Authority (HKMA) supervises banks and is committed to only 100% reserve backing for the local currency. The financial secretary is also able to use the Exchange Fund to maintain financial and monetary stability, but only 'with a view to maintaining Hong Kong as an international financial centre'. S. Hanke, 'On dollarization and currency boards: error and deception', Policy Reform, 5 (2002), pp. 203-222 However, since the Exchange Fund does publish a target of 110% cover and does not regulate banks, we might consider it a currency board, although the HKMA takes on other roles more similar to a central bank.
5. Ma et al. recently found that Hong Kong s currency board peg to the USD resulted in poorer economic performance than Singapore's managed floating regime. Y. Ma, Y. Y. Kueh and R. C. W. Ng, 'A comparative study of exchange rate regimes and macro-economic stability in Singapore and Hong Kong', Singapore Economic Review, 52 (2007).
6. For another critique of Hong Kong's currency board see Y. Wu, 'A modified currency board system; theory and evidence', Journal of International Financial Markets, Institutions & Money, 15 (2005).
7. Paul Yip, On the maintenance costs and exit costs of the peg in Hong Kong , Review of Pacific Basin Financial Markets and Policies, 8 (2005)
8. R. S. Rajan and R. Siregar, 'Choice of exchange rate regime: currency board (Hong Kong) or monitoring band (Singapore)?', Australian Economic Papers, 41 (2002).
9. Memo M. MacColl for D. G. Holland, 22 July 1974. The National Archives, London [hereafter TNA] Foreign and Commonwealth Office [hereafter FCO]4o/521.
10. T K Ghose The BankingSystem of Hong Kong (Singapore1995).
11. This was done without general discussion overnight on 6 July 1972, contradicting the claims by Feuerstein and Grimm that it takes time to eliminate a currency board. S. Feuerstein and O. Grimm, 'On the credibility of currency boards', Review of International Economics, 14 (2006).
12. T. Latter, Hong Kong s Money (Hong Kong, 2007)
13. L. Goodstadt, Profits, Politics and Panics: Hong Kong s Banks and the Making of a Miracle Economy 1935-1985 (Hong Kong, 2007)
14. J. Greenwood, Hong Kong's Link to the US Dollar: Origin and Evolution (Hong Kong, 2008).
15. For details on this episode see C R. Schenk, The empire strikes back: Hong Kong and the decline of sterling in the 1960s', Economic History Review, 58 (2004).
16. F. J. Knightly to G. O. W. Stewart in London, 7 June 1967. HSBC Group Archive, London [hereafter HSBC], 'The Hong Kong situation', Chairman's files, 1459/Box 2.09.
17. E. Haslam, Bank of England to G. O. W. Stewart, HSC, 15 June 1967. HSC, The Hong Kong situation', Chairman's files, 1459/Box 2.09.
18. G. O. W. Stewart to F. J. Knightly, 15 June 1967. HSBC, The Hong Kong situation , Chairmans files, 1459/Box 2.09.
19. F. J. Knightly to J. A. H. Saunders, 20 June 1967. HSBC, The Hong Kong situation , Chairmans files, 1459/Box 2.09.
20. Telegram from Mr Holmer sent to the Treasury and the Bank of England, 22 November 1967. Bank of England Archive [hereafter BE] OV44/258.
21. Letter from Cowperthwaite to Galsworthy, 8 February 1968. TNA T312/1934.
22. See correspondence between P. A. Graham of Chartered Bank and Cowperthwaite, 1-4 December 1967. HSBC, Chairman's files, 1459/Box 2.19. LegCo 29 November 1967.
23. This oral undertaking was confirmed in a letter from J. A. H. Saunders to Cowperthwaite, 12 March 1968. HSBC, Chairman's files, 1459/Box 2.14.
24. Financial secretary memo, 16 December 1967. HSBC, Chairmans files, 1459/Box 2.19.
25. The Hongkong Bank only expected to get HKD79.4 m. Half-yearly report, Hongkong Bank, December 1967. HSBC GHO201. F. H. H. King, The Hongkong Bank in the Period of Development and Nationalism, 1941-1984 (Cambridge, 1991), p. 738.
26. H. Wardle, secretary EFAC, to J. A. H. Saunders, manager HSC Hong Kong, 2 December 1968. HSBC, Chairman's files, 1459/Box 2.19.
27. See correspondence between Q. W. Lee, chairman of Hang Seng Bank, and Cowperthwaite in January and February 1968 in HSBC GHO322/4.
28. Report on the Accounts of the Exchange Fund 1969. TNA FCO59/554.
29. J. A. H. Saunders to Cowperthwaite, 12 March 1968 and reply 15 March 1968, HSBC, Chairman's files, 1450/Box 2.14.
30. For details of the negotiations see Schenk, The empire strikes back.
31. Minutes of EFAC meeting on 20 April 1967. HSBC, Chairmans files, 1459/Box 2.19. The Fund held £3.295 m in Commonwealth stock in April 1967, Report on Exchange Fund accounts 1968. TNA FCO59/443.
32. Minutes of EFAC meeting 6 June 1968. HSBC, Chairmans files, 1459/Box 2.19.
33. EFAC memo for meeting on 28 October 1968. HSBC, Chairmans files, 1459/Box 2.19.
34. Minutes of EFAC meeting 6 June 1968. HSBC, Chairmans files, 1459/Box 2.19.
35. J. J. Cowperthwaite to J. A. H. Saunders, HSBC, 18 June 1968. HSBC, Chairman's files, 1459/Box 2.19.
36. J. A. H. Saunders to J. J. Cowperthwaite, 5 July 1968. HSBC, Chairmans files, 1459/Box 2.19. Cowperthwaite speech in LegCo, 20 November 1968.
37. Extract from telegram between Hong Kong and Secretary of State, 18 September 1968. HSBC, Chairman's files, 1459/Box 2.19.
38. Note for Executive Council, Sterling Exchange Guarantees, 25 January 1969. TNA FCO59/554.
39. Letter fromJ. A. H. Saunders (HSBC), P. A. Graham (Chartered Bank) and W. K. Dargie to J.J. Cowperthwaite, 22 November 1968.
40. Minutes of Exchange Fund Advisory Committee, 28 October 1968. HSBC, Chairman's files, 1459/Box 2.19.
41. J. J. Cowperthwaite to M. W. Turner, HSBC, 7 December 1968. HSBC, Chairmans files, 1459/Box 2.19.
42. Telegram from Kong Kong to Foreign Office (hereafter FCO) re: Exchange Fund amendment bill, 2 December 1968. TNA FCO59/441.
43. D. L. Millar of Chartered Bank to M. W. Turner enclosing a copy of memo given to him by J. G. Paterson, 12 June 1969. HSBC, Chairman's papers 1459/Box 2.19.
44. J. A. H. Saunders, chief manager, to J. J. Cowperthwaite, 21 November 1968. M. G. R. Sandberg, manager Chartered Bank, to J. J. Cowperthwaite, 22 November 1968. HSBC, Chairman's files, 1459/Box 2.19.
45. Telegram from Sir D. Trench to FCO, 2 December 1968. TNA FCO59/441.
46. Telegram from J.J. Cowperthwaite to T.J. O Brien, FCO, I March 1969. TNA FCO59/441. Note of meetings at the Treasury in London 30-31 May 1969. Cowperthwaite, 5 June 1969. HSBC, Chairman's files 1459/Box 2.19.
47. Richard Hay, FCO, to Turner, Bank of England, 2 April 1969. TNA FCO59/441.
48. Telegram from Hong Kong to FCO, 16 May 1969. TNA FCO59/441. Minute of EFAC, 6 June 1969. HSBC, Chairman's papers, 1459/Box 2.19.
49. Minute of EFAC, 6 June 1969. HSBC, Chairmans papers, 1459/Box 2.19.
50. Telegram from Trench to FCO, 20 May 1969. TNA FCO59/441. J. J. Cowperthwaite to J. A. H. Saunders, 6 March 1970. HSBC, Chairman's files, Box 2.19.
51. The UK insisted that 2/3 of the sterling eligible for the London guarantee should be on deposit in London. The 40% of banks' sterling was determined to reach this level. Minutes of EFAC 8 September 1969. HSBC, Chairman's papers 1459/Box 2.19.
52. Minutes of EFAC, 9 June 1969. Note by M. Curran reporting phone call from Haddon-Cave, 1 August 1969. HSBC, Chairman's files, 1459/Box 2.19.
53. M. Curran, deputy chairman HSBC, to financial secretary, 26 March 1970. HSBC, Chairman's files, 1459/Box 2.19.
54. TNA FCO59/554.
55. TNA T312/2963.
56. Minutes of EFAC, 22 May 1972. HSBC, Chairman's files, 1459/Box 2.19.
57. HK Exchange Fund, Report on the accounts for the year ended 21 December 1972. HSBC, Chairman's files 1459/Box 2.19.
58. J. A. H. Saunders to financial secretary as chairman of EFAC, 3 January 1972. HSBC, Financial secretary re: devaluation and compensation 1968-1973, Chairman's papers, 1459/Box 2.14.
59. C R. Schenk, Malaysia and the end of the Bretton Woods system; disentangling from sterling 1967-73',Journal of Imperial and Commonwealth History, 38 (2008).
60. A. K. Rawlinson to Bell for the Chancellor, 6 July 1972. TNA T312/2963.
61. M. G. R. Sandberg to G. M. Sayer reporting on conversation with Haddon-Cave, 27 July 1972. HSBC, Financial secretary re: devaluation and compensation 1968-1973, Chairman's papers, 1459/Box 2.14.
62. Balance sheet of Exchange Fund for 1973. TNA FCO40/521. Balance sheet of Exchange Fund for 1968. TNA FCO59/443.
63. LegCo, 12 December 1972.
64. Letter from Haddon-Cave to D. L. Millar, chairman of Exchange Banks Association, 24 July 1972. HSBC, Financial secretary re: devaluation and compensation 1968-1973, Chairman's papers, 1459/Box 2.14.
65. G. M. Sayer to Haddon-Cave, 29 July 1972. HSBC, Financial secretary re: devaluation and compensation 1968-1973, Chairman's papers, 1459/Box 2.14.
66. Haddon-Cave to D. B. Millar, chair of Exchange Banks Assoc c/o Chartered Bank, 24 July 1972. HSBC, Financial secretary re: devaluation and compensation 1968-1973, Chairman's papers 1459/Box 2.14.
67. Letter from G. M. Sayer to Haddon-Cave, 30 August 1972. HSBC, Chairmans papers, 1459/Box 2.14.
68. Haddon-Cave to G. M. Sayer, 25 August 1972. HSBC, Chairmans papers, 1459/Box 2.14.
69. Exchange Fund report of accounts for 1972. HSBC, Chairmans papers, 1459/Box 2.19.
70. Governor MacLehose to FCO, 30 October 1972. BE OV44/266.
71. Note from the Governor to the Chancellor, dated 2 November 1972 and delivered 7 November 1972. TNA T312/2963.
72. Letter from G. M. Sayer to Haddon-Cave, 20 December 1972. HSBC, Financial secretary re: devaluation and compensation 1968-1973, Chairman's papers, 1459/Box 2.14. It was also administratively easier to limit the scheme to one bank.
73. Correspondence between Haddon-Cave and Sayer, 29 December 1972 and 3 January 1973. HSBC, Financial secretary re: devaluation and compensation 1968-1973, Chairman's papers, 1459/Box 2.14. Payton note for the record seen by BE Governor L O'Brien, 14 May 1973. BE OV44/267.
74. Haddon-Cave to the chair of Exchange Banks Association, dated 29 December 1972 and forwarded by him on 10 January 1973. HSBC, Financial secretary re: devaluation and compensation 1968-1973
75. Chairman's papers, 1459/Box 2.14.
76. Letter from G. M. Sayer to Haddon-Cave, 3 January 1973. Letter from chief manager Chartered Bank to Haddon-Cave, 12 January 1973. HSBC, Financial secretary re: Devaluation and compensation 1968-1973, Chairman's papers, 1459/Box 2.14.
77. G. R. Bell (Treasury) to Haddon-Cave setting out summary of their talks in London, 24 November 1972. Agreed by Chancellor of the Exchequer, who wanted to make local issue of government paper a prerequisite for his agreement, but was willing to let it go in the end. Memo by A. M. Bailey passing on Chancellor's views, 24 November 1972. TNA T312/2963.
78. Memorandum for Executive Council, Sterling exchange guarantees , 29 January 1969. TNA FCO59/554.
79. D. G. Holland to Stuart, 24 July 1974. TNA FCO40/521. On the reluctance of the Hong Kong government to spend see Goodstadt, Profits, Politics and Panics and Uneasy Partners: The Conflict between Public Interest and Private Profit in Hong Kong (Hong Kong, 2005).
80. Greenwood, Hong Kong s Link.
81. Exchange Fund report on accounts 1972. HSBC, Chairmans papers 1459/Box 2.19.
82. W. Purves to G. M. Sayer, 5 July 1973. HSBC, Chairmans papers, 1459/Box 2.19.
83. Exchange Fund report of accounts for 1972. HSBC, Chairmans papers, 1459/Box 2.19.
84. Letter from Sayer to financial secretary, 14 November 1974. HSBC Chairman's files, 1459/Box 2.21.
85. Speech by Haddon-Cave in LegCo, 12 December 1972.
86. Speech by Haddon-Cave in LegCo, 12 December 1972., Ibid.
87. Exchange Fund report of accounts for 1972. HSBC, Chairmans papers, 1459/Box 2.19.
88. Memo by Andrew C Stuart (head of Hong Kong and Indian Ocean Dept, FCO) for Mr Holland, noting a meeting with Haddon-Cave in Hong Kong the previous week. TNA FCO40/521.
89. Minutes of EFAC 16 July 1952 reported on 1941 cover. Memorandum to accompany the accounts of the Exchange Fund for the year ended 31 December 1946. HSBC, Chairman's file 1459/Box 2.21.
90. Ghose, The Banking System of Hong Kong, p. 22.