A banking tradition of note
If we were to assemble all the Nobel economics laureates who have ever lived and challenge them to produce a blueprint of a monetary system for a small economy of seven million people, quite a number might propose a pegged exchange rate. But I would wager that not one would suggest that all the currency notes (except for the smallest denomination) should be issued by a select band of three commercial banks.
Hong Kong is virtually unique in this respect. While commercial banks similarly issue notes in Scotland and Northern Ireland, the communities there are not solely reliant on them. English notes circulate on an equal footing although, curiously, neither the local notes nor the Bank of England ones have formal legal tender status in those territories - only coins do.
How did Hong Kong arrive at this position? The answer lies in a mixture of history, pragmatism and - in one case, of course - a smidgen of politics.
Although way back in history, commercial bank issuance tended to be the norm, in the 19th century, governments or central banks began progressively to take over the role. In British colonies, currency boards were commonplace during the first half of the 20th century, but generally the board itself issued the currency.
In Hong Kong, however, the government steadfastly left that role with the commercial banks. Whenever the question was raised as to whether the government might take over, it displayed extreme reluctance.
The main reason appears to have been that the slim colonial administration simply did not possess the means, physical or financial, to design, produce, store and distribute notes, and was unenthusiastic about the challenge of acquiring such means. It was also worried at one point lest its name on notes might be less acceptable to holders than the names of the established note-issuing banks, especially in southern China where, even then, a large proportion of the Hong Kong notes circulated.
The currency reform of 1935, when Hong Kong moved to a currency board, might have provided a clear opportunity for the government to take over issuance, but it had earlier promised the note-issuing banks that their status would continue at least until 1939, and there was no wish to renege on that. Instead, the government merely took steps to tidy up arrangements for the backing which the banks had to hold against their issuance, to ensure that their idiosyncratic role made no difference in overall monetary terms.
That assurance remains valid today. In other words, the monetary impact of changes in the note issue is the same as it would be if the government was issuing them. From then on, there was no longer any monetary policy justification for the government to assume the issuing function, and so the topic has ceased to draw much attention.
And so here we are now, welcoming - or criticising - the first two denominations in the new series, which came into circulation yesterday. What is in it for the three banks? The backing arrangements ensure that it is the government, not the banks, which takes any profit from issuance. And, although as part of that deal, the banks are reimbursed the production costs, they still have to bear the burden of design, storage, distribution and so on.
But, at the end of the day, they get free advertising of their name in everybody's handbag, wallet or till. It may not be possible to quantify such a benefit but, since all three seem more than happy to keep on issuing, they must regard it as adequate.
From the perspective of the Hong Kong Monetary Authority, which looks after such matters, it would doubtless be simpler and cheaper, in terms of management time overseeing and co-ordinating issuance - including security aspects - as well as in terms of containing production costs, if there was just a single issuer, and five note designs in place of 15.
But, if it ain't broke, don't fix it. Hong Kong has been particularly adept over the years at obliterating visible reminders of its history, so let us at least cling to this quaint and distinctive piece of tradition. Image-wise it can surely do no harm.
Tony Latter is a visiting professor at the University of Hong Kong
