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.
There was to be no rest. Even before the common currency talks with Malaysia had come to an end, another crisis loomed on the horizon. This time, it was sterling.
Currency markets had long been uneasy about sterling. Britain, unlike its ally the US, had emerged from World War II exhausted – its resources depleted, its people deprived, its prestige battered. The British economy did recover in the 1950s – they “have never had it so good”, then-prime minister Harold Macmillan told British voters in 1957. But by the time “the Swinging 60s” arrived, there was a palpable sense that Britain was living beyond its means and that it would soon be forced to devalue sterling from its fixed rate of US$2.80.
Singapore had a lot riding on sterling’s fate. It was part of the Sterling Area, and so was obliged to hold its reserves in sterling. A devaluation of the pound would mean substantial foreign exchange losses for the country.
What could it do to protect the value of its reserves? Should it accept the British government’s assurance that it would not devalue the pound? Or should it diversify out of sterling? And if it were to diversify, how could it do so without antagonising the British government to such an extent as to jeopardise promised British aid in compensation for the withdrawal of British troops from Singapore?
The travails of sterling in the 1960s reflected deep-seated policy dilemmas that successive British governments in the post-war period had to grapple with. Britain emerged from World War II victorious, but as “the most indebted country in the world”. What was required in those circumstances was a restriction of consumption and an increase in savings to pare down the debt.
However, it would have been difficult for any British government to urge the electorate to tighten their belts yet again after six grim years of war. Having sacrificed so much during the war – “I’ve nothing to offer but blood, toil, tears and sweat”, Winston Churchill had told them in 1940 – the British expected a better life after. And so in 1945, they voted out of office Churchill’s Conservative Party and voted in Clement Attlee’s Labour.
Attlee’s government initiated a cradle-to-grave welfare system. As a result, savings were diverted to consumption; the rising debt had to be serviced through capital inflows; there were endemic balance of payments deficits; and sterling came under repeated attack.
The pressure intensified in 1964 when Labour returned to power but with a tiny majority of just four. On their first day in office, Prime Minister Harold Wilson, First Secretary and Secretary of State for Economic Affairs George Brown, and Chancellor of the Exchequer James Callaghan, were informed by Treasury officials that Britain was facing a balance of payments deficit of £800 million for 1964 – twice what Wilson had estimated during the campaign, only to be accused then of “scaremongering” by Tory leaders. The prospect for 1965 was scarcely less alarming.
Wilson, Brown and Callaghan decided against devaluation – not least because the previous decision to devalue in 1949 had been taken by a Labour government. “There would have been many who would conclude that a Labour government facing difficulties always took the easy way out by devaluing the pound”, Wilson later explained in his memoir, The Labour Government 1964-1970: A Personal Record. “Speculation would be aroused every time that Britain ran into even minor economic difficulties – or even without them.”
As events unfolded, that was precisely what happened, with speculators concluding that Wilson’s government was not prepared to bite the bullet and reduce expenditure. Labour’s first budget disappointed the market. Old age pension, for instance, was raised from 12s 6d to £4 for singles, and 21s to £6 10s for married couples. Expectations were confirmed that the Wilson government would not back its tough words with tough action. Sterling came under renewed attack – by “the gnomes of Zurich” as Brown colourfully, though mistakenly, called the speculators.
To defend the pound, the Bank of England began drawing on its bilateral credit lines with other central banks. But these proved insufficient and a bigger rescue effort was mounted. In November 1964, the US Federal Reserve assembled a joint credit facility, amounting to US$3 billion, with 11 other major central banks and the Bank of International Settlement. The announcement of the facility eased market concerns, only for a while. The facility had to be renewed the following year.
In 1966, sterling came under pressure again. Wilson had called for general elections in March that year, and this time won a decisive majority. Perhaps lulled by electoral success, Callaghan announced a budget that the markets judged insufficiently austere. Furthermore, a mid-year seamen’s strike undermined sentiment, and the announcement of a large drop in the reserves created more pessimism. In July, the government had to announce an austerity package. But it was only after the US Federal Reserve announced an expanded swap line that sentiment towards the pound stabilised.
It was short-lived. A series of events in 1967 forced Wilson and Callaghan to renege on their assurances that sterling would not be devalued: Charles de Gaulle’s veto of Britain’s application to join the European Common Market, the Six-Day War in the Middle East which led to the closure of the Suez Canal and in turn a rise in the costs of British imports. There were rumours of Middle Eastern countries withdrawing their funds from London.
In October, at the annual Labour Party Conference in Scarborough, the government activated a prices and incomes policy to dampen inflation. Lee, who was a guest speaker at the conference, was assured by Wilson that the British government was determined to avoid devaluation. But matters came to a head the same month with the outbreak of strikes in the dockyards of Liverpool and London, which caused a delay in the shipment of British exports. The trade deficit for October spiked upward.
In November, Wilson and Callaghan decided that the parity of US$2.80 to the pound could no longer be defended. On 16 November, the British cabinet approved their proposal to devalue the pound by 14.3 per cent to a new parity of US$2.40. Callaghan announced the move on 18 November – and promptly resigned as chancellor of the exchequer. He was succeeded by Roy Jenkins.
Both Singapore and Malaysia were informed of the devaluation in the late evening of 18 November (local time), a few hours before the BBC announced it in London. The news was unexpected, and came at an awkward time as there were two currencies circulating in Singapore – the new Singapore dollar as well as the old Malayan dollar.
Though the currency board had begun issuing the new Singapore dollar in June, the public had been given time to exchange the Malayan dollar (which remained legal tender) for the new currency. Now the Government had to decide whether to devalue the Singapore dollar in line with sterling and what to do about the Malayan dollar in consultation with Kuala Lumpur.
The old Malayan dollar, however, was treated differently. Both countries agreed that its sterling parity should remain at 2s 4d. This meant that it would be at a discount of 14.3 per cent to the new Malaysian and Singaporean currencies. Those who had not redeemed the old currency for the new issue would be worse off. The divergence in values between the note issues created confusion in the marketplace, with some vendors refusing to accept the old notes and coins.
On 23 November, the Singapore government issued a statement that would become the subject of close scrutiny by the British government. The first part of the statement was unexceptional. It explained the government’s position and reassured the public that ample time would be given to redeem the old Malayan notes and coins. It was the second part of the statement that caused eyebrows to be raised in London.
The statement disclosed that the combined external reserves of the Singapore government and the Board of Commissioners of Currency Singapore (BCCS) amounted to $1,251.6 million, twice what London had estimated. More startling still to London, the statement also revealed that since July 1966 the Singapore government had been gradually diversifying its reserves from sterling into other currencies, mainly the US dollar. Indeed, half of the reserves was now in currencies other than sterling. About 82 per cent of the non-sterling portion was in US dollars.
The statement added that diversification had been undertaken with two considerations in mind. First, since Singapore was part of the Sterling Area, its government had refrained from any action that could have precipitated sterling weakness. Second, given the British government’s promise of aid to mitigate the effects of Britain’s military withdrawal on the Singapore economy, the diversification was conducted so as not to “prejudice a fair settlement” regarding the aid. Because of these considerations, the Singapore government had left its sterling reserves in London intact, and had moved only the additional revenues it had accumulated over time into non-sterling currencies.
The British Treasury and the Bank of England began an intensive probe into how Singapore had managed to increase its reserves and diversify them without London knowing about it. The Bank of England found that its figures on Singapore’s reserves tallied with the Singapore government’s figures of its sterling reserves. What was missing was Singapore’s non-sterling reserves, the source of which the Bank was “completely at a loss” to explain. Likewise, the Treasury, after meticulously tabulating the monthly statements on Singapore’s reserves, still came up short of the figures released by Singapore. It was only later that the puzzle was solved: Singapore’s budget surpluses over the years had been consistently underestimated.
The Singapore government’s statement nonetheless confirmed British suspicion that Singapore was an important Sterling Area country. It had the fourth largest holdings of reserves in the Sterling Area, after Australia, Kuwait and India. And though it held only half of its reserves in sterling, it was still, among Sterling Area members, the fifth-largest holder of the currency. The four largest holders of sterling were Australia, Hong Kong, Kuwait and Malaysia. For these reasons, Singapore’s diversification out of sterling was worrisome to London. What if its actions tempted other Sterling Area countries to follow suit?
Whitehall made attempts to ferret out how and in what amounts Singapore had switched out of sterling into other currencies. A possible lead was the Crown Agents, which acted for the Singapore government in London. Though the Crown Agents would be unwilling to divulge details of a client’s account, Whitehall felt that a probe “at a fairly high level” of the organization could be worthwhile. This was subsequently undertaken by Sir Arthur Snelling, a senior Treasury official who then reported: “I have found out from the Crown Agents and told the Bank of England and the Treasury the amounts Singapore had switched out of sterling in recent months”.
Jenkins, a formidable intellect who later became chancellor of the University of Oxford and a celebrated biographer, fired the first salvo. In a letter dated 6 December, he wrote to Dr Goh to express his concern at the extent to which Singapore had diversified out of sterling and his “regret that your government did not take us into their confidence in making the moves which have now been announced, indeed, in taking the decision to announce them".
He asked that the British government be informed of future diversifications.
The monetary reserves, he added, were not insubstantial – about $352 million to back the new Singapore dollar, plus $150 million to back the old Malayan currency still circulating in Singapore. There were other deposits in sterling as well. Consequently, Singapore had sustained losses of about $157 million as a result of the pound’s devaluation, a substantial amount for a “small under-developed country to sustain”. Still, despite the loss, “you may be pleased to know that neither I nor any of my colleagues has uttered a single word of recrimination against your government” , Dr Goh noted with a touch of tartness. He concluded by referring to the reaction in Malaysia, “where consultations with your government (about sterling diversification) did take place”, and enclosed newspaper cuttings reporting on the protests in Malaysia against the devaluation.
Jenkins had a point, but he missed the larger implications of Dr Goh’s distinction. In retrospect, it is clear that the distinction reflected an original insight into the nature of Singapore’s reserves: The term “non-monetary” reserves was a somewhat inelegant formulation to be sure, but it was accurate insofar as it underlined the difference between the reserves that the BCCS needed to hold in order to meet its obligation to redeem the note issue for sterling, and the rest, the non-monetary reserves, the currency composition of which the Singapore government should arguably have greater latitude in deciding. The distinction foresaw the differentiation that later led to the creation of the GIC a full 14 years in the future, namely, that Singapore’s reserves can be thought of as two pools – one, what would be required to manage the Singapore dollar exchange rate (“monetary reserves”), and the other, what could be invested long-term (“non-monetary reserves”).
Singapore’s response to the withdrawal announcement was, in the words of one observer, “angry and militant”. George Thompson, the emissary sent by Wilson to meet the Australian, New Zealand, Malaysian and Singapore governments on the defence cuts, noted that the general response to the news was “deep feelings of being let down”. He also reported that in the case of Singapore, Lee had threatened retaliatory measures if Britain went ahead with the earlier withdrawal, a warning that Dr Goh later repeated. Singapore, Dr Goh cautioned, could “feel obliged” to withdraw its sterling balances in London by one-third each year up to 1971. Singapore’s sterling holdings had become a potent bargaining chip.
Knowing about the planned announcement on withdrawal, Jenkins had refrained from engaging further with Dr Goh, and had left it to Wilson to raise London’s concerns directly with Lee. The Wilson government’s strategy was to tie the promise of aid to Singapore’s actions on sterling. Accordingly, Wilson wrote to Lee to inform him that Britain would offer Singapore £50 million in aid to be phased over five years, but conditional on Singapore acting satisfactorily on sterling. Lee’s response, as noted by British Treasury officers, was to give “satisfactory oral assurances to our high commissioner, although only in general terms”.
But three months later, another squabble arose. This time it was triggered by developments in the gold market. Beginning in late 1967, there had been heavy buying of gold from the so-called “Gold Pool”. Established in 1961 by eight major central banks, the pool was essentially a stockpile from which gold could be bought or sold in London to keep its price at US$35 an ounce.
The sterling devaluation had stoked fears of further exchange rate instability among the major currencies. There was also uncertainty about how long the fixed exchange rate system would last. As a result, in March 1968, there was a burst of panic buying of gold. On 14 March, the pool members caved in to the outflow of gold from their stocks and dissolved the pool. The London gold market closed for two weeks. When it reopened, gold traded at US$38 an ounce and soon climbed to US$42.
Singapore, on the instructions of Dr Goh, it transpired, had been in the market selling sterling just before the gold market closed. The amounts were not large. Singapore had sold £3.2 million for a US$-denominated bond issued by the World Bank and £7 million for gold. But the British were enraged when they found out about these transactions and dispatched several queries about them. Singapore’s response, communicated through Sim Kee Boon, then permanent secretary at the Ministry of Finance, was that the transactions should not be viewed as attempts to diversify out of sterling. The World Bank bond was bought in support of its fundraising exercise, while the gold would be held in London and would be sold for sterling if it was disposed of.
London did not accept Sim’s reply and instructed Sir Arthur de la Mare, then the British high commissioner to Singapore, to convey to Lee that the £10 million sold should be “reconstituted”. De la Mare saw Lee on 27 March. The next day he sent a dispatch to the Commonwealth secretary summarising his conversation with Lee. It was a dramatic and astounding document.
De la Mare reported Lee as saying that the transactions would not have occurred if he had had his way; that the cabinet was split into a pro-Japanese camp, led by Dr Goh, and a pro-British camp; and that if he, Lee, were to force the issue on Britain’s behalf, there might be a “cabinet break-up” and he would be committing “political suicide”, as it would give Dr Goh a chance to capture the party leadership.
De la Mare, always sympathetic to Singapore, cautioned Whitehall that Britain’s relations with Singapore were at risk if they pursued a hard line against Singapore on sterling. One consequence of the estrangement could be that British interests would lose out to the Japanese. De la Mare ended his dispatch with a reference to the British surrender to the Japanese in February 1942, saying he hoped “we are not on our way to another tragic rendezvous with history on the Bukit Timah Road”.
What is one to make of this dispatch? It seems difficult to credit the story of a breach between Lee and Dr Goh, a breach so serious as to threaten the government. All the Singaporean eyewitnesses to those times say this was “wayang” (play-acting), just the two top Singaporean leaders divvying up the good cop/bad cop routine between them. Furthermore, they point to the facts: there was no cabinet split, nor was there any hint of one. Dr Goh continued as finance minister till August 1970, when he returned to defence and was promoted to the additional post of deputy prime minister. And in the 1980s, Dr Goh, by then first deputy prime minister, was placed in charge of the Monetary Authority of Singapore (MAS), and again took frontline charge of Singapore’s monetary policy. What sort of breach could have occurred in 1967 if the succeeding years witnessed the continued close collaboration of these two giants among Singapore’s founding fathers?
Still, there is no doubt that the two disagreed on what Singapore should do in response to the sterling crisis. Sim Kee Boon and Ngiam Tong Dow, both officials in the finance ministry then, recalled the two disagreeing vigorously. Lee himself, when interviewed for this book, said plainly that he would have preferred if Singapore had not disappointed the British by selling sterling just then. He had an “obligation to Harold Wilson”, he recalled, a “friendship”. Wilson had “promised to slow down (British military) withdrawal and give us aid”, he recounted.
Mr. Ngiam Tong Dow was a top civil servant who later became an outspoken critic of the public service and the government.
He spent 40 years in the apex Singapore Administrative Service where he became the youngest permanent secretary at age 33 and won top accolades like the Distinguished Service Order in 1999 when he retired at age 62.
Wilson, it should also be remembered, had sent a stern message to Malaysian prime minister Tunku Abdul Rahman in June 1965 not to take action against Lee and his colleagues when Singapore was part of Malaysia. “I felt it necessary to go so far as to let the Tunku know that if he were to (arrest Lee), it would be unwise for him to show his face at the Commonwealth (prime minister's) conference” , Wilson wrote in his memoir.
It is altogether possible that if it had not been for Wilson, there might well have been a “coup” against Singapore’s political leadership in 1965. Instead, in part because of Wilson’s unambiguous signal, the Malaysian leadership decided it was best to hive off Singapore as a separate, sovereign state. It was understandable if in these circumstances, Lee felt an “obligation” to Wilson. His “sympathies were with the British” during the sterling crisis, he said, and he “didn’t want to do them harm”.
Lee was also concerned about the aid the British had promised. “Supposing we hadn’t sold (sterling)”, he said. “How much would we have lost as against the assets they’ll leave behind and the aid that they’ll give us? They knew we were in a jam – that it was 20,000 jobs lost when the troops withdraw and they felt sorry for us. So they left all the workshops, the shipyards, everything was in place – they gave us everything that they had here. So if I were the finance minister I would not have done it.”
The British government for its part did not fully believe there was a breach between Lee and Dr Goh. But they recognised, for good reason, that the two had different views on sterling and that “in financial matters… Dr Goh can and does act on his own in matters of the first import to us”.
The British, accordingly, tried another tack. They informed Singapore that the aid package to Malaysia would be announced while that for Singapore would be delayed until Singapore “reconstituted” the sterling that it had sold.
Dr Goh responded by suggesting two ways of reconstitution. One was for the gold in question to be deposited with the Bank of England for two years. This was ingenious: the British would be assured the gold would not be switched into US dollars while Singapore would retain the gold. The other suggestion was to convert the US dollar-denominated bonds into sterling, which would then be deposited in the offshore sterling market. This again was shrewd. Deposits in the offshore market attracted higher interest rates than deposits in Britain and the Bank of England could not monitor offshore market transactions as closely as it did onshore transactions.
Dr Goh’s suggestions were met with exasperation. The British Treasury proposed that Jenkins write a formal reply to Dr Goh, but de la Mare advised against this, observing that the letters between the two tended to be abrasive rather than conciliatory. He added that he had just spoken with Lee, who was also of the view that Jenkins and Goh “each raised the hackles of the other”, and that “there had been occasions when if he had seen Goh’s reply before dispatch he would have stopped it, and he thought that if ‘someone’ in London had seen the chancellor's letters to Goh before dispatch they might have thought it well to stop them too”.
In May 1968, Britain began negotiations with Sterling Area countries, including Singapore, on an extension of the Sterling Agreement. The British first proposed that Singapore agree to maintain 50 per cent of its reserves in sterling for seven years. This was unacceptable to Dr Goh and his team, especially since there was every possibility of another sterling devaluation. The negotiations were “difficult and protracted”. There were disputes over Singapore’s reserves figures, the proportion of sterling that should be guaranteed by Britain and the Minimum Sterling Proportion (MSP) that Singapore should be required to maintain. It was not till Singapore learnt that Australia had agreed to a draft agreement that it too agreed, “with considerable reluctance”, to an MSP of 40 per cent, the same as for Australia.
In September 1968, Singapore renewed the Sterling Agreement with Britain for three years. In return for Singapore’s commitment to an MSP, London agreed to guarantee the US dollar value of an agreed proportion of the MSP. Later, in September 1971, the Sterling Agreement was renewed for another two years and the MSP for Singapore was reset to 36 per cent, but again not without protracted negotiations. But by then the US dollar guarantee for part of the MSP had become of dubious value, for the US dollar too had weakened. Indeed, in August 1971, President Richard Nixon had unilaterally devalued the US dollar, an action that effectively ended the Bretton Woods international monetary system of fixed exchange rates.
In June 1972, when sterling again came under renewed selling pressure, London too floated the pound and the currency weakened. On 26 June 1972, The Straits Times carried an article with the heading: “Singapore has broken her ties with sterling” . The article reported that the Singapore government had decided to use the US dollar as intervention currency in place of sterling. Other Commonwealth countries, including Malaysia, made similar announcements around that time. The British had been earlier putting out feelers for a renewal of the Sterling Agreement in 1973 when the current agreement was due to come to an end but the floating of sterling effectively meant the dismantling of the Sterling Area
The sun had finally set on the Sterling Raj