Executive Summary

1     This paper provides an overview of the evolution of Singapore's currency and monetary policy arrangements, against the backdrop of the history of the international monetary system.

2     The discussion begins with an account of the Gold Standard era from 1870 to 1914, a period of unprecedented growth in the world economy. Under the arrangements of the Gold Standard, countries fixed their currencies' value in terms of gold. The paper proceeds to describe the conditions, which facilitated the workings of the system such as the close cooperation which prevailed among the major central banks at that time.

3     The next major event in international financial markets was the Bretton Woods agreement for a system of fixed exchange rates. This system worked well for about 25 years, between 1945 and 1971. However, strains on the system arose from the late 1960s onwards, as governments found it increasingly difficult to commit to the fixed exchange rate system in view of competing domestic policy imperatives.

4     The essential feature of the current international financial system which emerged after the final breakdown of Bretton Woods in 1973 is that it was unplanned or uncoordinated, a 'no system', as some have termed it. This no system has produced large swings in the exchange rates of the major industrialised countries, which in turn, has caused volatility in the exchange rates of the developing countries. This is because developing countries have either been pegging their exchange rate to a reserve currency, like the US Dollar, or managing it against a basket of major currencies.

5     Our survey then picks up on the historical development of Singapore's monetary and currency arrangements. Singapore was founded by the British in 1819, who developed the island as a regional port for the trading activities of the East India Company. As merchandise trade transactions were settled through Singapore, the mediums of exchange used in the world markets at that point in time would also be used for transactions locally. Singapore's currency and monetary arrangements in the early years, were therefore in a sense, an endogenous outcome of our important position as regional trading centre. For example, during the period 1819 to 1903, silver coins from Mexico, Spain and Peru, were used in Singapore and the other countries in the region. Singapore switched to the Gold Standard when the major trading nations in the east adopted the system in the final years of the nineteenth century. These included Russia, Japan, India, and Siam (present Thailand) around the 1890s.

6     With the beginning of industrialisation from about the 1950s, Singapore anchored itself to the Sterling pound. This served as a means to achieve stability and confidence in our currency. Great Britain continued to be a major trading partner of Singapore and an important source of capital flows. The peg to the pound was therefore backed by the underlying trade patterns.

7     Through the 1960s and early 1970s, Singapore was subjected to the increasing fragility of the Bretton Woods System. With the breakdown of the system of fixed parities in 1973, Singapore was confronted with the need to build-up its exchange rate management infrastructure, as it no longer had an anchor currency to 'import' stability and confidence. During this crucial period of transition, the Board of Commissioners of Currency played a crucial role in supporting Singapore's exchange rate system. By backing the issue of the domestic currency with foreign reserves, the government signalled to financial markets its commitment to maintaining a strong convertible currency.

8     The exchange rate centred monetary policy evolved gradually through the early 1980s. The main objective of monetary policy was to achieve stability in prices, and confidence in the domestic currency; these have always been paramount to Singapore's success as a trading centre. The choice of the exchange rate as the instrument of monetary policy emerged as an endogenous outcome to the objective of price stability, and the structure of the Singapore economy. The latter implied that the exchange rate could have a powerful influence on inflation outcomes.

9     The system has proven its ability to deliver on the objective of maintaining price stability in the two decades it has been in operation. Its resilience was reaffirmed during the Asian crisis, when the flexibility of the system was a key part of the MAS response to the unfolding turmoil across regional financial markets.

10     The paper concludes by drawing some lessons and implications from the historical review. For example, we highlight the fact that the exchange rate system of a country is often an endogenous outcome of domestic and external factors. However, while an appropriate exchange rate regime facilitates the achievement of macroeconomic stability, it does not safeguard against the country's vulnerability to speculative pressures. The Asian crisis has underscored the importance of backing up the exchange rate system with sound, consistent and credible macroeconomic policies.

11     The importance of this point has been highlighted by MAS' own experiences over its 25-year history, as it sought to ensure the macroeconomic stability of the economy, and safeguard the soundness and integrity of the financial system. The MAS adopted a number of key guiding principles over the years, which included: (i) adopting a medium to long term perspective when making policies; (ii) ensuring an ethos of fiscal prudence within the government, which helped the MAS in its task of preserving the value of the currency; and (iii) recognising that confidence is the key to modern financial systems. Although central banks would need to adapt their strategies to changing circumstances and conditions, the fundamentals of prudence, stability and confidence will continue to be the relevant guiding philosophy in currency and monetary policy management in the future.