Recently, I have a chance to pick up a book on the history of GIC (Government of Singapore Investment Corporation). The book gives important backgrounds of the creation of GIC. In my opinion, it is a short history of Singapore’s reserve management and its currency.

In 1965, Singapore separated from Malaysia to become an independent and sovereign state. Malay States and Singapore had a common currency arrangement since 1937. After the separation, both countries continue to use the Malayan Dollar for a while. But well before separation, the Malaysian government had given notice in 1964 that it would issue its own currency, the Malaysian ringgit. (Not to be confused Malaysia with Malayan. Malayan represents a number of political entities in Pennuslysia Malaysia while Malaysia was formed in 1963.) Singapore thus had 2 choices. One is to continue with a common currency arrangement with Malaysia. Another is to issue its own currency. Singapore preferred the former. The Malaysia government also thought that a common currency would be to the mutual advantage of both countries. Therefore, the two countries began several rounds of negotiations. In fact, they came close to having a deal. The negotiation failed due to a trigger on the status of the proposed site of the Singapore branch of Bank Negara, the central bank of Malaysia. Malaysia insisted that while the value of the land would be credited to the account of the Singapore branch, the title would remain in the name of Bank Negara Malaysia. It means the Singapore branch was not a legal entity and could not therefore own assets. That would mean it could not be the legal owner of its reserves. This was definitely not acceptable to Singapore. These stories told us the importance of reserve.

Singapore issued its own currency on 12 June 1967. But Singapore would not have a central bank but maintain the currency board system. Latter the currency board merged with the Monetary Authority of Singapore. MAS is not called the Central Bank of Singapore because it does not have currency insurance capability. The choice to separate currency insurance from other functions of central banking to me is admirable. First, every dollar was backed by its equivalent in reserves. No printing of money. Second, the leaders recognized that the power of creating credit had been frequently abused. Third, since it gave up using the tool of monetary easing, the only ways to deal with the economic downturn are to save in the good times and work harder during bad times. Salute!

In the early years, Singapore held its reserves in sterling as it was part of the Sterling Area. (Sterling was the world reserve currency back then, like the US dollar today) Coming out of the war, the British was heavily in debt. It would be difficult for any government to tighten the belts yet again after six years of war. The rising debt had to be serviced through capital inflows. This led to an endemic balance of payments deficits. Sterling faced enormous devaluation pressure. In 1957, the British cabinet approved the proposal to devalue the pound by 14.3%. Singapore decided not to devalue its currency to give confidence to the new currency and diversify its reserve against the sterling. There were a lot of heat exchanges between Singapore and British since Singapore had an agreement with the British on the proportion of sterling to be held in its reserves.

In a letter from Dr Goh Keng Swee to Roy Jenkins, Dr Goh said, “Three-fourths of the funds we keep overseas are not monetary reserves. They consist of accumulations of various deposits and surpluses on Government account, mainly the outcome of prudent financing over the years and continuous surpluses in Singapore’s overall balance of payments.”, and “Our monetary reserves, represented by $352 million in new Currency backing and about $150 million in old Currency backing, are held in London except for some $46 million in U.S. dollars. There is also a small amount, $73 million, held in gold in London. I do not think you can say that an unduly large proportion of our monetary reserves is being held outside the Sterling area.” The idea is to separate reserve into two buckets, monetary reserve, and non-monetary reserve. This clearly led to the function of GIC which is to invest the foreign reserves that were in excess of what MAS needed to manage the Singapore Dollar and the exchange rate.

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