The money and capital markets were still underdeveloped in the mid-1980s. One striking fact was that the money market was very rudimentary and there was practically no open market for short-term securities; the only investors in treasury bills and government bonds were commercial banks and a few other financial institutions, which had to hold them until maturity. Certificates of deposits did not exist, and, for all intents and purposes, promissory notes issued by the finance companies were nonnegotiable. In order to increase the liquidity aspect of government bonds, in April 1979 the Bank of Thailand established the government bond repurchase market. In reality this was only a brokerage window at the central bank for institutional investors and, therefore, did not help to achieve the desired objective of open-market operation. Thus, Thai interest rates were determined, to a significant degree, by international forces rather than central bank sales and purchases of government securities.
The Security Exchange of Thailand (SET) had combined the functions of securities market and securities commission, providing the legal framework for underwriting and trading of corporation shares of common stocks and bonds as well as government securities. In 1974 the SET assumed the functions of the Bangkok Stock Exchange, which never had been very active. In 1976 the SET had an upsurge because of expansionary monetary policy. In 1978 the SET collapsed, however, because of massive speculation, easy margin finance of up to 70 percent of a transaction, unpreparedness and inexperience of the brokers as well as the investors, and inadequate regulation and supervision of the market and such activities as inside trading and manipulation. The government created at that time two special public funds to purchase securities in order to limit the negative effects of price swings in the SET. Many investors, however, held on to their investments that had declined in value in order to wait for a better price, thus decreasing normal stock market activity. The hesitation to trade in the market created a surplus problem for the SET, further damaging investor confidence. Some economists suggested that more specific regulations and supervisory systems were needed in order to revive the SET and restore public confidence.