Ang Kar Yong (A0070877U)

GES 1002/SSA 2220 Global Dimensions of the Singapore Economy

D. Why was the Singapore dollar issued in 1967?
Before 1967, when the Federation became independent, there wasnt any conflict or distrust
within the currency board. The Federations currency board then was based in Singapore.
However since the Federation was still dependent on the British armed forces in their fight
against the communist, and Singapore was the base of British armed forces, the Malayan
government was acceptable to the idea that the currency board was being based in
Singapore.
However in 1965, when Singapore went independent, there are more complications within
the currency board. It has then more than one government in the arrangement. The distrust
that mainly caused the political separation also affected the relationships in the currency
board. As a new currency board arrangement had to be signed and agreed upon since the
prevailing one would expire in 1967, this also contributed to and made it easier for the
separation of the existing currency board and hence the new Singapore dollar as well.
The two finance ministers of Malaysia and Singapore back then were Mr.Tan Siew Sin and
Dr.Goh Keng Swee respectively. Even though they were both from Malacca and were distant
relatives, the distrust they had for each other prevailed. Both the Singapore government and
Malaysia government thus agreed to go their separate ways, and issue different currencies.
The Malaysia currency is to be issued by its central bank Bank Negara Malaysia; and the
Singapore currency is also created - the birth of the Singapore dollar.
Singapore chose to adopt the method of the past currency board in issuing its currency.
Doing so helps to ensure that all the Singapore dollars were be backed by reserves. This
simply means that the Singapore currency board would not issue Singapore dollars unless
the appropriate foreign currency was deposited with it, as set out in the exchange rate of the
Singapore dollar.
In addition, Singapore government and Malaysia government signed an interchangeability of
currency agreement, with a renewable term every two years. According to the currency
agreement, the valuation of one Malaysian ringgit is equal to one Singapore dollar.
With such agreements, the Singapore dollar was launched successfully. This was being done
even though Singapore did not have a central bank. The ministry of finance handled all

Ang Kar Yong (A0070877U)

GES 1002/SSA 2220 Global Dimensions of the Singapore Economy
financial regulatory matters. In 1971, Singapore launched the Monetary Authority of
Singapore (MAS) in order to consolidate all financial regulations. From then, the valuation of
the Singapore dollar started gaining strength. And in 1973, the Malaysia government and
Singapore government failed to renew the interchangeability agreement. The Singapore
dollar went above the Malaysian ringgit. Singapore had then developed her financial
institutions and economic conditions, attracting foreign countries financial flows into the
Singapore economy.
What are some economic consequences of this currency separation?
After the Singapore dollar was issued in 1967, an Asian dollar market was soon established
in 1968. An official from the Bank of America suggested this idea to the Singapore
government. There were off-US shore US dollars that companies were holding abroad in
order to avoid being taxed if these money were to return to the US. The money hence flowed
into Singapore as off-US shorted US dollars based in Asia.
An inhibiting factor was the 40% income tax payable on interest earned by such US dollars.
Thus the Singapore government decided to abolish this income tax to attract off-US shore
dollars into Singapore. The banks borrowing and leading US dollars are not required to pay
taxes from the profits earned through such activities. This led to many banks started setting
up Asian dollar departments to handle the off-US shore dollars. Foreign banks also started
setting up their branches in Singapore. While MAS allowed and gave them licenses to
operate, these foreign banks were only allowed to mainly tap on the large financial flows
arising from the US dollars and other currencies outside their countries of origin.
British banks that were established since the 19 th century were allowed to continue
functioning but their expansion were limited. The focus was on the local Chinese banks,
where they were supported in setting up new branches, and their share of deposits
increased.
With the start of Singapore dollar, the implementation of policies in encouraging foreign
banks to start operating in Singapore, going into the foreign exchange market aided the
banks both local and foreign to flourish. Banking became very profitable and together with
the monetary policy of floating exchange rates, which started in 1973 by President Nixon,
was how Singapore eventually became a major financial centre by the end of 1970s.