A Currency is “Reevaluated”

By Minnesotastan in Money & Finance on Dec 2, 2009 at 10:37 pm

North Korean won Economic activity inside North Korea has reportedly ground to a halt following a government announcement that it is devaluing its currency at a rate of 100:1.

There were reports of public outrage and confusion after the announcement of the measure, which requires North Koreans to swap existing won notes for new ones at an exchange rate of one to 100 — effectively knocking two zeroes off their value. Because of a cap of 100,000 won per family (£475 at the official exchange rate), anyone with significant holdings of cash will have their savings wiped out.

The move is seen as an effort to quash small businesses and private enterprises which have proliferated in the unofficial economy. As many as 30,000 vendors are believed to operate in a market outside the capital, Pyongyang, and many of them had accumulated substantial cash reserves. This move effectively confiscates that cash.

Analysts do not foresee any direct economic repercussions outside the country, but it does serve as a reminder that many other world currencies are, like the North Korean won, “fiat money”

Links at the Times Online, Wall Street Journal, and Economist. Photo credit.

Tags: currency, money, North Korea

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Sour Bob
Dec 3rd, 2009 at 8:34 am
Romania did the same thing, squared, in 2005, converting their currency at a rate of 10,000 to 1.
Skipweasel
Dec 3rd, 2009 at 10:55 am
If you haven’t already upset your citizens then making already difficuly lives harder would seem to be a good way of provoking them to revolt.
ByrdBrain
Dec 3rd, 2009 at 1:02 pm
I assume that the amount of cash reserve a North Korean has is a moot point since there’s nothing to buy there
Ben Eshbach
Dec 3rd, 2009 at 1:37 pm
This might seem like a lame question, but I’m asking it in earnest. A currency’s value is in it’s purchasing power, not in the number of zeros printed on the paper. If tomorrow Americans were all required to turn in their dollars for dimes then what we used to be able to purchase for a paper dollar bill we can now purchase for a dime – because the dime has become “worth” what a dollar was worth yesterday. Even international purchases would immediately adjust to the new inflated purchasing power of the dime. All that seems to have been done is a shift in the basic currency unit. Does this make sense?
Skipweasel
Dec 3rd, 2009 at 2:55 pm
Ben – yes, but the important bit is the cap on how much you can exchange. Otherwise, yes, it’s an arbitrary number for a unit of exchange and has no meaning in itself and can readily be swapped for other units.

The difficulty is in the cap. If you were told that you could only convert £1000 of savings into the new units and had to abandon the rest I reckon you’d be a bit miffed, too.
Ben Eshbach
Dec 3rd, 2009 at 3:16 pm
@ Skipweasel – Aha! Thank you.
AnthonyC
Dec 3rd, 2009 at 4:39 pm
@Ben Eshbach

You would be basically right, except for the caveat “cap of 100,000 won per family (£475 at the official exchange rate).”

In other words, anyone who has more than £475 worth of cash (in N Korean currency) will lose 99% of the value of that extra cash. Instantly. If they jad held their wealth in goods or foreign currency, they’d be fine. Unfortunately now that this has been announced, it is too late to do that. I’m sure if we could see the finances of some government officials, we’d find at least a few trades on currency and commodity markets in the recent past, though.
Gauldar
Dec 4th, 2009 at 1:58 pm
@AnthonyC

I think that only 5% of the population of North Korea at most is even capable of investing outside of their country. Little gets in, and little gets out. Anyone living there that is trying to leave the country without government permission is shot, but if they manage to get out they are considered treasonous, and their family is sent to a concentration camp. These people are screwed.
http://en.wikipedia.org/wiki/Category:Concentration_camps_in_North_Kor ea

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