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.
The devaluation of sterling in November 1967 was a harbinger of more turmoil in the international monetary system. The next four years or so were marked by incessant international currency crises, culminating in 1971 of the abandonment of the Bretton Woods system of fixed exchange rates that had been created after the end of World War II. The period overlapped with Dr Goh’s second stint as Finance Minister from August 1967 to August 1970. The upheavals in global financial markets led him to conclude that the reserves should not be managed on an ad hoc basis. Accordingly, he initiated steps to develop reserves management as a dedicated activity of government.
Up to 1971, when the Monetary Authority of Singapore (MAS) was established, there was no central monetary authority in Singapore. Instead, a number of agencies, including the Board of Commissioners of Currency Singapore, the Commissioner of Banking, the Exchange Control, and the Accountant-General’s Office (AGO), had performed various monetary and banking functions.
The Board of Commissioners of Currency Singapore (BCCS) was established on 7 April 1967 with the enactment of the Currency Act, and it continued the “currency board” system that had been in operation since British colonial times.
Then Finance Minister Lim Kim San was appointed the first chairman of the board. The new Singapore dollar, which was issued by the board in June 1967, was fully convertible to a foreign currency at a fixed exchange rate and also fully backed by foreign assets or gold.
One of the quirks of the situation, as Dr Goh was to note in an address in 1970, was the wide ambit of the AGO. Apart from its normal accounting functions, it also undertook some central banking functions, like issuing Treasury bills and acting as the government’s banker. In addition, the AGO had oversight of the country’s reserves and dealt with brokers like the Crown Agents in London.
Coordinating this assortment of agencies was the job of the Ministry of Finance. It was an untidy system, one that placed a heavy burden on the Finance Minister and his officers. Dr Goh eventually concluded that the arrangement was not equal to the challenges involved in watching financial markets and investing the reserves.
Sometime in 1968, he began convening weekly meetings on reserves management. Apart from himself, the regular attendees at the gatherings included the accountant-general, Chua Kim Yeow, and the two finance ministry officials, Sim Kee Boon and Ngiam Tong Dow. The meetings were held on Monday mornings at Dr Goh’s office in Fullerton Building (since then converted into a hotel). Sim Kee Boon, in an interview , recalled Dr Goh’s “Monday morning prayers” as tutorials on the conduct of central bank functions. Dr Goh, he felt, was teaching himself as well as his officials how they might function when Singapore finally did establish a central bank or monetary authority. In retrospect, because the meetings often involved discussions of how the reserves might be invested, the Monday morning group might also be described as Singapore’s first Investment Committee.
The group did not have as easy an access to market information as we do now. This was a time of telexes, not faxes, let alone e-mail. Foreign newspapers arrived in Singapore some three or four days late. Television was available in Singapore, but coverage of international financial developments was spotty and cursory. There was no CNN or CNBC or Channel NewsAsia.
The “Monday morning prayers” were simple, unceremonious affairs. There were no support staff or observers in attendance. Dr Goh would direct the agenda and call for reports to be prepared or research to be conducted as and when he felt they were necessary. Elizabeth Sam, a young finance officer then, took the minutes, which had to be completed within the same day for Dr Goh’s vetting. Chua would be responsible for implementing the investment decisions made at the meeting. He would usually forward Dr Goh’s instructions to the Crown Agents in London for execution. The entire process was typical of Dr Goh’s “hands-on, direct style” of working, Sam recalled later.
The weekly meetings began at a time of extreme stress in the international monetary system. The Bretton Woods system, in existence for close to a quarter century then, was in crisis. Essentially a modified version of the gold standard, the system had countries fixing their exchange rates against a common peg or “numeraire” – in this case, the US dollar. In turn, the US government guaranteed the conversion of US dollars to gold at a fixed price of US$35 per ounce. As long as that convertibility was not in doubt, holding US dollars was as good as holding gold.
The creation in the main of John Maynard Keynes, the famous British economist, and Harry Dexter White, a senior US treasury official, the Bretton Woods system of fixed exchange rates functioned well initially and helped sustain the post-War global economic boom. But by the late 1960s, it had come under severe strain because major global economies had chronic balance of payments surpluses or deficits. For various reasons, they resisted altering their exchange rates, as they were supposed to, which meant the system lacked an effective mechanism for correcting what economists called “balance of payments disequilibria”.
The world’s major economies fell into two camps: on the one hand, there were the chronic trade surplus countries like West Germany, Japan and Switzerland; and on the other, chronic trade deficit countries like the US, Britain and France.
These were conditions that fed contagion in the currency markets. Thus, the devaluation of sterling in November 1967 led to selling pressure on the French franc, which was eventually forced to devalue in August 1969. The franc devaluation renewed speculation of another sterling devaluation. With time, the speculative attacks became self-reinforcing, with each success in bringing down a currency encouraging speculators to search for a new victim.
Ultimately, Bretton Woods was undermined because of rising doubts about the status of the US dollar as a secure store of value. These doubts were kindled by US economic developments as the 1960s progressed. President Lyndon Johnson then had instituted his “Great Society” welfare programmes even as he presided over an expensive war in Vietnam. The result was chronic fiscal deficits and expansionary monetary policy, a combination that resulted in US trade deficits and a rapid accumulation of US dollars in surplus countries. As the overhang of US dollars increased and more US dollars were presented to the US Treasury in exchange for gold, there was increasing worry that the US would run out of gold and would suspend its pledge to convert US dollars to gold at US$35 per oz. This indeed occurred in 1971, when President Richard Nixon unilaterally suspended the convertibility of dollars to gold. With that peremptory stroke, he cut the Bretton Woods system from under its feet.
Before the inevitable occurred, the gold market had become the barometer of the market’s uneasiness over currency instability. Gold was viewed as the ultimate safe haven the asset investors turned to when there was mistrust in any paper currency. The sterling devaluation of November 1967 triggered speculation against the US dollar and a consequent “gold rush” in March 1968. This led to the dissolution of the so-called “Gold Pool”, a mechanism created by eight major central banks, including the US Federal Reserve, to help keep the price of gold at US$35 per oz. The gold market was also closed for some time.
During the closure of the gold market, the US orchestrated an agreement among most of the world’s major central banks that they would neither buy gold from the market nor sell it to other monetary authorities. The communiqué announcing the agreement was sent to central banks and the relevant monetary authorities around the world – including Singapore – accompanied with the request that they comply with the agreement. One of the consequences of the agreement was an embargo on gold purchases from South Africa, a major producer of gold then.
Meanwhile in Singapore, Dr Goh’s weekly meetings focused inevitably on developments in the currency and gold markets. He and his staff, Dr Goh later said, devoted “an inordinate amount of time and effort to the study of current monetary developments”.
Their overriding concern was how Singapore’s reserves should be safeguarded amid the global financial turmoil. Dr Goh was sceptical of the assurances emanating from Washington and London that the Bretton Woods system would hold and that the US dollar and sterling, the world’s two major reserve currencies then, would maintain their parities against the currencies of countries with balance of payments surpluses, in particular the Deutsche mark, Swiss franc and Japanese yen. He also concluded that the price of gold would have to rise.
Consequently, his first decisive “move was really (to change the) currency composition” of the reserves, Sam recalled. He directed that the proportion of sterling and US dollars held by Singapore be reduced in favour of the Deutsche mark, the Japanese yen and the Swiss franc. In doing so, he initiated a policy of currency diversification that would later become a cornerstone of reserves management everywhere. But at that time, it was an “unusual course because most central banks just adhered to holding their reserves in the reserve currencies”, Sam noted.
Dr Goh also decided to buy gold. But given the US-led embargo on gold purchases from the market or from official stocks, the purchases would have to be covertly made. South Africa, Dr Goh decided, was the most suitable source of gold to approach. Gold was one of its major exports and the gold embargo was depriving it of a major source of revenue. It was known in the market that it would welcome approaches from potential embargo breakers.
The first connection was made in September 1968 in Washington, at the annual meeting of the International Bank for Reconstruction and Development (IMF-IBRD). Dr Goh, accompanied by Ngiam, met the South African minister for finance, Dr Nicolaas Diederichs. Dr Diederichs was a cautious man. He turned up the volume of the television in his hotel room to prevent his conversation with Dr Goh from being eavesdropped by some intelligence agency. The meeting was kept brief and to the point. Both parties came to a preliminary agreement that Singapore would buy 100 tonnes of gold at the indicative price of US$40 per oz. Dr Diederichs proposed a meeting between emissaries from the two countries in Zurich to confirm the quantity and price, and to settle various details such as the method of payment and how the gold was to be transferred to Singapore’s account.
The meeting with the South Africans took place as scheduled in Zurich. There was no need for further negotiations as the South Africans indicated their assent to the terms agreed to at Washington. Wee called Dr Goh on the telephone to seek his confirmation that 100 tonnes of gold be bought at US$40 per oz. Dr Goh agreed and the deal was sealed.
In 1969, Dr Goh created a new unit within the Ministry of Finance, the Department of Overseas Investments (DOI). Singapore’s external assets had risen at “an exceptionally fast rate” and Dr Goh saw the need for them to be managed by a unit dedicated to the task. Hence, the creation of the DOI. The DOI in effect was a rudimentary investment management unit, the embryo from which GIC developed.
A clue to its orientation was the appointment of Lim Chee Poh, a stockbroker, as its first head. He left after a short tenure and was succeeded by Francis De Costa, a deputy secretary at the finance ministry. De Costa, however, soon became involved in the negotiations to renew the Sterling Agreement and the consequent effort to reduce Singapore’s sterling holdings. He was succeeded by Elizabeth Sam. She would oversee reserves management over the next 12 or so years, heading DOI until its absorption into MAS on 1 January 1971, and later helming MAS’ International Department, DOI’s successor, until 1981.
Dr Goh was clear about DOI’s direction. It should invest Singapore’s reserves so as to maximise returns, and not merely take the conventional route of investing in cash and short-term paper. This meant investing in international equities and bonds. This was a revolutionary, unheard-of step in those days, particularly for a finance ministry.The first Japanese brokers Sam invited to present a sales pitch to DOI for Japanese equities did not believe that any business would come their way. They were incredulous that a finance ministry was considering investing in Japanese stocks.
But that was precisely what the Singapore officers were considering, and word soon spread through the brokerage community that business was indeed available from the DOI. Sam received approval from Dr Goh to invest in the US, Britain, West Germany and Japan. Eventually, specific brokers were chosen for each of these countries: James Capel and the Crown Agents for Britain; Lehman Brothers and Lazard Freres for the US; Dresdner Bank and MM Warburg-Brinckman Wirtz for West Germany; Nomura Securities and Daiwa Securities for Japan; and the Swiss Bank Corporation and Union Bank of Switzerland for Switzerland.
Sam had two officers assisting her, an accountant and an investment officer. The latter was Ng Kok Song who would remain with Sam at MAS and then move to GIC after its formation to take charge of its equity and bonds departments, and eventually to be Group Chief Investment Officer.
The DOI was short-lived, for it was subsumed as a department in MAS when the latter began operations in 1971. However, its influence transcended its life and the ethos it symbolised was more than ephemeral. The returns-oriented culture that Dr Goh inspired was transplanted to MAS, and later to GIC. The “buccaneers” who faithfully attended Dr Goh’s “Monday morning prayers” would go on to shape the future course of reserves management in Singapore.