Bank Negara Malaysia - History

History

In 1837 the Indian rupee was made the sole official currency in the Straits Settlements, but in 1867 silver dollars were again legal tender. In 1903 the Straits dollar, pegged at two shillings and fourpence (2s. 4d.), was introduced by the Board of Commissioners of Currency and private banks were prevented from issuing notes. Since then, the continuity of the currency has been broken twice, first by the Japanese occupation 1942 - 1945, and again by the devaluation of the Pound Sterling in 1967 when notes of the Board of Commissioners of Currency of Malaya and British Borneo lost 15% of their value.

On June 12, 1967, the Malaysian dollar, issued by the new central bank, Bank Negara Malaysia, replaced the Malaya and British Borneo dollar at par. The new currency retained all denominations of its predecessor except the $10,000 denomination, and also brought over the colour schemes of the old dollar.

In 1985, following the "Plaza meeting" of G-5 finance ministers in New York City, the US dollar fell sharply causing major losses in Bank Negara's dollar reserves. The bank responded by starting a program of aggressive speculative trading to make up these losses (Millman, p. 226). Jaffar Hussein, the Bank Negara Governor at the time, referred to this strategy as "honest-to-God trading" in a December 1988 speech in New Delhi.

In the late 1980s, Bank Negara under Governor Jaffar Hussein, was a major player in the forex market. Its activities caught the attention of many; initially, Asian markets came to realize the influence Bank Negara had on the direction of forex market. Alan Greenspan acting the Federal Reserve chairman later realized Bank Negara's massive speculation activities and requested the Malaysian central bank to stop it.

On September 21, 1990, BNM sold between $500 million and $1 billion worth of pound sterlings in a short period, driving the pound down 4 cents on the dollar (Millman, p. 228). In response, bankers began front running Bank Negara's orders. Two years later on Black Wednesday, Bank Negara attempted to defend the value of the British pound against attempts by George Soros and others to devalue the pound sterling. George Soros won and Bank Negara reportedly suffered losses of more than USD 4 billion. Bank Negara lost an additional $2.2 billion in speculative trading a year later (Millman, p. 229). By 1994, the bank became technically insolvent and was bailed out by the Malaysian Finance Ministry (Millman, p. 229).