This year marks the 40th anniversary of GIC. In celebration of this milestone, Made of Bold commemorates the founding leaders’ vision of forming an entity dedicated to managing Singapore’s reserves. These bold stories have laid the foundations of GIC’s values and purpose in securing Singapore’s financial future.
These bold stories are from the publication Bold Vision: The Untold Story of Singapore’s Reserves and Its Sovereign Wealth Fund.
A Singular Man
As the economic architect of modern Singapore, Dr Goh Keng Swee wrote many budget speeches and policies. But unbeknownst to many, he was largely responsible for the first chapter of the nation’s bold reserves management story.
After separation, Singapore was keen on establishing a Common Currency arrangement with Malaysia. However, the status of a piece of land at Robinson Road in Singapore became the focal point for dispute, leading the island nation to stand its ground and inevitably resulting in a currency split.
Donning A Straitjacket
Amidst challenging social, political and economic uncertainties, a young nation stood against conventional wisdom and established a currency board system. This decision built confidence in the Singapore dollar in the early days of nation-building.
The Sterling Raj
Singapore was at the mercy of sterling’s fate – it was obliged to hold its reserves in sterling but a devaluation of the pound would mean substantial foreign exchange losses for the small nation. The Sterling episode saw a heated exchange of letters between then-British Chancellor of the Exchequer Roy Jenkins and Dr Goh Keng Swee.
Dr Goh Keng Swee and his team circumvented a US-led embargo to buy gold with an ingenious and clandestine idea of using two halves of a torn dollar bill to verify the identity of the officials involved.
A Productive Interregnum
When MAS was formed in 1971, it started off with a blank canvas – an unheard-of mix of a quasi-central bank and a currency board. The institution was not just permitted to, but tasked to invest for returns and profit, which was a pioneering approach to investing reserves for returns at the time.
Genesis of an Idea
GIC was conceived in just 7 months – from a mere idea in Dr Goh’s mind to the day he issued the press statement to announce the establishment of a new investment company.
Today, GIC may be recognized as one of the top sovereign wealth funds in the world, but its story has a very humble beginning – the company’s first Managing Director began his tenure with only a desk. There was not even a chair, until he found one in an unused room.
When Singapore separated from Malaysia in August 1965, it continued to use a common currency with Malaysia and Brunei – the Malayan dollar. Issued by the Board of Commissioners of Currency of Malaya and British Borneo, the Malayan dollar was a currency that generations on both sides of the Causeway were accustomed to. It served as an umbilical cord linking Singapore to Malaysia, sustaining the close trading and financial ties between the two territories. Political separation, Singapore’s leaders hoped, need not necessarily mean monetary separation.
But the Malaysian government had given notice as early as December 1964, well before separation, that it would issue its own currency, the Malaysian ringgit, by mid-December 1966. Independent Singapore had thus two options: continue with a common currency arrangement with Malaysia on a different basis, or issue its own currency.
The common currency arrangement had its beginnings in 1897, when a currency board was established for the Straits Settlements, which comprised Singapore, Penang and Malacca. Since its introduction, the board had gone through several reconstitutions. In 1937, when the Malay States joined the Straits Settlements, it became the Board of Commissioners of Currency, Malaya. In 1950, to recognise the inclusion of Sarawak, Brunei and North Borneo (now Sabah), it was renamed the Board of Commissioners of Currency, Malaya and British Borneo. The 1950 Currency Agreement was amended in 1960 to recognise the change in status of Malaya as an independent country in 1957, and of Singapore as a self-governing state in 1959.
A currency board system operates like the gold standard. In the case of the latter, currencies are pegged to gold at a fixed rate; in the former, currencies are pegged to an international reserve currency at a fixed rate. In both cases, the currencies are backed 100 per cent.
The Malayan dollar was pegged to sterling at the rate of two shillings and four pence, or 0.290299 grammes of gold. The amount of Malayan dollars the board could issue depended on the amount of sterling it held, with the Malayan dollar being fully convertible to sterling at the stated parity. For these reasons, the currency enjoyed the confidence of traders and investors. There was no possibility of the government printing money to finance deficits.
The 1960 Currency Agreement between the territories continued the common currency, although Malaya had by then its own central bank, Bank Negara Malaya. But the agreement also allowed any of the national authorities to give an 18-month notice to leave the currency board and issue its own currency.
On 12 December 1964, Malaysia did so, declaring it would issue its own currency, the Malaysian ringgit, to replace the Malayan dollar in two years. Singapore was then part of Malaysia, so the Malaysian ringgit would automatically have become its currency too. But Separation from Malaysia on 9 August 1965 meant that the proposed Malaysian ringgit would be foreign currency in Singapore.
The other source is internal government files, which reveal the decisive role that Dr Goh played in shaping the thinking of his Cabinet colleagues, though currency issues were no longer part of his portfolio. He had moved from Finance to Defence in 1965 and took no part in the formal negotiations with Malaysia on the currency arrangements.
The common currency arrangement had its advantages, which was why many, including the Singapore International Chamber of Commerce and the Singapore Chinese Chamber of Commerce, urged its continuance. Arthur Burns, then-chairman of the US Federal Reserve, on a visit to Singapore in May 1966, described the common currency arrangements between the two countries as “one of your great economic assets”. A common currency would be backed by the combined reserves of two countries; it would facilitate the close economic links between Malaysia and Singapore. And finally - a sentiment held by many on both sides of the Causeway, but unspoken – it would leave the door open for a political reunion of the two territories.
On 8 November 1965, Lim wrote to Tan, recalling that both of them had agreed that “our two Governments should do everything possible to maintain close economic and trade links between Singapore and Malaysia”. He suggested one way to do so would be to continue with a currency board issuing a common currency. The other would be to establish a joint central bank that could then issue currency for both countries.
Tan replied on 13 November to say that he had authorised the Governor of Bank Negara, Tun Ismail bin Mohd Ali, to initiate discussions with Singapore. Indeed, Ismail had visited Singapore a day earlier and had submitted a Memorandum on the Proposed Currency and Banking Arrangement to Singapore’s Finance Minister.
Bank Negara’s memorandum concluded that “economic and financial considerations would suggest that it would be to the mutual advantage of Singapore and Malaysia to continue to have a form of common currency and an integrated banking system”. But Bank Negara rejected Singapore’s first preference—a currency board.
A currency board would be anachronistic, Bank Negara suggested, given the stage of development of the two economies. It was a passive and inflexible mechanism, useful only for the issue and redemption of note issue. A central bank, by contrast, would be able to control bank credit, a more important component of money supply than the note issue in developed economies.
Singapore would continue to press the case for a currency board in the preliminary exchanges, but Kuala Lumpur was adamant that the currency board system was not an option for discussion.
Bank Negara also rejected Singapore’s second option, a joint central bank. To Lim’s point that “a joint central bank would be the most appropriate institutional framework for two sovereign nations”, Ismail replied that a joint central bank was not acceptable, as it would involve “a passing of new legislation in Malaysia and a reconstitution of Bank Negara Malaysia”.
Bank Negara’s suggestion was to continue the common currency arrangement, but with it issuing currency for both countries. It said it could issue currency in Singapore through its Singapore branch, which it had established when Singapore was part of Malaysia. There could be differences in design to differentiate the currency issued in Malaysia from the one issued in Singapore, though either one would be legal tender in the other.
In the event, Bank Negara’s proposal formed the basis of negotiations. Kuala Lumpur envisaged a more centralised arrangement than Singapore wished. Singapore would be represented through a Singapore branch of the central bank, headed by a Deputy Governor appointed by, and answerable to, the Singapore government. Much of the ensuing negotiations revolved around the differences between the two sides on the status of the Singapore branch.
The other issue that Singapore raised concerned the control and ownership of the reserves, in the first instance, the pool of reserves transferred from the existing currency board. This, more than the type of monetary system, was a fundamental issue for Singapore: it would only agree to negotiations if there were binding assurances that its reserves would remain under its control and management. Bank Negara understood Singapore’s concern and agreed to modify its original proposals concerning the arrangements for the management of reserves. The reserves attributable to each country, it proposed, could be separately controlled and managed by maintaining separate accounts with earmarked depositories.
On 9 May 1966, Lim wrote to Ismail to say that Bank Negara’s revised proposals, in particular the revision providing for separate physical control and management of the respective currency reserves, were acceptable in principle to Singapore. Negotiations could begin to settle matters of details such as the exchange rate parity, the design of the new currency, the appointment of the Singaporean Deputy Governor and the Board of Directors, and steps for liquidation in the event of termination.
Formal negotiations began on 10 June. Bank Negara, the convener of the meeting, was represented by a team led by Ismail himself, and included its Deputy Governor Choi Siew Hong and the Manager of its Singapore branch Hooi Kam Sooi.
Singapore’s delegation was headed by Sim Kee Boon, then-permanent secretary at the Ministry of Finance, and included Ngiam Tong Dow and Elizabeth Sam from the finance ministry; the attorney-general, Tan Boon Teik; and theaccountant-general, Chua Kim Yeow. The Malaysian government delegation was headed by Abu Bakar Samad bin Mohd Noor, then secretary to the Malaysian Treasury, Tan Sri Chong Hon Nyan and Dato’ Malek Ali Merican from the Treasury, and the solicitor-general, Tan Sri Salleh Abas. Two representatives from the IMF also attended the talks: U Tun Thin and U San Lin.
The delegations met 11 times in all, within a period of slightly less than a month. Each meeting was intense and gruelling. Some meetings would start in the morning and end after midnight. The discussions were wide-ranging and detailed: should the agreement call for “concurrence” or “consultation” between the two parties? Should it be “Bank Negara Malaysia, Singapura Branch” or “Bank Negara Malaysia - Singapura Branch”?
But though intense, the talks were civil. Sim later remembered the negotiations as “difficult but not bitter”. Ismail, he said, “tried to be fair”. The personal ties among the negotiators helped. Tan Boon Teik was from Penang. Choi and Hooi had studied at the University of Malaya in Singapore, which was also the alma mater of Sim, Ngiam and Sam. Sim had known Ismail for some time and had developed a “cordial” working relationship with him.
The Singapore cabinet was kept informed of the progress of the talks, with a small group comprising the Prime Minister, Lim, Dr Goh and EW Barker, then Minister of Law, monitoring events closely and sometimes meeting every day.
Dr Goh was then defence minister but was influential in shaping the government’s strategy in the currency talks. He took it upon himself to compose detailed memoranda to explain to his cabinet colleagues the complexities of monetary policy, the implications of the proposals being tabled and the stand Singapore should take. Sim and Ngiam found themselves reporting not only to Lim Kim San, but also to Dr Goh.
Far from viewing Dr Goh’s interventions as intrusions on his turf, Lim welcomed them. Old friends from their days at Raffles College – Dr Goh had been best man at Lim’s wedding – they formed a formidable team: Dr Goh the economic theoretician and practitioner par excellence, and Lim the businessman turned-politician, a “political entrepreneur… who seized opportunities using powers of analysis, imagination, a sense of reality and character”, as Lee was to describe him later.
We get a glimpse of how Dr Goh and Lim related to each other from Yong Pung How’s recollections of his association with both men in the early 1980s, when Dr Goh was Chairman of the Monetary Authority of Singapore (MAS), and Lim had been persuaded to come out of retirement to be the caretaker managing director of MAS. Yong recalled the two having heated arguments over policy issues, the staff within hearing distance and cringing at the “unmentionable terms” they flung at each other. Then, wreathed in smiles, they would emerge for lunch, usually Peranakan food. But after lunch, back in the office, they would resume their heated altercations.
It was Dr Goh who had been instrumental in getting Lim appointed chairman of the Housing and Development Board in 1960, and later in persuading him to run in the 1963 general elections. They remained lifelong friends and comrades.
Significantly, Dr Goh seemed to have been the most sceptical among his senior colleagues about the arrangements for the common currency. He felt that the draft provisions that had been submitted had too many loopholes to prevent the agreement benefiting one party more than the other. The provisions, he noted, had to be unambiguous on how Singapore’s interests would be protected: How could Bank Negara’s board be structured to adequately protect Singapore’s rights? If Bank Negara was only obliged to “consult” rather than seek the “concurrence” of the Singapore government, wouldn’t Singapore’s monetary policy be determined ultimately by a foreign government? Shouldn’t the provisions on credit creation and deficit financing be tightened? What about the implications of the agreement for the supervision of Singapore banks?
Dr Goh felt Singapore should seek two safeguards: First, each government’s reserves should unambiguously be under its own direction. And second, Bank Negara should operate only as an agent of the Singapore government, completely subject to the direction of the Singapore Finance Minister in matters affecting Singapore.
He forecast that these safeguards, though absolutely necessary for Singapore, would be unacceptable to Kuala Lumpur. Singapore should therefore be prepared for a breakdown in the negotiations, he advised.
Dr Goh had been the first among his colleagues to see in 1965 that Singapore’s political separation from Malaysia was inevitable. A year later, he seemed to have been the first to conclude that a monetary separation was inevitable too.
Still, notwithstanding Dr Goh’s reservations, and somewhat to his surprise, the talks progressed to the point of producing a Final Draft Agreement. It provided for a common currency with the same design, except that the Malaysian issue would be designated the “M” series and the Singaporean issue the “S” series. The two issues would be legal tender in either country. Each country would control its own issue and the management of its reserves. The reserves to back the Singaporean note issue would be held in a separate and distinct account controlled by the Singapore Government. The Singapore branch of Bank Negara was to be managed by a Singaporean deputy governor, appointed by the Singapore government.
In a meeting with his colleagues on 6 July, Lee commented that Singapore did not get all the safeguards it had hoped for in the draft agreement. For example, it had wanted tighter provisions that the Singapore branch would be unambiguously under the direction of Singapore’s Finance Minister. He observed that the proposed agreement was between two unequal parties, for Bank Negara was already an established institution while Singapore had no equivalent central banking machinery. The Prime Minister, however, viewed that the break-up of the Common Currency arrangement would forestall future wider economic cooperation between the two countries. The best option therefore was to accept the draft agreement and work towards modifying it over time.
This was a bombshell. If the Singapore branch could not own property, that would mean it could not be the legal owner of its reserves. As Lim later explained to parliament: “…if we had agreed to [this position], it follows that all our currency assets would have to be vested in Bank Negara Malaysia, and that this statutory body created by the Malaysian government would be appointing itself the trustee of our currency reserves and assets. In other words, we would have to hand over legal ownership of all our assets to a bank which was a statutory body of another country and entirely subject to its legislation and control”.
Lim’s letter of 21 July was followed by a response from Tan Siew Sin. Two days later, Tan wrote to his Singaporean counterpart, noting Singapore’s reservations about the draft agreement but also adding that a decision was needed by the end of July, as the deadline for placing orders with the London printers for the new currency notes was mid-August. On 4 August, Lim flew to Kuala Lumpur to meet Tan at his residence, carrying with him a formal letter of reply.
The letter stated clearly that Singapore would never place its reserves in trust with an agency under the control of a foreign government. It suggested two options that would give Singapore the assurance that it had “immediate access” to its currency reserves. One was to place these reserves with an independent trustee like the IMF or the Bank of England. The other was to incorporate the office of the Deputy Governor overseeing the Singapore branch as a Corporation Sole and for Singapore’s assets to be vested in him and not Bank Negara.
Ismail replied that the corporation sole suggestion was unacceptable as it meant a separate legal entity, in effect a separate central bank. In a reply on 8 August, Tan also stated that Singapore’s proposals were not acceptable. He subsequently visited Singapore on 13 August. At a meeting at Rumah Persekutuan, he was given a letter by Lim, which reiterated Singapore’s stand that it could not be placed in a position where its reserves might be jeopardised. But Lim expressed a willingness to explore “any alternative proposal” to resolve the impasse.
In a reply dated 17 August, Tan said the draft agreement did ensure that Singapore would have “the whole of the assets and liabilities shown in the books of Bank Negara Malaysia” in the event that the agreement was terminated. He added: “Your real fear is that we may not honour that Agreement. The only answer to this is clearly to have no agreement at all.”
And so it came to pass that at 1.30pm on 17 August 1966, both governments announced to their peoples that Singapore and Malaysia would have separate currencies from 12 June 1967.
Not for the first time, it should be noted, the prime minister had been prepared to be more conciliatory towards Kuala Lumpur than many of his colleagues, including Dr Goh, had been thus inclined. But, in this instance as in others, he was driven to conclude that there were limits to being conciliatory. He decided he would have been negligent if he had not insisted on the most watertight and stringent legal measures to ensure the safety of Singapore’s assets. “Singapore’s reserves”, he wrote later in succinctly framing the issue on which the currency negotiations broke, “could not be protected simply by relying on trust”.
Ultimately, despite the inevitable strain placed on the relationship between the two governments as a result of the failure of the currency negotiations, cooler heads did prevail. Tan himself noted in the Malaysian parliament that he could “appreciate Singapore’s reluctance to enter into an agreement of this kind. Consequently, I suggest that this is not the time for mutual recrimination”.
In retrospect, it was clear that the currency interchangeability agreement was but a stopgap measure to ensure that the traditional ties of banking, commerce and social intercourse between Malaysia and Singapore would not be abruptly disrupted by the currency split. Thus, despite the agreement, Singapore was confronted with stark economic realities even as it issued its own currency. The writing was on the wall: the destinies of the two economies would follow different paths. Singaporeans would have to find new ways of earning a living. The first separation had to be followed by a second.
It says much of the importance that Singapore’s founding leaders accorded the country’s reserves that they chose to face the existential uncertainties of a currency split rather than risk Singapore losing control of its reserves.