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John Greenwood, the architect of the currency peg, tells the Post of the turbulent lead-upto ‘Black Saturday’ that forced a radical fixThere was quite an extended background of instability in the Hong Kong dollar.迷你倉 The currency had been weakening for a couple of years, the main background to that being the Sino-British negotiations over the future of Hong Kong after 1997.But in the summer of 1983, particularly in August and September, the depreciation of the Hong Kong dollar accelerated sharply, to the point where there were runs on the supermarkets. There was a serious anxiety among ordinary people and wages had completely lost touch with the rises in the cost of living, so people were being very seriously affected by those price rises.In a personal sense, just homing down to that weekend, the financial secretary was out of Hong Kong at a Commonwealth finance ministers’ conference and he was going on to the World Bank/IMF meetings in Washington. That was John Bremridge and he was not available to make any major decision, so the person who was left in charge, at least on the monetary side, was Douglas Blye.The view of the Hong Kong government had been that the floating system was working fine, that exports were doing OK, so they weren’t going to change anything. But clearly things got out of control. The acceleration in the depreciation and the rapid rise of inflation really forced a decision on them and I worked very intensively on a revision of a paper that I had done some time before.Over the previous two years, I had analysed the Hong Kong monetary system and said essentially that because there wasn’t a central bank, they couldn’t control either the price of money or the stock of money, and so the appropriate thing to do was to introduce a central bank and either control the exchange rate or set about controlling the quantity of money. Both of those things had been rejected.In August, when I went on holiday, I had this sort of brainstorm when I realised that you didn’t need a central bank to control the exchange rate, you could have a currency board mechanism which would require minimal institutional changes in Hong Kong.One of the reasons for opposing a central bank was that it would mean big institutional changes at a difficult time and the authorities were understandably reluctant to do that.I came back in August and spent the last part of August and early September working on this paper to propose now three possible schemes – the third scheme being to change the system slightly to create this currency board that would effectively control the exchange rate.When I published this paper in mid-Sept儲存mber, it was titled something like “Three Possible Schemes to Rescue the Hong Kong Dollar”.I was on the phone to people like Milton Friedman and Alan Walters and Maxwell Fry, getting their endorsement of the paper because I knew how important it would be and that the scheme would have to work. Then I got a call from the Hong Kong government to come in and meet with them on the Saturday morning, I think it was, or even the Sunday morning. I had been working through the night and I was completely exhausted.I remember going out to try to play hockey on the Sunday and after a few minutes on the field I had to say to my captain that I couldn’t play at my normal strength – without explaining the reasons!All three of them (Friedman, Walters and Fry) had such a very good knowledge of such systems that they were each monetary scholars and they were therefore confident that if we got the basic mechanism right that it would work.Alan Walters was particularly supportive and put the scheme to Margaret Thatcher.Milton Friedman was a great supporter and as he said, he had a front-row seat in the process – I would speak to him three or four times a week at night in San Francisco.And Maxwell Fry was extremely valuable because he crystallised some of the technical elements of the paper. He reviewed it in detail and came back to me with some suggestions that I incorporated into the paper and credited him with that.What I tried to do was to go to the highest academic authorities that I could find and get their endorsement, and all three of them gave me their endorsement, which boosted my confidence to promote the system enormously.Ididn’t invent it (the currency board concept). Currency boards were widely used in colonial times and currency boards are essentially an adaptation of the gold standard or the silver standard. I promoted it and applied it in the circumstances of Hong Kong and it has worked.But I think huge credit has to go to Hong Kong’s monetary officials – notably Joseph Yam Chi-kwong and Norman Chan Tak-lam and others – who refined the system and made the technical changes necessary to make it more robust and appropriate to a financial system where capital movements are now made at the touch of a keyboard electronically, where in the old days that was not the case.I would not over-estimate my particular role. I promoted it and put in a lot of effort at the time, but a lot of the credit has to go to Hong Kong monetary officials and those in the Treasury who have nurtured the system and made it as robust and resilient as it is.Read John Greenwood’s analysis of the biggest risks to the peg in Thursday’s edition.mini storage