Independent from Malaysia and Adoption of Currency Board
- SG initially wanted joint currency with malaysia for trade and hope for unification; but Malaysia insisted that Singapore branch of joint central bank cannot own assets, which means SG to lose its reserves; plan fell apart
- For SGD credibility, pursued currency board over central bank; currency board is like gold standard but pegged to hard currencies instead of gold; currency board countries do not have control over its credit (can only print as much as its reserve holding)
- Under currency board, consequence of prolonged trade deficit is severe, so country can only survive if remain competitive; foreigners hold SGD will redeem reserve currency; losing reserve currency causing credit contraction → unemployment → lower imports → restoring trade balance
The Sterling Crisis and End of Bretton Woods
- 1967 Sterling devaluation
- Confidence waning for post WWII Britain to repay its debt; series of speculative attacks led to 1967 gov devaluation of GBP from 2.8USD to 2.4USD, and later 1972 complete floating; this essentially voided the agreement with Sterling reserve countries
- SG had previously quietly shifted GBP reserve from 90% to 50% of total, mostly to USD, Gold, and currencies of other account surplus countries; Department of Overseas Investments formally formed 1969 (later MAS) to manage diversified reserve investments
- Later GIC (investment management) separated from MAS (exchange rate stability)
- 1971 End of Bretton Woods
- Created by Keynes, Bretton Woods is a system where world economies peg their currencies to USD while USD fix to Gold; facilitated post war economic recovery
- However, in late 1960s world is divided into countries with perpetual payment surpluses (Germany, Switzerland, Japan) and ones with deficits (US, Britain, France); countries were resistant to altering their exchange rates to bring back payments equilbrium
- Meanwhile, under President Johnson's Great Society program + Vietnam War, expansionary policies & fiscal deficits → USD pilling in surplus countries, and US faced a "run on Gold"
- Speculative flows into hard European currencies; German Bundesbank suspended further purchase of USD, officially allowing the mark to float; first nation leaving Bretton Woods
- 1971 Nixon suspended dollar convertibility to Gold; Gold price became free floating
- Root cause of the collapse: lack of international coordination and US unwillingness to carry the world economy
- 1970s stagflation. OPEC 4 times oil price to make up for USD deperciation → inflation; Gold price rose 18 times
