Understanding Money (Part 2)

Money is the life blood of any capitalist economy, but the management of money defers from country to country.

How is money managed in Singapore? The Sing Dollar was born on 1967. Almost 2 years after separation from Malaysia, the Government decides to issue Sing Dollars. To establish confidence in the new currency, every dollar would be 100% backed by gold and foreign exchange reserves. On this basis, the Currency Act (Chapter 69) was formulated, passed in the Parliament and endorsed by the President of Singapore as law.

The Sing Dollar is printed and issued by the currency board, which was known as Board of Commissioners of Currency Singapore. The number of Sing Dollar to be printed is regulated strictly by the Currency Act (Chapter 69). For example, section 21 of the Currency Act demands that a currency fund* be set up to back up 100% of the face value of every Sing Dollar. The asset allocation of this currency fund consists of gold, silver, foreign exchange in the form of deposits, government and corporate bonds, equities, treasury bills etc. Therefore, whenever the Singapore government receives its revenue from taxes and service fees, the cash flow will go towards the currency fund. Any excess cash flow will then go to the state reserve account. This is to ensure the value of Sing Dollar is (always) tangible. In other word, each Sing Dollar is back up by its appropriate value of tangible assets. (*The exact asset allocation of the currency fund is not privy to the public. Mr Lee Kuan Yew does wrote in page 97 of his memoirs, "From 3rd world to 1st", that by 1987, the GIC was able to manage the reserves of the currency board, which could be referring to the currency fund.)

Since 1/10/2002, the currency board function has been transferred to MAS (Singapore’s de facto central bank). Prior to 1/10/2002, the Sing Dollar note is signed by the Chairman of currency board, now the notes are signed by Chairman of MAS.

This prudent approach restricts the number of Sing Dollars at the international level. This is advantage to Singapore because it prevents the currency speculators from launching an easy attack on the Sing Dollar.

Many people take the relative strength of Sing dollar for granted. In 1998, at the height of Asian currency crisis, where the Thai, Malaysian, Indonesian currencies suffered massive fall in value. Both the Thai and Malaysian government leaders suggested that Sing Dollar be used as the base currency to be pegged by regional currencies. The Singapore government wisely accepted the compliment and declined the suggestion.

First, the relative size of Singapore’s economy is not large enough to support the Sing Dollar as the regional currency. Second, if Sing Dollar is the regional currency, it will experience massive outflow of Sing Dollars into the central banks of the regional countries to be kept as reserves (to square off regional trade imbalance), this would mean the loss of control of our currency. This is something the “old guard of Minister for Finance” (people like Goh Keng Swee & Hon Sui Sen) fought hard to prevent it from happening. As the Chinese saying goes: “A dollar in the pocket is better (and feels safer) than 2 dollars due to me but in other people’s hands.”