But there is another difficulty, peculiar to China, in connection with the issue of paper money. In practically all the countries I have referred to, the note circulation was not attempted until there was a fairly large circulation of the unit coins of the country. In Siam, Japan or India the unit coins have remained the same for hundreds of years; the only adjustments that had to be made were in connection with the gold values of the units. In this country, on the other hand, circumstances necessitate the issue of paper money simultaneously with the adoption of the new unit - which, however, is the unit of at least a third of the volume of foreign trade in this country. The object of reform is to bring about the much-needed stability within as short a period as possible, and with as little expenditure as possible. Depending entirely on the circulation of metallic money or waiting until metallic money has a sufficiently large circulation, would mean not only a long waiting, but large expenditure. Several millions of pounds worth of silver would have to be bought at once, thus driving up the price of the white metal, and increasing the cost of reform. I do not agree with Dr. Vissering in his proposal, that the withdrawal of old coins and sycee should be the last step, or that the existing currency should last longer than could be helped. From the start, arrangements should be made so that, deducting for a small cost of coinage, silver coins in the country might be converted in direct proportion to their weight and fineness into the standard or Shanghai tael, the receiver having the option to take the whole or any part of it in silver or in paper. The issuing bank, which would receive the coins from the mints in exchange for silver, should see that for every 10 taels of notes that it issues, four-tenths is kept in coins and that the other six-tenths in bullion. This bullion need not necessarily be in the vaults of the bank, but at least 3/10ths, or one half of it should be in the bank, while the balance may be certificates of the treasury for the amounts kept on Government account in China or out of China, either in gold or silver. The advantage of this arrangement would be that, while in times of panic there would be sufficient to meet demands, the Government might not only save a great deal of the cost of coinage but also regulate exchange with regard to payments due to foreign countries on loan accounts. For the public there is the full assurance that, so far as paper money is concerned, the Government cannot forcibly take any step that would prevent their obtaining metallic money or bullion, whenever they may need it.
While criticizing Dr. Vissering's scheme I stated that an effective reform should eschew paper money as much as possible; hence, it may be pointed out that I am not consistent. My project is, however, not on the same lines as that proposed by the learned doctor. He began with an inconvertible note issue and while proposing the issue of notes even after the token coins are put into circulation, he would have the seigniorage profit as the reserve. At no time in the history of currency has seigniorage profit been sufficient to form a reserve against notes. The essential feature of a reform scheme should be to induce people to have faith in the coins or paper issues. It is hardly possible that Dr. Vissering's scheme could bring that about. The very start is false; and the issue of inconvertible notes, even before the issue of coins, would prove sufficient to make the Chinese people distrust the scheme. For ages, they have understood and appreciated the value of metal; and any other currency was always forced upon them. When it is understood that even in such an advanced country as England, whose volume of trade is the largest of any single country known in history, the daily transactions of life are conducted solely through the medium of coinage - the smallest paper money available being £5 - one need not wonder at the Chinese being anxious to stick to metallic money. The issue of £1 and 10s. currency notes in England on account of the situation created by the war of 1914 was almost a revolution in currency; people accepted these notes, in spite of the fact that the Government guaranteed it and the Bank of England had sufficient reserve to pay the whole of it in gold, more out of patriotism than any great faith in the change.
Consequently it would be futile to suggest any course which leaves out of consideration the necessity for metallic reserve. Paper should be issued for the sole purpose of economizing metal and saving on coinage expenses. Therefore, the Government or the banks delegated by the Government to issue and control the paper currency, should have the full amount of reserve in metal or any other shape which would permit of immediate conversion into metallic currency. There should be no more revival of inconvertible notes, if currency reform should succeed; the creation of unsecured paper money would become a dangerous expedient, as it has on several occasions in the past, if it were allowed to develop into inflation. The moment that people understand that there is the full amount of reserve to meet all demands for conversion of paper money, they would prefer to leave coin and bullion in the bank, rather than have to cart heavy weights of metal for their daily trade transactions. The accumulation of metal in the vaults of the banks would also make its effect felt on the economic life of the people; it would engender a confidence which would prove a stimulus to production and trade. On the other hand, inconvertible paper, whether issued by the Government or a bank, would always have the taint of suspicion attached to it; for, having nothing to back it up, one is uncertain at what date it would lose its value and refuse to be converted - at all.