Monetary Policy

Reflections on Alan Walters and the Hong Kong currency board

Alan Walters was an inspiring teacher with a broad interest in a variety of economic problems. He was especially interested in applying theoretical ideas to practical problems. I first met him in the early 1970s when he was at the LSE and I needed help on Japanese monetary issues. Subsequently, when I became involved with Hong Kong’s currency crisis in 1983 his help proved decisive. There was solid opposition in Hong Kong to my proposal for the restoration of a currency board, but Alan’s pragmatic approach was able to remove most of the barriers at a stroke. Although he was living in Washington DC, he was still an adviser to Margaret Thatcher. Richard Thornton, the CEO of GT, volunteered to take my analysis to Washington by Concorde, and Alan soon called me back with a series of questions. Overall he agreed with my diagnosis and my proposals. Moreover, he immediately understood the need for urgent action in view of the on-going negotiations between Britain and China over the future of Hong Kong.

Fortuitously the crisis in Hong Kong occurred immediately ahead of the IMF/World Bank meetings in Washington, and not only were the most senior Bank of England and Treasury officials due to attend, but also the Prime Minister was on a State visit to Canada, and due to call on her friend President Reagan in Washington. Thanks to Alan’s appreciation of the problem in Hong Kong and his influence with the PM, a meeting was promptly arranged between the Chancellor of the Exchequer (Nigel Lawson), the Governor of the Bank of England (Robin Leigh Pemberton), visiting Bank and Treasury officials, Alan Walters and the PM at the British Embassy in Washington on Tuesday, September 27th. At the meeting the PM asked Walters to go out to Hong Kong and review the plan in detail. For personal reasons he was unable to go, but on October 6th and 7th a delegation of two (Charles Goodhart from the Bank and David Peretz from HM Treasury) did visit Hong Kong to vet the scheme and give Hong Kong officials the necessary seal of approval.

From our phone conversations at the time I recall Alan saying to me that the main question which would concern the British authorities was whether the Bank of England’s reserves might be put at risk by the obligation to maintain the HK$ fixed rate (see Margaret Thatcher, The Downing Street Years, pp. 489-490). We agreed that if the HK dollar was put under pressure, interest rates in Hong Kong would rise sharply, but the Bank of England would not be called on to lend its reserves because high interest rates in Hong Kong at a broadly unchanged fixed exchange rate would attract inflows back into the territory. As Alan had envisaged, the question did come up at the embassy conference, but more importantly the analysis that Hong Kong would never need to call on the Bank of England’s reserves also turned out to be correct.

Shadow Monetary Policy Committee

John Greenwood OBE is Chief Economist of INVESCO plc. A graduate of Edinburgh University, he did economic research at Tokyo University and was a visiting research fellow at the Bank of Japan (1970-74). From 1974 he was Chief Economist with GT Management plc, based initially in Hong Kong and later in San Francisco. As editor of Asian Monetary Monitor he proposed a currency board scheme for stabilizing the Hong Kong dollar in 1983 that is still in operation today. Mr. Greenwood was a director of the Hong Kong Futures Exchange Clearing Corporation (1987-91) and council member the Stock Exchange of Hong Kong (1992-93). An economic adviser to the Hong Kong Government (1992-93), he has been a member of the Committee on Currency Board Operations of the Hong Kong Monetary Authority since 1998. Mr. Greenwood is a director of INVESCO Asia Ltd in Hong Kong, INVESCO Asset Management Singapore Ltd, and the Hong Kong Association in London. In 1980 he translated Yoshio Suzuki’s book, Money and Banking in Contemporary Japan from Japanese. In 2007 he completed a book entitled Hong Kong’s Link to the US Dollar: Origins and Evolution which covers the collapse of the currency in 1983 and its subsequent restoration to stability under the plan he devised.